Croma Security Solutions Group (LSE:CSSG) — Half Year Results

0:01 Good morning, ladies and gentlemen. Welcome to the CROMA SECURITY SOLUTIONS GROUP PLC half year results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the q and a tab that's just situated on the right hand corner of your screen. Please just 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 we'll publish those responses where it is appropriate to do so. Before we begin, as usual, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from CROMA SECURITY SOLUTIONS PLC. Roberto, good morning, sir. Good morning, Jake, and thank you for the introduction.

0:47 Welcome, everybody, to the CROMA SECURITY SOLUTIONS GROUP PLC, six months to the 12/31/2024. I hope to give you some information that is very relevant to what we've been

1:00 up to. If we can go through past our overview. So that some of you have already seen part of this presentation, but for those of you that haven't, I'd like to talk to you about the security market today as it is. Our market is very distinctly split between the locksmithing sector and the electronic security sector. Locksmiths, key cutting safes, grills, shutters, etcetera, all physical security measures. And generally speaking, when we talk about locksmiths, they sit on their own in very, very small fragmented businesses around the country, sometimes only a handful in each town and city.

1:48 In terms of the security electronic security market, it's made up of larger companies providing access control, CCTV, intruder alarm systems, communication systems. And they generally don't cross pollinate because the skill sets required in locksmiths is very different to those in electronic security. Here at CROMA, we have two distinct companies, one in locksmithing and one in electronic security. And over our years of experience, the one thing that we have observed is that the opportunity that we are picking up on as our strategy is around the six and a half thousand locksmith businesses in the country today.

2:33 Now whilst that's a large number, quite a large number of the six and a half thousand locksmiths are single sole traders operating from a van without premises. What we're interested in is the ones with premises with between three and five staff that have been operating for a number of years with an established marketplace, and we'll talk more about that later. And when we talk about this as this being our market opportunity, we absolutely see it as that, and we'll explain again further later. The CROMA model, which is our third circle on there, is really about us being already a proven acquirer of these individual small locksmith businesses, and we then use them to feed into our electronic security division as well as broadening their capabilities as they're in in these individual lock businesses.

3:33 If we just talk about the interim highlights, well, I'm really pleased that, you know, against the backdrop of a very difficult trading environment, we are up on all measures. And very, very pleased that we've reported those, and you've seen those numbers, no doubt, already. I guess from an operational point of view, the highlight is post six months, literally just post six months, we acquired a locksmith business in Leeds, and I'll run you through that on a later slide as well. So our network now totals 17 secondurity centers as of January 31, and we have a strong pipeline of future acquisitions. We've also had strong flow of new business during that period.

4:27 We're finally, on this slide, we're considering strengthening our management team in order to ensure smooth operations going forwards as we expand our portfolio.

4:42 So let's talk about the group today. Our headquarters are in Southampton. We have 95 employees, and we've been in business for more than fifty years in total. The 17 secondurity centers that you can see on the right hand side of this slide, at the bottom, you'll notice Leeds being the new one. And you can see from the map that we're starting to get around certainly in the North, and we've got other areas that we're interested moving forwards in in filling in. In terms of the growth strategy, well, it's fairly straightforward. Some of you will know, and those of you that have done your research will be very aware that we sold our guarding division some eighteen months or more now ago, and we're reinvesting that £6,500,000 from the sale of Vigilant to help us in creating our national security brand.

5:44 Generally, we're acquiring modestly valued independent locksmiths, and this is all part of the strategy. One of the reasons we're looking at these established locksmith businesses because we're able to buy them at very sensible levels as small businesses and add them on to what we're doing. We continue to aim to complete between three and five acquisitions per annum. We should stress we may end up doing two very large ones. We may do five small ones, and that remains our target as we as we speak today. In terms of the acquisition and conversion model, it's well established, and we're targeting an annual return of investment of at least 15%.

6:29 I'm happy to say that on all of our past acquisitions, we have achieved that. So when we invest this 6,500,000, we're looking at uplift to EBITDA margin, and I've mentioned the return of investment of 15%. Turning to the acquisition that we've just made. This is a really interesting one because we've acquired Meridian Security Systems in Horseshorth in Leeds for a £150,000, which was less than three times EBITDA. In terms of the business, it's been well established, run by John Taylor and his wife four other staff, and they are a business that has an online presence as well as some electronic security.

