Vianet Group (LSE:VNET) — Interims Results

0:00 Good morning, and welcome to the VIANET GROUP PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the q and a tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to James Dixon. Good morning, sir. Thank you, Millie, and thank you, everyone, for joining Sarah and I today. I'll kick straight into the results. We believe we've got made strong progress despite The UK and global macro background that's impacting pretty much every sector.

0:46 We've seen growth in our pipeline and our installed footprint in both divisions, so that's that's very positive. In unattended retail, our exit from ERP provision to focus on device footprint expansion has allowed us to gain some valuable strategic market share. And, you know, the retain and gain strategy that we implemented for the three g exit is also working for the the the network operators withdrawal of the two g networks. So moved in the right direction. And hospitality, you know, division we had growth in all key metrics, so really, you know, really good news there.

1:32 And, our investment in innovation and technology is starting to pay dividends, so really strong foundations to deliver sustained growth going forward. We'll just turn the page, to those who are new to VIANET. I'll quickly take you through this slide. Bottom line is that we help customers transform business performance, helping them get it right first time, allowing them to do more with less. Hardware in both divisions is an enabler that allows us to harvest data, thereby, we can produce dashboards, alerts, alarms, and it also aids our PCI compliant process for payment processing. Absolute focus on reducing waste and shrinkage in both divisions and focus on increasing productivity and consumer experience, and that allows them to drive, you sales improvement.

2:34 As I said, two divisions, unattended retail, primarily UK focused with, some with some presence in The Benelux with Jacob Dow Edwards. It's really about capturing data from remote assets, and our cashless payment devices. We're in about 37,000 machines across the piece, and that's up a thousand, you in the in the past period. Our hospitality division, beverage metrics, originally focused on The UK pub market, least intended, but now diversifying into the managed sector and making some progress there. And with the acquisition of BeverageMetrics in The United States, that gives us a presence there, and we're starting to make inroads with some contracts there.

3:30 It's a software as a service business model where we have long term commitments with blue chip clients, generally three to five year contracts. It's a subscription model that really allows us to drive valuable recurring incomes. Moving on to the financial highlights. I'm not going to dwell too much on this in SteelSarah's thunder, but a strong set of results, especially given the economic uncertainty and the investment climate for our customers. Growth and profitability, the top line and profitability, you know, both impacted by ERP, our decision to, you know, withdraw from the ERP market to pivot and focus on to device footprint growth, which is really drives our recurring income.

4:23 Strong cash and net debt performance, and that's, you know, after completing share buybacks and increasing our dividend. And we're really pleased to be able to announce 33 bit three 33% increase in the dividend to point four of a p, and that ties into what we do will be our approach going forward, a progressive approach to dividend. Moving on to unattended retail. The three g switch off, that completes at the end of this month. And, of course, we've now got the network operators. We've o two have withdrawn access to two g networks for roaming sims, and that impacts a number of industries across the piece from alarm and security companies all the way through to unattended retail and hospitality.

5:24 So, again, our retain and gain strategy that we implemented for the three g, shutdown is working working well, for the two g access withdrawal. We've seen footprint expansion now on the back of our hardware pricing strategy, and it's allowed us to secure, you know, increased number of installations and a strong recurring income stream. Our focus on device management is really paying dividends, and that device management approach is really about maximizing device uptime and improving the user experience, and that's where we're making some, you know, inroads and clear creating some clear blue water between ourselves and the competition.

6:15 We've secured existing customers and we've gained new business. 52 new contract wins in in the half year, versus 48 last year. That's given us a really good pipeline. We've seen growth in the, you know, growth in the core estate from $3,036,000 to nearly 37,000, so good growth there. Importantly, we've also seen a a change in the mix. We've seen the our cashless devices generate higher recurring income per unit, and we've seen that then grow to 20 over 26,000, and that's the trend that is gonna continue. So we're really pleased about that. The the focus on device management is really delivering us some great testimonials with our customers, typically driving an 18% uplift in customer revenues per machine.

