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Photo-Me reports half-year sales and profits down

Photo kiosk maker Photo-Me International plc reports six-month revenues declined 2 percent to £119.8 million. 

The portion of the full announcement is reproduced below:

INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 OCTOBER 2018
Continued strong Laundry performance

Photo-Me International plc (PHTM.L), the instant-service equipment group, announces its results for the six months ended 31 October 2018.

Results summary

Reported

At constant currency

Six months ended
31 Oct 2018

Six months ended
31 Oct 2017

Change

Six months ended
31 Oct 20171

Change1

Revenue

£119.8m

£122.2m

-2.0%

£121.9m

-1.7%

Underlying Revenue

£119.8m

£116.9m

+2.5%

£116.6m

+2.7%

EBITDA

£39.1m

£44.7m

-12.9%

£44.7m

-12.5%

Profit Before Tax3

£26.0m

£32.9m

-21.0%

£32.7m

-20.4%

Adjusted Profit Before Tax3

£26.7m

£29.0m

    -7.9%

£28.9m

-7.6%

Cash Generated from Operations

£36.1m

39.9m

-9.5%

Net Cash2

£32.4m

£47.1m

-31.2%

EPS (diluted)

5.33p

6.40p

-16.7%

Adjusted EPS

5.47p

5.64p

-3.0%

Interim dividend per Ordinary share

3.71p

3.71p

1 For constant currency comparatives, average rates of exchange used were £/€ 1.139 (H1 2018: 1.129), £/Yen 146.057 (H1 2018: 145.173)

2 Refer to the note 8 to the financial statements for the reconciliation of Net Cash to Cash and cash equivalents as per the financial statements

3 The breakdown of profit before tax to adjusted profit before tax is presented in the table on page 4.

Financial summary

·     Underlying revenue was up 2.5% to £119.8m, excluding the impact of restructuring Photo-Me Retail in the comparative period

·     Adjusted profit before tax was down 7.9%, when adjusted for one-off items in H1 2018 and H1 2019

·     The Group remains highly cash generative with £36.1 million of cash generated from operations in the period (2017: £39.9m).

·     Net cash position of £32.4 million, (2017: £47.1m) following distribution of £28.8 million to shareholders in dividend payments and £33.4 million of investments made in the last 12 month

·     Interim dividend maintained at 3.71 pence per Ordinary share in line with stated dividend policy for 2019

 Operational summary

 ·     Operations in Japan have recovered faster than expected, with underlying Asia operating profit up 15%, excluding the cost of restructuring operations in Japan.

 ·     Continued expansion of Laundry operations, with over 30% more Revolution units in operation at the period end and total revenue from Revolution up 28.5%.

 ·     Identification revenue growth increased 2%, reflecting further diversification of services and successful deployment of secure photo ID upload technology. 

Innovation update

 ·     After the period end in November 2018, the first banking booths which provide front-end retail banking services to customers were launched in Paris.

Outlook

·     The Group maintains its guidance for the FY2019 and expects to report profit before tax of £44 million, net of restructuring costs in Japan and excluding any movement in the value of Max Sight Holdings.

·     The Group’s ability to meet guidance will be reliant on normalized trading conditions in its key markets.

Serge Crasnianski, CEO, said: “In the last six months, the expansion of Laundry operations and deployment of photobooth identification solutions continued in line with our plan.  Revolution Laundry units in operation and revenue from these machines were up 30.4% and 28.5% respectively in H1 2019. In addition, we continue to diversify our identification business offering.

“The Board expects to meet its previously stated guidance for FY 2019, with profit before tax of £44 million, net of restructuring costs in Japan and excluding movements in the value of the Group’s investment in Max Sight Holdings. The Group’s ability to meet guidance remains subject to the economic environment, foreign exchange movements and consumer sentiment, which could affect performance.”

The Group operates approximately 47,000 vending units across 18 countries and its technological innovation is focused on three principal areas:

  • Identification: photobooths and integrated biometric identification solutions
  • Laundry: unattended laundry services, launderettes, B2B services
  • Kiosks: high-quality digital printing

In addition, the Group operates vending equipment such as children’s rides, amusement machines and business service equipment.