7:16 We also acquired the freehold property from where he has traded for the last twenty years, which is a well known location for customers to come and visit. And we've secured the ongoing brand and location by purchasing that freehold for 275,000 at market value. In terms of their year, December 31, they generated revenues of 100 and sorry, 836 with DVT of 46. And I mentioned earlier trading for 20 years, and they've been serving their local residents and business community throughout that time. They operate from that one single store as well as their online successful online business.

8:04 The key point here, and this is something that we look for in all of our acquisitions, is that all six of the staff remain firmly in place to carry on that business in that location, and the the vendor also is confirmed to want to stay with us for the foreseeable years ahead. Our nearest store to Leeds is in Berry in North Manchester, where we also specialize in electronic security sales. And immediately, we have this opportunity to lift the leads store profitability and meet commercial demand, which Meridian has not yet had capacity for. One of the things when we met them is that they explained that they didn't feel they could expand easily, didn't have the breadth of knowledge which we now bring to the table, and we are already just weeks into this process developing some of their clients to add value to our existing business in Berry.

9:06 In terms of the acquisition program, we've talked about three to five. Well, currently, we're on track to complete another two to three acquisitions in 2025. And this pipeline is a mix of cold targets and a growing number of recommended targets. I think because of the success of our previous acquisitions, the industry are all talking to each other, and we're now starting to see people contact us and ask if we're interested in looking at their businesses. Some of you again will know we have a very stringent process for ensuring suitability or a term that I use all the time, which is survivability of those businesses under our control. We have not publicly stated how big our pipeline is, but sufficient to say we have many opportunities and hence why we're considering expanding our management team to give us more time to dedicate to expanding in this sector.

10:06 The market is interesting because it continues to be little or no competing buyers. And I think that's not anything unusual because these are small businesses for which most companies would not pick up, and it needs a lot of expertise which we have in our business to convert them and consolidate them and turn them into higher EBITDA margin businesses. And therefore, pricing in the sectors remain stable. We're able to buy at very favorable rates. In terms of the current term real estate, we have nine freeholds and eight leaseholds. We often get asked the question, why are we buying freeholds? Well, it's a very simple answer. Freeholds secure the established trading locations.

10:55 They also reduce our operational costs. And whilst we have now 3,000,000 tied up in property, we mustn't overlook the fact that our bankers stand ready to give us up to 90% on drawdown against that 3,000,000 should the need arise if our acquisitions accelerate to the point where more cash is required over and above the cash we already have in the bank, the 2 and a half we still have to receive, and the fact that we remain very cash generative. So let's talk about the store transformation model. Typically, these are family owned businesses. They have a limited product range because, like all industries, the locksmiths have exactly the same thing. And if we liken it to the motor industry where there are so many brands in the market, you cannot be an expert in all of them.

11:55 I'm very pleased to say that across our 17 branches, we cover just about every product that's in the market. And where we have a branch that may not be experienced in a particular product, they can draw down on our knowledge and access to those products from other branches. It means when a customer walks into a shop with an unusual requirement for that particular local area, they can source that through the group very, very quickly. They tend to have a lot of local customers, and we must remember that they deal with schools, hospitals, the general public, and the trade. One of the things that's common in all of these locksmith businesses is that they have limited back office, and we're finding that in many of the acquisition targets, they don't even have really strong bookkeeping, and they tend to hand that over to their accountants for high fees.

12:52 And that is an immediate saving to our business because we transfer accountancy into our central headquarters straight away. The other thing that we noticed in these businesses, they have low operating margin because they're trying to juggle too many balls with too few staff. They have limited buying power because they're small. And their typical revenue, we put down point two to 1,000,000, but, of course, there are those with higher turnover than a million out there, and some of those are also targets for us to acquire. In the middle of this slide, you'll see the words the CROMA effect. What what is the CROMA effect? What does it mean? Well, it means when we take over these businesses, generally speaking, we will take them from single digit to double digit EBITDA margin.

13:39 We have group procurement powers, which they don't have. We have rebate schemes set up with most manufacturers and onto annual turnovers. We will receive additional refunds against our spend. We're looking at a return on investment target of 15%, and Teo, our CFO here to my right, keeps a very close eye and control of what's happening on that front. And, of course, when these businesses are sitting under the CROMA banner, they become group owned, they become part of the national network, and we do have some national accounts, and we're already transferring some of those orders into those branches instead of contracting them out or making the long trip from our existing locations to service those accounts.