7:14 And one particular example is Luca Zay Drabina Santore where we got about 18% uplift and also allowed them to have a 40 14% reduction in their transaction costs. So a real winner, and that's allowed us to drive new installations through their network. I get looking at the adjusted operating profit of, you know, 910,000 versus 980,000 last last last first half. Basically, the foregone ERP will wash through in the current in the current year, and we'll see that rebound into the next period when we start to see the, device footprint in the full year of subscription income per device coming through.

8:02 In terms of our progress in in verticals, forecourts were up from about 1,800 to 2,100 devices on forecourts. We've also completed integration development on supermarket loyalty cards. So that's allowed us to get, you more more market share within the supermarket arena. And, again, the the four court vertical as well, our device uptime is super critical there primarily because the the average transaction value is so high. So if your device is done, you you can make substantial losses. So that that's really allowed us to make a real difference. Moving on to the next slide.

8:52 I guess my message here is that we've demonstrated real resilience through disruptive periods over the last, you know, so eight, nine years, and we've got really positive trajectory of the device footprint out there and device growth. And that's valuable market share, and it's also strategic market share because at the moment, we're taking share from international competitors. And if we look at the look at the, I guess, the issues that the sector has had to deal with blanket closures during the COVID lockdowns, then dealing with the, you know, machine profitability, with increased work from home, where you may have, you know, 60% of the foot the footfall passing a machine versus what was a 100% pre COVID.

9:47 That created a lot of uncertainty in the sector. And then you move on to three g, two g withdrawals. That means our customers, operators, and food service, and brand owners are really reviewing investment decisions, and that slowed things down. But we're starting to come through that, and we're seeing the seeing the growth again. The good news is that 90% of our growth is gonna come from existing customers, so that's pretty positive. And the other the other thing we wanna pick up on there is the the mix is increasingly moving towards cashless, despite the fact that we're see gonna be seeing the growth in the telemetry only as well, and that's that's more valuable.

10:35 Moving on to hospitality. We're entering this period of sustained growth for the hospitality division. In The UK, we've got stable lease and tenanted base, and we're making good progress in terms of entry into the managed managed to pump market. And The USA is making really good progress as well. All the key financial metrics are positive across the piece, so that that's a that's really encouraging. We've seen for the first time in probably ten, fifteen years growth in our installed base, and we expected that to continue going forward. The economic background is unhelpful both in UK and The US.

11:22 It is tough for the pub pub companies and rec fast casual dining restaurants, you know, here and in The States. And that pretty much makes us an essential tool, you know, when when they get around to making a decision because we can help them improve sales. We can help reduce costs, improve their consumer experience. I think one of the keys as well is that there's gonna be winners and losers both in The UK and The States, probably more so in The States where it's it's it's it's very transparent that there are some winners and some losers. And at the moment, we tend to be with the winners. We look at the progress in The United States. The the fintech partnership agreement was signed in in late August, and that allows us the unique access going forward.

12:15 We've completed the pilot with World Beer, and we're about to roll out in World of Beer. And we've got good momentum in other pilots. So bottom line is if you look at, you know, hospitality as a whole, we provide significant savings for our customers. It's intuitive. A minute a day is all it takes to actually, you know, act, pick up and identify the issues that need to be resolved on that any particular day or week, and it pays for itself if you can save or sell one additional pint a day. A bit closer look at, you the The States, encouraging progress and really good engagement. We as said, we've signed that partnership agreement with fintech in late August.

13:04 That gives us unique access to The United States market, and it working with that whole integration with with FinTech, integrating our inventory platform with their with their payment processing and payment reconciliation helps reduce labor costs, improves improves volatility, and helps customers get it right first time. Look at purely at the shift point of sale losses. Now, again, one pint per day uplift will pay for the system in in in second side six months. Existing contracts include Chili's, Margaritaville, and Marriott franchisees, and now World Beer.