Whilst the Group both sells and services this equipment, the vast majority of units are operated and maintained by Photo-Me. Photo-Me pays the site owner a commission based on turnover, which varies depending on the country and location of the machine.

The Group has built long-term relationships with major site owners and its equipment is generally sited in prime locations in areas of high footfall such as supermarkets, shopping malls (indoors and outdoors) and public transport venues. The equipment is maintained and serviced by an established network of 700 field engineers.  

The Company’s shares have been listed on the London Stock Exchange since 1962.

CHAIRMAN’S STATEMENT

Results 

During the period, Group profit before tax has been impacted by reduced B2B revenue and machine sales activity, especially in the UK, where we have suffered from large order lags. Due to the extent of our B2B customer relationships, we expect this to recover in the second half of the year.

Our strong performance in Japan and the continued positive momentum of our high margin Laundry business gives the Board continued confidence in reiterating its previously stated profit before tax guidance of £44 million for FY 2019, net of restructuring costs in Japan and any movement on the Group’s investment in Max Sight Holdings.

Excluding the impact of the restructuring costs, investments adjustments, exchange gains and a favourable commercial litigation outcome, results for the first half year were down 7.5% compared with the corresponding period in the prior year (H1 2018).

Underlying revenue increased by 2.5% against the comparative period, excluding a £5.3 million reduction in revenue from Photo-Me Retail in H1 2018 due to the restructuring programme. On a reported basis, the restructuring of Photo-Me Retail in H2 2018 had a negative impact on total revenue (2.0% decline) when compared with the comparative period.  

Expansion of laundry operations remained a key growth driver, with total revenue from Revolution machines up 28.5%. Revenue from Identification grew by 1% and revenue from Kiosks reduced by 27% to £6.6 million.

Reported EBITDA was £39.1 million, resulting in an EBITDA margin of 32.6% (H1 2018: 36.7%, but was 34.7% when excluding the impact of the one-off items listed below.

Adjusted profit before tax was down 7.9% when adjusted for one-off items in H1 2019 and H1 2018, reflecting the lag in B2B revenue and machines sales activity due which is expected to recover in the second half. A reconciliation of Reported profit before tax to adjusted profit before tax is noted in the below.

Reconciliation of Reported Profit Before Tax to Adjusted Profit Before Tax  

Six months to
31 October 2018

Six months to
31 October 2017

Profit before tax

£26.0m

£32.9m

Discontinued operations

–     Profit on disposal of Stilla Technologies SA

£(3.2)m

–     Loss of Max Sight Holding investment

£2.7m

Property gain

£(2.3)m

Exceptional items – restructuring costs

£1.2m

£0.9m

Underlying profit before tax

£26.7m

£31.5m

 

H1 2018 one off gains:

–     Favourable commercial litigation

£(1.6)m

–     Exchange gain

£(0.9)m

 

Adjusted profit before tax

 

£26.7m

 

£29.0m

In H1 2018, the Group reported two exceptional items – a property gain (£2.3 million) and the associated restructuring costs for Photo-Me Retail (£0.9 million). The Group also benefited from a one-off favourable litigation outcome (£1.6 million) and a one-off exchange gain (£0.9 million).

In H1 2019, the Group recorded a gain on the sale of its investment holding in Stilla Holdings (£3.2 million) and a loss on its shareholding in Max Sight Group Holdings Limited (£2.7 million). During the period, the Group was also impacted by the cost of restructuring its Japanese operations (£1.2 million). On a reported basis, in H1 2019 Profit Before Tax declined by 21.0%, with the Group’s Adjusted Profit Before Tax declining by 7.9%. 

The Group remains highly cash generative, with £36.1 million of cash generated from operations in the period.

The Group’s net cash position as at 31 October 2018 was £32.4 million, compared with £47.1 million as at 31 October 2017, following distribution of £28.8 million to shareholders via dividend payments and £33.4 million of investments in the last 12 months. Compared with 30 April 2018, net cash increased by £5.7 million, from £26.7 million. In H1 2019, the Group invested £14.1 million in future growth, made £4.2 million of acquisitions and paid out £14.0 million as dividends to the Group’s shareholders.

Strategy update 

The Group’s strategy remains unchanged, and the Board continues its commitment to further diversifying its operations and developing new technologies with multiple applications, which can be deployed across new and existing geographies, and will be expected to provide a rapid return on investment. 