14:32 Of course, they have their local customer base, which we can expand services to, and they can also start supporting our national customer base. I think the final point about store transformation is the centralized group services. Again, some of you will be aware that we have our own IT team here with software writers, and we have written our own software that gives us electronic control and very, very good information coming back from all of the spends in these stores. And that is something that pushes them towards paperless and gives us sight on minute by minute on each of those shops. If we talk about the financial review, which we covered earlier, I said I was very pleased with the numbers. As you can see, revenue, gross margin, EBITDA, all of those numbers are up.

15:28 Cash and cash equivalents up significantly in general terms. Whilst that's such a high run-in half year twenty four, some of you that have read the reports will realize that we did collect another couple of million pounds. So we've moved forward slightly. On a like for like basis, our revenue grew by 4%, and we still have this further 2,500,000 that I mentioned earlier that's due in from the disposal of Vigilant, and that is to be paid over the next six quarters. So let's look at our two divisions, locksmiths and electronic security. So our locksmiths at the moment, you know the presence is across the 17 secondurity centers, and, of course, we are actively seeking to grow that number.

16:17 In terms of customer base, all of these locksmiths that we hold in the 17 centers and the proposed targets for acquisition tend to have a loyal customer base with high reoccurring revenues. I think this is an important factor to understand how safe these are as acquisitions because most of them supply master key systems to the local authority schools and hospitals that I mentioned earlier. And those master key systems are locked into those businesses. So whilst we don't have contractual paperwork tying those clients to those local stores, they do have a product that can only be serviced through their local center with registered keys, and that is our reoccurring revenue walking through the door all the time.

17:08 In terms of the revenue drivers, well, of course, replacement and upgrade grades of locking systems is standard. Key systems have a a a life, albeit a very long life. They also have to be re replaced in the event of lost keys or breaches in security and just general improvements. So there is always upgrade work required across most clients' estates. Of course, growing prime levels and the increased sorry. The associated increased safety concerns that the general public hold is another driver for our business. The other driver, of course, is growth in housing. And one important part about blocking is innovation.

17:55 We are an innovative bunch, and we like innovation and introducing that to clients. EyeLock is one of those products. And whilst we are still in its infancy in The UK, we are seeing a lot more interest in a hybrid locking system that bridges the gap between physical and electronic security. And and just to finish off there, iLock is a purely mechanical system, but it draws power over a three millimeter air gap from the back of telephones to activate those locks, populates a database as to who is opening the door and at what time. And, yes, it's a very effective product, and we will see some change in our industry going forwards. In terms of the final bullet on this locksmith slide, it is a natural bridge into fire and security.

18:45 And one thing we should be clear on is that whilst clients may spend on locks and keys, they tend to have a far higher spend when it comes to electronic security, so surveillance cameras, alarm systems, access control systems, etcetera. So picking up strong clients that trust those local locksmiths already with their locks and keys is not a difficult sell to our clients to suggest to them that we might want to come and service their electronic security. When we move on to the fire and security slide, well, our presence is headquarters down here in Southampton, and we also have another division in Bury in Greater Manchester. So we have engineer bases in both locations.

19:32 In time, we plan to expand them into other areas and other centers. The set the sector focus for fire and security, health, leisure and entertainment, schools, utilities, government, and ministry of defense, These are all clients that we work with consistently in our electronic security systems business. Again, the revenue drivers, interestingly, compliance with private and corporate regulation. There is an awful lot of legislation coming into force, and a lot of which is already enforced, and still many companies are flouting these regulations. As experts in our business, we understand those regulations, regulations, and we are able to articulate those to clients.

20:22 And we find many people in our industry are not playing the compliance card correctly and advising their clients correctly. Whilst it leads to greater spend for those clients and perhaps their uncomfortable conversations, they are black and white regulations that people should follow, and we are very good at articulating that to our clients. Innovation, we mentioned earlier through technology. Again, we are early adopters of good, not bleeding edge, but we try and test all of the new technologies as they come out. And when we are satisfied, we introduce these very early to our clients to enhance and bring better results in in their security. Again, growing prime levels and associated increased safety concerns is a driver in fire and security.