13:51 Bottom line is it's all about hitting the quality benchmarks, getting help from customers get it right first time, improving the productivity. And, you know, if we look at where we are in terms of a significant loss reduction in the current year, we will have a loss reduction. We'll quite be where I I was hoping to be in terms of total revenues, but we're confident that we will secure meaningful contracts in the next several months that are gonna make a real difference. With that, I'll hand over to Sarah. Very much, James. So, yep, welcome. And for the results this year, looking at the profit and loss across half one, what we see is the progress has remained solid. We've improved profitability.

14:43 Turnover remains stable at 7,670,000, and operating profit has increased 10.4% to GBP 1,500,000 from last year's 1,430,000. This demonstrates an enhanced operational efficiencies across the board and EBITDA is up 20% year on year. Earnings per share has increased to 0.79 versus last year's 0.06, all supported by the growth in profit. Importantly, recurring revenues have held strong at 84% of overall turnover, and that provides our visibility for half two and beyond and the confidence that goes along with that as we move forward. We turn over to the actual divisions themselves and the highlights within SmartZones.

15:28 The turnover has increased 5.6%, reflecting our customer demand of 250,000 in absolute terms, with 229 new installs, like James said, that were highest for a while, and recurring revenues increased slightly to 4,210,000 from 4,190,000 year on year, and this being 90% of overall turnover for the division. Gross profit increased 2.6% or 93,000 in the period. So all in all, SmartZone's making excellent progress. And when we come to the unattended division, turnover for the period is 2.97 versus last year's 3.2, and this is a direct result of what James has already spoken about and the economic backdrop. However, gross margin profit increased 52% from 48 last year, which shows our resilience in this division.

16:21 And operating profit for the period was 910,000, a slight reduction year on year due to the pivot away from ERP. And importantly, again, for here, revenue remained strong at GBP 2,230,000 for the period, 75% of overall turnover, providing really good footprint foundations for moving forward. We take a look at our cash flow. Cash generation remains very solid. Pre working capital cash flow strengthened year on year to 1,790,000 from last year's GBP 1.61, representing 10.7% growth, and post working capital cash flows of 1,720,000, so very healthy. These were invested in the r and d, the rental devices, as well as paying an increase in dividend and purchasing shares back at 250,000 in the year.

17:14 All while continuing to repay debt and reduce our net debt position, so really self funding. We move along to our balance sheet. Again, this remains strong. It continues to strengthen and shows resilience within the organization. Refinancing with HSBC took place in the period. The rates have improved, and the commitment is there until April 2028. That saw reduced repayments in the period and provides long term certainty. Cash remained strong at 2,570,000 from last year's 2,250,000, and net debt stands at 500,000 versus last year's 1,000,000 at this point. This was even after paying the higher dividends, the purchase of the share buybacks, which without we would have been towards net cash. So all in all, a strong balance sheet to support the future growth of the business as we move forward.

18:08 Thank you, Sarah. Bottom line is that we're in an exciting position, strong financial foundations. We've got strong commercial pipeline and some really good prospects, and there's some strategic opportunities for us as well. We look at that strong financial in engine that's built on our really strong recurring income base that's that's only gonna grow. And the the and we've continued to invest in our technology and innovation to ensure that we stay relevant, you know, going forward, because we're not satisfied with where we are. We wanna continue to actually drive good growth. We managed to deliver bottom line growth. We expect to see top line growth going forward.

18:57 If we look at smart machines, for instance, there's really strong contractual pipeline there. It's really about rate of deployment. 9% of the growth that we're showing, in those device footprint growth over the next couple of years comes from existing customers. That's gonna deliver us really strong strategic market share, that becomes valuable to to others. We look at the the the demand for data and the insights. There's increasing demand for data insights. People need to do more with less. There's more and more utilization utilization of the AI, and we continue to invest in our technology.