In the last six months, the expansion of Laundry operations and deployment of photobooth identification solutions continued in line with our plan.

In addition, the Board rapidly addressed performance issues in Japan and realigned operations to the more challenging and competitive market conditions in the country. The benefit of the restructuring programme is already evident, and the Group remains confident that this business will return to growth in FY 2019.

Details of strategic progress by business area are set out in the Business Review.

Dividends

The Board is declaring a maintained interim dividend of 3.71 pence per Ordinary Share (H1 2018: 3.71 pence per share).

This is line with the Board’s intention to maintain a total dividend of 8.44 pence per ordinary share for the current financial year ending 30 April 2019.  

The interim dividend will be paid on 10 May 2019 to shareholders on the register on 5 April 2019. The ex-dividend date will be 4 April 2019.

Outlook

Expansion of the Group’s Laundry operations remains a key priority for the Group in the second half of the year, building on the growth in the number of Revolution laundry units in operation and revenue from Revolution machines which were up 30.4% and 28.5% respectively in H1 2019. In line with the Group’s strategy, Laundry operations will continue to make up an increasing proportion of the Group’s total revenue in the medium term. In addition, diversification of identification solutions will continue to be the driver of revenue growth in this business area

The Board expects to meet its previously stated guidance for the 2019 financial year, with profit before tax of £44 million, net of restructuring costs in Japan and excluding any movement in the value of the Group’s investment in Max Sight Holdings, This guidance remains subject to the economic environment, foreign exchange movements and consumer sentiment, which could affect performance.   

CHIEF EXECUTIVE’S BUSINESS AND FINANCIAL REVIEW

BUSINESS REVIEW

The Group has three principal areas of business; Identification, Laundry and Kiosks.

In addition, the Group operates other vending equipment such as children’s rides, photocopiers and amusement machines. Whilst this is not one of our three principal business areas, these machines are profitable and benefit from synergies relating to other areas of the business, such as our network of field engineers.

In the first half, the Group remained focused on the expansion of its Laundry operations and deployment of secure photo ID upload technology in its identification business.

Identification

Photobooths and integrated biometric identification solutions

31 October 2018

31 October 2017

Change

Number of units in operation

28,421

28,211

+1%

Percentage of total Group vending estate (number of units)

61%

60%

+1%

Revenue

£79.1m

£78.3m

+1%

Capex

£3.9m

£4.9

-19%

 

Identification revenue increased by 1%, with a 1% growth in the number of units in operation. This resilient performance gives us confidence for the future and reflects the successful diversification of photobooth services, including the extension of our encrypted photo ID upload for documents such as passports and driving licences.

In total, the Group has more than 10,000 photobooths connected to government organisations for the secure upload of photo ID. The Board anticipates that this number will continue to grow as discussion with governments progress.

New services have been introduced to a small number of photobooths in the UK & Republic of Ireland and France, enabling customers to scan and copy documents. We are monitoring customer response and, if successful, further photobooths will be enabled with these services during the second half.

Capex reduced in the period, following significant capex in H1 2018 as part of the ongoing maintenance and renewal cycle.

Laundry

Unattended Revolution laundry services, launderettes, business-to-business laundry services

31 October 2018

31 October 2017

Change

Total laundry units deployed (owned, sold and acquisitions)

4,636

3,850

+20.0%

Total revenue from laundry operations

£21.9m

£17.3m

+26.0%

Revolution (excludes Launderettes and B2B):

Number of Revolutions in operation

2,527

1,937

+30.4%*

Percentage of total Group vending estate (number of units)

5%

4%

Total revenue from Revolutions

£13.9m

£10.8m

+28.5%

Revolution capex

£4.3m

£6.6m

-35.0%

*There were 2,232 full time units in operation during H1 2019 compared with 1,937 in H1 2018.

 Laundry operations continue to be the primary growth driver for the Group, with an average of 50 new machines installed each month, mainly in Continental Europe. In the second half, the Group expects that this will increase to an average of 80 machines per month.

 Total revenue from Laundry operations increased by 26%. The rollout of Revolution machines continues apace, with the estate increased by 30.4% as at 31 October 2018. Total revenue from Revolution was up by 28.5%, which was achieved against a 15.2% increase in machines in full-time operation throughout H1 2019.

