Ingenico : Full-year results 2017

Key figures

Mid-term outlook: EBITDA double digit CAGR between 2018 and 2020

The electronic payment market is evolving with customers' usages developing and merchants' needs multiplying. In the meantime, complexity is increasing as the commercial scale is expanding geographically but also within new channels opened to commerce. In light of this, value has extended beyond mere payment acceptance devices, and now lies in bringing business solutions to points of interaction that are multiplying in line with the development of customer and merchant touch points.

In recent years, the Group has invested organically and through several acquisitions to gather the relevant skills and assets in order to build products, offers and solutions that help the merchants grow their business. From a pure point of acceptance provider, the Group has enriched its value proposition towards acquiring, full service and online and in-store processing in order to build seamless end-to-end solutions. Today, our client centric organization addresses all kinds of merchants, SMBs, organized retailers or digital players. Our two business units enable us to address the merchants' needs indirectly through B&A and directly with Retail. The latter has recently been organized into three dedicated business lines focusing on distinct merchant segments: SMBs, Global Online and Enterprise.

In order to achieve our ambition to enable payments everywhere, enhance merchant and consumer experiences and deliver an end-to-end full service offer, Ingenico Group has established three key priorities for the period 2018 - 2020:

• Maintain our leadership in acceptance solutions across all customer segments and channels
• Introduce our next-generation Open Android payment platform
• Expand our direct-to-merchant footprint with a unique Blueprint and repeatable business model

These priorities, which will be deployed within our two business units, Banks & Acquirers and Retail, will enable Ingenico Group to create value for all stakeholders.

11% Organic growth in revenues in the fourth quarter 2017

Fourth quarter 2017 performance

In the fourth quarter of 2017, revenue totalled €692 million, representing a 14% increase on a reported basis, including a negative foreign exchange impact of €29 million. Total revenue included €440 million from Terminals and €252 million from Payment Services.

On a comparable basis, revenue was 11% higher than in the fourth quarter of 2016, including a 10% increase in Terminals and a 12% increase in Payment Services.

Compared with Q4'16, the various divisions performed as follows on a like-for-like basis:

• Europe & Africa (up 11%): The quarterly performance showed a very resilient market fuelled by the vast majority of countries.
  In the Banks and Acquirers Business Unit, most countries drove the overall dynamic. Western countries showed a very strong performance, mainly fuelled by France, Spain and Italy with the Telium Tetra deployment. Eastern Europe remained dynamic, mostly driven by Greece and Poland and their local regulations, while the other countries were resilient facing a difficult comparison basis.
  In the Retail Business Unit, the quarter was still very dynamic and marked by the gaining of several contracts. The Axis platform has shown a very good performance for existing clients, but also good traction with new customers such as Uniqlo or New Bbalance in Spain. Ingenico Group continued to expand its pan-European offer with new deals with players like Adeo (Leroy Merlin, Weldom, Brico Center, Alice Délice,…) to provide cross-channel solutions.
  
• Asia-Pacific & Middle East (up 3%): In the Banks and Acquirers Business Unit, dynamic was driven by China, which benefited from the successful launch of the APOS. Close to 400k units were shipped during Q4'17, bringing the number of units shipped during the year to over 1.3m. As expected India is now back to a normative level of business. Therefore the country has been declining as it faced a challenging comparable basis due to the demonetization process which started in Q4'16 and ended in June 2017. South East Asia showed a mixed performance between Indonesia, where the market is currently standing by following ongoing regulatory changes, and other countries such as Thailand and Japan in which the Group performed well.
  In the Retail Business, the main part of the activity is located in Turkey with a positive dynamic, benefiting from the government push for POS with fiscal memory and services enabling transaction data to be transferred to tax authorities.
  
• Latin America (up 27%): The region, which is part of the Banks and Acquirers Business Unit, showed a very strong quarter. The Brazilian market seems to have recovered as Ingenico Group is back to positive growth during the fourth quarter. Following the same trend as in the first nine months, the other countries have driven the performance, with Mexico benefiting from the Telium Tetra deployment and Chile, Peru or Costa Rica which have become very strong drivers over the past quarter.
  