19:43 We've invested in our database databases, our APIs, and our reporting suites, to ensure that we come and continue to be intuitive, e easy to use, and, and highly relevant. If we look at the whole cashless payment, that continues to grow. We our focus on device uptime and user experience, coupled with, very competitive transaction rates and, you know, industry leading customer experience. And then our absolute focus across the piece over the last four or five years has been to become a trusted partner for our customers. And that for me is vital because if you're a trusted partner, they know customers know you're gonna do the right thing, and they're they're happy to work with you in partnership going forward.

20:36 And the testimonials that we're starting to produce and use out there in the marketplace really underline that. Bottom line is that, you know, the the markets and leavers that leavers are working in our favor. We have relevant solutions. We continue to innovate and we're flexible with our customers when events and issues occur and that we know that we're going to win with our customers. That concludes the formal part of the presentation, and we're going to move on to questions now. That's great. Thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab situated on the right hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of slides and the published Q and A can be accessed via investor dashboard.

21:32 As you can see, we have received a number of questions throughout today's presentation. Please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end. Thanks, Luke. Okay. First question, it's in two parts. I'll take them part at a time. Due to general economic constraints, you previously said that a lot of customers were preferring to go with sales rental option on new stroke renewing contracts, thereby spreading total cost over the length of the contract. Can I ask if this trend is continuing and at what levels compared to previous years? Bottom line is that hospitality tends to be CapEx, almost a 100%. In unattended retail, we got a mix, and it largely depends on the timing of contracts and the timing of when rollouts are being completed.

22:25 Foodservice and brand owners tend to go CapEx model, and the, you know, vending operators tend to go rental model. So that's so it's really dependent, but the past the past six months has pretty much been similar trends that we've seen in in the past, so nothing nothing new to report on there. The second question second part of the question. At the previous investor presentation, you said you had penciled in for approximately $1,000,000 in sales for VIANET USA in the current year. Is this still the anticipate number for for this year? Bottom line is that, you know, we're buying behind where we want to be on that, but what what we do have is that we have contracts that we're in the process of, getting signed up that are gonna move us some way towards that, but we won't hit the 1,000,000 US dollars.

23:24 But having said that, it's not it's not factored into our numbers. Those were internal forecasts and ambitions rather than hard baked in forecasts. So expect to see progress there. Where will the growth come from in a shrinking marketplace? Is the only growth totally offshore? Okay. Well, if we take hospitality first, bottom line is that, you know, we're we're in probably nine and a half, nine and a half 9,600 pubs and bars largely in The UK. There's a total of 41 in excess of 41,000 pubs and bars in The UK, 16,000 independents. There's probably 12 and a half, 13,000 leasing tenanted and probably eleven, twelve thousand managed operators.

24:14 We're starting to make inroads. We're starting to see an increase in the number of leasing tenanted. So we see migration from a lower poor performing managed houses moving into leasing tenanted, which help them to stay in sustain a stable leasing tenanted base. And we're starting to see some real, you know, engagement in managed operators, and we're starting to do installations in the managed operators, and we expect that to continue to grow. So we expect to see growth in The UK pub sector. That's number one. Number two, we expect to see growth in the vending the vending unattended retail market is not shrinking. It is in growth, and our existing contracts, will deliver 90% of the growth that we're forecasting going forward.

25:04 And then we look at The USA. The USA, it may be a shrinking market, but it's a very substantial market. And at this moment in time, we're a small player who are who are engaged in seriously with some seriously big players in The States, and it's just taken time to get that across the across the line. But we're confident that they will will happen in the in the coming in the coming months. Next question. With new wins showing a positive uplift, how aggressively are you pursuing market share capture? And what barriers are there to switching from competitors? If if an existing device if we take unattended retail, if an if there's an existing device out there that's a competition device and it's currently two g or the last of three g waiting to be upgraded, then we feel pretty confident that we can go in there with a compelling a compelling, you know, offer and testimonials that will allow us to, you know, gain that business.

26:16 If it's an existing, you know, four g outlet that's already been upgraded with a with with the by the competition, that's slightly more problematic, but we're we're prepared to be flexible and innovative in terms of our pricing structures to try and swap those four g out as well. Mhmm. And and that and that happens. That might be that one of our existing customers has acquired, you know, another operator that has a competition four g site in, and we'll work with them to, you take them out over time. And, you know, in in The UK hospitality, we haven't. There are there is no real competition. Next question.