Revolution machines have been redesigned to reduce the cost of manufacturer and provide a faster return on investment. The first Batch of the new machines is due to be delivered in December 2018. New functionality has been installed, including fabric softener, which will increase the yield per machine. When tested via existing machines, the softener has increased revenues by 15%.

The level of capex in the period reflects the Group’s focus and discipline around identifying high footfall locations where the Revolution units will be highly profitable rather being wholly focused on the number of units deployed. The UK, Ireland, Portugal, France and Spain remain key geographies for growth and the Group is looking to extend operations into Germany and Austria.

The Group is still on track to deploy its target of 6,000 units (owned and sold) by the end of the Group’s 2020 financial year.

Kiosks

High-quality digital printing services

31 October 2018

31 October 2017

Change
%

Number of units in operation

5,533

5,918

-7%

Percentage of total Group vending estate (number of units)

12%

13%

Revenue

£6.6m

£9.1m

-27%

Capex

£1.8m

£0.5m

243%

The number of kiosks in operation reduced primarily due to the restructuring of Photo-Me Retail, which resulted in the removal of machines located in shops which were closed.  These Speedlab units were transferred to Photomaton in France and have been refurbished prior to being deployed to replace previous generation machines in the country. This explains the decline in revenue and significant increase in capex in the period whilst the machines have improved revenue following relocation in France, there was a period of time when the machines were not operational.

Investment in innovation

After the period end in November 2018, the first banking booth, which provides front-end retail banking services to customers, was launched in partnership with Anytime (“Anytime”), a Belgian Fintech company.

The first ten enabled booths were unveiled in Paris, allowing customers to open a personal or professional bank account and scan in supporting documents. It then takes two days for a new account to be opened once compliance checks have been completed. The new client will receive a credit card by post within two days of the account opening.

Photo-Me has an extensive network of booths throughout Europe. “Anytime” believe that Photo-Me’s technology will enable it to address a new market and that in the future the booth will offer further banking services to its clients. In the long-term, customers will be able to deposit cheques and cash in the booths and speak directly to bank specialists through the screen.   

REVIEW OF PERFORMANCE BY GEOGRAPHY

Commentary on the Group’s financial performance are set out below in line with the segments as operated by the Board and the management of Photo-Me. These segmental breakdowns are consistent with the information prepared to support the Board decision process. Although the Group is not managed around product lines, some commentary below relates to the performance of specific products in the relevant geographies.

Key financials

The Group reports its financial performance based on three geographic areas of operation: (i) Continental Europe; (ii) UK & Ireland; and (iii) Asia. 

Whilst reported revenue declined by 2.0%, primarily due to restructuring in the UK, underlying revenue grew by 2.5%.

 Revenue

 Operating profit

Six months
ended 31 October

Six months
ended 31 October

2018
£m

2017

£m

20175
£m

Change

2018
£m

2017

£m

20175
£m

Change

Continental Europe

70.4

66.1

65.9

7%

20.7

22.5

22.6

-8%

UK & ROI

27.5

33.5

33.5

-18%

4.6

7.3

7.6

-37%

Asia

21.9

22.6

22.5

-3%

1.5

2.4

2.4

-37%

Corporate costs

(1.1)

0.6

0.3

Total

119.8

122.2

121.9

-2%

25.7

32.8

32.9

-22%

5 For constant currency comparatives, average rates of exchange used were £/€ 1.139 (H1 2018: 1.129), £/Yen 146.057 (H1 2018: 145.173

Excluding the French commercial litigation outcome (H1 2018), the operating profit for Continental Europe is stable.

Excluding an exchange gain in H1 2018 (£0.9 million), the UK operating profit is down (-28%), due to large order lags in B2B and third-party sales activities which will be widely recovered in the second half

Underlying Asian operating profit before restructuring is up 14.5% (H1 2019: £2.7 million compared with H1 2018: £2.4 million up 15%

Vending units in operation 

As at
31 October 2018

As at
31 October 2017

Change year on year

No of units

% of total

No of units

% of total

Continental Europe

24,787

53%

24,229

51%

+2%

UK & Republic of Ireland

11,909

26%

12,951

27%

-8%

Asia

10,037

21%

10,145

22%

-1%

46,733

100%

47,325

100%

-1%

As at 31 October 2018, the Group’s estate comprised 46,733 units, broadly flat compared with the same period last year due to several factors.