• North America (up 16%): The quarter showed a very strong dynamic as expected.
  Canada's performance was in line with our expectations, still facing a tough comparison basis in Q4, although to a lesser extent than in Q3'17.
  The US market showed a very strong performance in Q4'17, still driven by the verticals targeted over the past 18 months. The Unattended sector was a very strong driver, especially with a major deal signed in the Vending vertical. Solutions for mobility showed a strong traction and this quarter saw the successful launch of the new mobile device M70, which is an 'all-in-one' Open Android Tablet including Chip and contactless payment acceptance capabilities. The other verticals such as Hospitality, Restaurants or Healthcare continued to deliver with new customers like Choice Hotels or Adventist Health.
  
• ePayments (up 11%): The quarter showed another strong performance enabling the Group to reach its double-digit growth objectives for the full year despite a strong comparison basis in the second half. Ingenico's online activities were able to provide a strong conversion rate improvement over the quarter, enabling our clients to improve sales performance, especially during specific events such as Single Day, Black Friday or Cyber Monday. Volumes processed within Ingenico's platforms on those specific days were up to three times the average daily volume globally, mainly driven by the globalization of these commercial events which gives increasing credibility to the online cross border offer. In parallel, the quarter was driven by very good traction from the Ogone collecting activity with volumes up 46% versus Q4'16. In parallel, the integration between our two platforms in India (EBS and TechProcess) is about to be completed, enabling the Group to accelerate the deployment of the online offer.
  In the meantime, new clients such as Gamivo, Aerolineas Argentinas or Lyca Mobile have been onboarded on our platforms during the fourth quarter.

Within our new client centric organization, the Banks and Acquirers Business Unit posted a revenue of €367 million, an increase of 8% on reported figures and including a negative foreign exchange impact of €17 million. The activity performed strongly this quarter, increasing by 12% on a comparable basis thanks to the ramp up in the United States, the Brazilian recovery, the dynamic in China driven by the success of the APOS and the resilience of the European markets. This strong performance was partially offset by some headwinds in Indonesia and a strong comparison basis in India.

The Retail Business Unit reported a revenue of €325 million, an increase of 21% on reported figures including a negative currency impact of €12 million. On a comparable basis, revenue was up 9%, driven by the very good performance of the European markets, especially fuelled by the ramp up of in-store services with Axis and the resilience of the ePayment division despite the strong comparison basis.

Performance for the full year 2017

In 2017, revenue totalled €2,510 million, representing a 9% increase on a reported basis and including a negative foreign exchange impact of €35 million. Total revenue included €1,661 million from Terminals and €849 million from Payment Services.

On a comparable basis, revenue was 7% higher than 2016, including a 5% increase in Terminals and an 11% increase in Payment Services.

Over the year, ePayments (+11%) showed strong improvement in terms of stability and customer satisfaction, enabling the division to perform well throughout the year. New milestones were reached during the year such as the merger between the two Indian platforms that is about to be completed, or the evolution of the Ogone model from a pure gateway to a cross-border platform. In Latin America (+5%) the Brazilian dynamic was deeply impacted by the difficult macroeconomic situation, but it showed a slight recovery in the second half of 2017 despite the competitive landscape. The other countries were very dynamic, mainly driven by the Telium Tetra launch. In North America (-6%), Ingenico Group outperformed the market as US inventories were cleaned up, and the course of the Banks & Acquirers activity was back to normal. In parallel, the Retail Business Unit slowed down because of a difficult comparison basis. EMV is no longer a driver in the region, but all the verticals targeted for more than a year are now fuelling growth. Canada recorded a performance in line with our expectations despite a tough comparison basis in the second half of the year. The performance of Europe - Africa (+7%) reflects the leadership of Ingenico Group in the region. The beginning of the year was driven by the tailwind of the PCI V1 to V3 migration which was followed by the deployment of Telium Tetra, while the dynamic of the Eastern countries was very good throughout the year. Asia-Pacific & Middle East (+9%) showed a mixed performance across the countries as India was strong over the first half, driven by the demonetization process, followed by a difficult comparison basis in the second half. China was impacted at first by the ramp up of the QR code based APMs before benefiting from the successful launch of the APOS, accounting for more than 1.3 million shipments over the period. The remaining Asian countries showed a strong dynamic and resilience with the exception of Indonesia, where the switch implementation amongst public banks resulted in a 'wait and see' momentum. In the meantime, Turkey continued to perform strongly, fuelled by the deployment of POS with fiscal memory.