27:06 Could you comment on your market share and who are your main competitors? Well, hospitality is easy in The UK. We are we are the market, and we have no competition in in The UK. In The USA, there are probably about three or four competitors, but they're scratching the surface of what is a substantial U U US market. We're taking it slow and steady, but we believe that we're gonna be winners in the in the, you know, medium medium term. When we look at unattended retail, competitors are NIACS would be the the the real competitor in the in The UK.

27:58 They have a substantial presence across across a number of different sectors, And we compete very effectively with them, because we focus on device uptime, user experience, and the superior transaction rates, and that allows us and the customer experience help desk that we have is industry leading, so that allows us to compete very effectively with them. And, again, gets back to us being trusted advisers. And then you've got other competitors, Televend, trying to get into The UK market. And, you know, I say trying, they they don't have much in the way of presence in The UK at this moment in time. And, again, the other one would be Cantaloupe.

28:47 Cantaloupe bought a business called SP Soft, which was a vending management software, but they they've struggled to get any traction in terms of, you know, device footprint out in the marketplace. And that gets back to why we our focus was on delivering device footprint during the three g, two g switch off to really drive and secure that valuable recurring income. That looks like it's the last question. No. Okay. There is one I've missed here. Okay. Is VIANET oh, you have been in The USA for some time now. Is it realistic to expect to achieve critical mass there?

29:36 And is this a distraction core UK business? Bottom line is not a distraction to core UK business. Bottom line is the acquisition of VNET GROUP PLC has really strengthened our core UK business, and the the product development that we we've invested in is equally relevant in The UK and in The States. That's point number one for me. Point number two is that we are gonna be successful in The United States, and, there is a case of, you know, watch this space, and, we we will deliver. Just checking these no.

30:31 I think you've also I've already answered with new wins showing a positive uplift, how aggressively are you pursuing market share? I think I've already answered that one. Yeah. That is all the questions for now. That's great. Thank you for answering all those questions you can from investors. And of course, the company can review all questions submitted today and we'll publish those responses on the investor meet company platform. Just before redirecting investors to provide with their feedback, which I know is particularly important to the company, James, can I please just ask you for a few closing comments? Okay. Well, really pleased with the strong progress in the past year or so. Really delighted with the level of customer engagement and the underlying momentum that we have in both divisions.

31:18 We have a strong pipeline in unattended. It's 90% of our existing customers who are going to deliver that future growth. In The UK hospitality, lease intended is super stable and showing a little bit growth with us. And we're making inroads into the managed sector and that's only gonna continue to, you know, accelerate. And really looking at The USA hospitality making progress in both the, you know, what they call top beverage metrics. It's beverage metrics, you know, draft beer module, but it's also the in fast scan inventory module that we're making start to make inroads and they will be hit be able to announce some progress there fairly shortly. Also, when when we talked about being trusted advisers for our customers, it's also about having trusted partnerships with people like fintech, scovie, Macintosh, Atender. It's about being peep being the sort of people that others wanna deal with, and that's important to us.

32:22 And we continue to invest in our technology and our innovation to ensure we're we're relevant, and that's only gonna pay dividends going forward. Really encouraged with what the technology team have been doing with AI and accelerating development. It's really accelerated our whole product development, moved from the stage where developers become a bot bottleneck to the stage now where it's business analysts and the product managers who are the bottleneck to feed the feed the the the AI development. And really, you know, absolute focus on delivering, you the recurring income growth and allowing the capital returns that will allow us to, you know, you know, keep our shareholders happy.

33:10 Thank you. James, Sarah, thank you for updating investors today. Now please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This may only take a few moments to complete, and I'm sure it be greatly valued by the company. On behalf of the management team of VIANET GROUP PLC, we'd like to thank you for attending today's presentation, and good morning to you all. Thank you.