In Continental Europe, units in operation increased by 2%, reflecting continued Laundry expansion and the installation of photobooths.

In the UK & Republic of Ireland, the number of Revolution machines increased significantly whilst the overall number of units in operation decreased due to the removal of Speedlab kiosks related to the restructuring of Photo-Me Retail in H2 2018. These machines will be relocated to other geographies, and unprofitable photobooths and children’s rides have also been removed and sold to third parties. This decline in units was partially offset by an increase in the installation of Revolution machines at highly profitable sites.

In Asia, operated units declined slightly compared with same period last year, due to the removal of certain unprofitable machines during the restructuring programme in Japan.

Continental Europe

Continental Europe remains our main revenue growth territory, up 7% compared with the same period last year, driven by the expansion of Laundry services. Excluding the favourable litigation outcome in H1 2018, operating profit was stable at £20.7 million in H1 2019 compared with £20.9 million in H1 2018. EBITDA was up 1%.

The Group remains in discussions with the French government regarding the extension of its secure photo ID transfer technology to include photo ID for new passports and identification cards. Advanced discussions continued with the Dutch government regarding deployment of this technology for use in driving licences in the Netherlands.

The Laundry business continued to perform well, including a first-time contribution from La Wash Group, which was acquired in May 2018 for a consideration of £4.75 million. Expansion of Revolution laundry operations in Portugal, France and Spain has continued and the Group continues to assess the German market.

At 31 October 2018, 53% of the Group’s total units in operation were situated in Continental Europe (H1 2018: 51%).

UK & Republic of Ireland (including Corporate)

As expected, the restructuring of Photo-Me Retail in H2 2018 had a negative impact on revenue in this geography, which declined by £5.3 million. In addition, there was some impact on revenue from the removal of unprofitable children’s rides in H1 2018.

Excluding the one-off operations (£3.3 million), operating profit was up 8.2%.

In this geography, the Group has successfully diversified its photobooth services with the rollout of secure digital upload technology for Irish Online Passport renewal and British Passport renewals. In total, 2,950 photobooths are now enabled for UK passport renewals with a target of 4,000 enabled photobooths by the end of December 2018

The Group continues to increase its Laundry presence in the Republic of Ireland, with Laundry revenues now accounting for 75% of the country’s total revenue (H1 2018: 70%). In the UK, the group continue to install Revolutions on very profitable sites (187 units).

At 31 October 2018, 26% of the Group’s total units in operation were situated in the UK & Republic of Ireland (H1 2018: 27%).

Asia

Revenue in Asia reduced by 3%, which was a good performance given that the extent of the challenges in the Japanese market was not evident until H2 2018. The Board took swift action in H2 2018 to address the highly competitive market conditions. In line with the previously announced restructuring plan, administrative functions were streamlined, low revenue machines were relocated, and unprofitable units removed. The business has recovered faster than initially expected and is now performing well. Trading in the other countries in Asia remains strong.

Excluding the £1.2 million one-off restructuring cost incurred in H1 2019, operating profit increased by 14.5% to £2.7 million. In the second half, the Group will see the full benefit of this restructuring programme. In FY 2019, the total restructuring cost for Japan is expected to be between £1.5 to £2.0 million.

Whilst the photo identification market in Japan remains highly competitive, the Board continues to believe there are growth opportunities given Photo-Me’s dominant market position in the country. As a result, the Group intends to commence the deployment of its new units which have a significantly lower production cost than the units deployed previously and will offer a 35% faster return on investment. 

At 31 October 2018, 21% of the Group’s total units in operation were situated in Asia (H1 2018: 22%).

Specific items

Operating profit UK & Ireland Segment in the period to 30 April 2018 includes restructuring costs of £2,630,000 relating to the Photo-Me Retail Limited business unit and in Corporate, a profit of £2,320,000 arising on the disposal of the former head office building in Bookham.

Other net gains of £3,708,000 in the year to 30 April 2018 includes the gain on the deemed disposal of the Group’s interest in Max Sight Limited and Fullwise Limited.

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