As part of our new organization, our reporting is evolving towards the two Business Units, Banks & Acquirers and Retail. Over the year 2017, Banks & Acquirers posted a revenue of €1,411 million, an increase of 8% on reported figures and including a negative foreign exchange impact of €14 million. On a comparable basis the activity increased by 8%. The Retail Business Unit reported a revenue of €1,099 million, showing an increase of 9% over the period on reported figures and including a negative foreign exchange impact of €20 million. On a comparable basis, revenue increased by 5% during the year, impacted by a difficult comparison basis in the United States.

Adjusted gross profit up 6%

In 2017, adjusted gross profit reached €1,067 million, up 6% compared to €1,005 million in 2016, and representing 42.5% of revenues.

Operating expenses contained throughout the year

In 2017, adjusted operating costs were €541 million, representing 21.5% of revenue, compared to 2016 when adjusted operating costs represented 22.9% of revenue.

This decrease highlights the first results of the efficiency plan implemented in July 2017. As of 31^st December 2017, the efficiency plan has generated more than half of the €20 to €25 million plan of efficiencies to be realized on a full-year basis. Those efficiencies concern all types of expenses, with a specific effort on the G&A.

Expansion of the EBITDA margin reaching 21.0% of revenues

EBITDA was €526 million against €476 million in 2016, representing an EBITDA margin of 21.0%, up 40 basis points compared to 2016. EBIT margin represented 18.1% of revenue and reached €453 million compared to €403 million in 2016, an increase of 60 basis points, thanks to the strong control of operating expenses.

A resilient operating result

The other income and expenses reached €-30 million. In 2016 they were €-5 million. The increase is mainly due to acquisition costs, mostly related to Bambora, that account for more than €20 million over the year. The operating result includes price purchase allocation costs that represented €52 million in 2017 compared to €42 million in 2016.

After taking into account these charges and other operating costs, profit from operations was €371 million, against €357 million in 2016. Operating margin represented 14.8% of revenue, against 15.4% in 2016.

Net profit attributable to shareholders progressing year after year

The financial results account for €-23 million, down from €-8 million in 2016, a year which benefited from the sale of the Visa Europe equity securities that represented €12 million. Taxation costs were reduced by 10% to €87 million, against €97 million in 2016. This improvement is explained by a streamlining of the operational structures leading to an effective tax rate for the Group of 25.1%, against 27.9% in 2016.

In 2017, Group net profit attributable to shareholders rose 5% to €256 million, against €244 million in 2016.

A strong cash generation despite increase of non-recurrent expenses

The adjusted free cash flow³ was up 6% in 2017 at €269 million, i.e. a conversion rate of 51%. 2017 has been a very dynamic year in terms of acquisitions which has led to significant non recurrent expenses mainly related to Bambora. Group's operations, post other income and expenses, generated a free cash flow of €239 million, i.e. a FCF/EBITDA conversion ratio of 45.5%. The cash generation was impacted by a negative change in working capital, mainly due to the currency effect and a very strong acceleration of the Q4'17 activity. Investments increased by 15% to €88 million against €77 million in 2016.

The Group net debt increased to €1,471 million against €126 million one year ago. The ratio of net debt to equity is 80% and the ratio of net debt to EBITDA is up to 2.8x from 0.3x at the end of 2016. The increase of the net debt level is mainly related to the acquisition of Bambora for a total consideration of €1.5 billion. Note that the leverage calculation is not factoring in a full impact of Bambora.

Proposed dividend of €1.60 per share, an increase of 7%

In line with the Group's dividend policy, a proposal to distribute a dividend of €1.60 per share will be presented to the Annual General Meeting of shareholders on 16^th May 2018, representing a distribution rate of 39%. This dividend will be payable in cash or shares, according to the holder's preference.

2018 outlook

In 2018, Ingenico Group expects an EBITDA between €545 million and €570 million. The guidance factored in an assumptions of a negative impact from currencies of c. €25-30 million. Given the tough comparison basis and the pipeline of projects, the phasing of the year should be reflected in a soft first half 2018 followed by a stronger second half.