21:14 I don't expect you to understand the fourth bullet point, but for the uninitiated Martin's Law, Martin lost his life at the the Manchester Arena at when we had the the bomb there. And that is a piece of legislation passing through the house as we speak, and it will bring this terrorism bill to to play in open spaces where we have ticketed events and large gatherings. And all of those numbers underneath, as I said, I don't expect you to know what they are, but they are relevant standards that should be applied for escape mechanisms used on doors. Currently, The UK has not even begun to address all of the concerns in that area.

22:02 It's a massive marketplace to put the right hardware on those doors and escape routes to buildings and venues. So finally, let's talk about the outlook. Well, we've entered an acquisition led growth phase. We're very much moving at a pace now with this. We've completed the Leeds acquisition this year in January on the thirty first. We've got the strong pipeline, and we're on target to complete further two to three similar transactions in 2025. We've got an excellent financial position with cash resources to fund our rollout plan, and we expect to see the compounding benefits of these acquisitions contributing to sales and profitability.

22:52 Trading for this first half oh, sorry, second half has begun well, and we are well positioned to complete a successful year. And finally, net assets per share moved from $10.09 to $1.11. I think that is sums it up from our perspective, and I'd be very happy to move on to answering some of the questions that we have on the screen. So if we go to the top, please, Izzy, of those questions, I think our first question, how confident are we in receiving the balance of payments due from Vigilant sale?

23:33 This is a reoccurring theme, and a lot of people keep asking that question. But every time they ask that question, we really give the same response. There is no certainty in life. We don't know fully the answer. But are we confident? Yes. We are confident. Why are we confident? It's because we've received all payments to date, and they are the majority of the way through making all those payments. We have a director on their board that we've placed. We have constant updates and reports on performance, and it would seem ridiculous for them to fail to make their balance payments at this stage when they've already invested so much in buying out that business.

24:23 So whilst nothing remains certain, we are confident that we will see those payments come through. Now the next question, I can see from Gary B. It says, with a mix of nine freehold and eight leasehold properties, will future acquisitions prioritize freehold locations for better long term control? Thank you, Gary. Good question. Again, my answer remains the same on that because if we think the location is relevant to the footfall and it's a long established location, then, of course, we're going to want to try and control it if we can.

25:09 But we are open to leaseholds and freeholds. It's all dependent on each and every case. So in terms of what purse so I'd say next question. Michael, out of the six and a half thousand UK locksmiths, approximately, how many locksmiths meet the three to five staff with premises threshold? Again, a very good question, Michael, because that will tell us how many we can acquire. I think there are more of them than we can probably acquire in my time. So I would suggest there's at least one to two in every in The UK.

25:59 Next question. Sorry. They're flying around on the screen here. So so what percentage of national accounts is contracted out to third party locksmiths? I'd like to say that's actually a very small amount. I would think it's probably nearer to a single digit of one or two, if that. We control most of the works through our own locksmiths. We occasionally, for a small quick support call, might place it with a contractor, so a very small amount. In terms of the 17 centers, again, Michael, how many offer master key services? Every single one of them.

26:45 And it they all have the ability to provide master key services and do so. Next question. Again, Michael, what percentage what percentage of corporate and commercial customers use both locksmiths and fire and security products? I'm not sure if you mean what percentage globally or of our clients. Could you hold that question on screen there? Because I can't see it. What percentage of corporate and commercial customers use both Locksmith and Fire? I think you're asking the question of within our business. I would say I don't know is the honest answer, the total percentage. What I do know is we have thousands and thousands of locksmith clients, some of which literally come in for a few keys and a few locks.

27:37 So I would say it's a small a small percentage of people. Whereas if you look at our electronics systems, almost all of those clients that we provide them, they also buy locks and keys from us. Next question. Okay. So what percentage of your revenue is retail individuals requiring a key or new locks, and what is corporate? Again, difficult to split, but I would say it's a thirty seventy split, possibly less than 30 actually in retail.

28:23 We have a lot of commercial we have a lot of commercial work that comes through the doors. One of the areas where we're very strong is that we have lots of tradesmen driving around that have got jobs to fix. A housing association would be a good example of that where they have trade staff that have to fix window locks, door locks, and they come into our shops to pick up replacement components on the day so that they can secure a door or secure a window. Now whilst they can order those parts, they generally won't get them for a day or two from other suppliers. So we are the convenience of turning up, picking up the component, and servicing clients same day. So we have a lot of reoccurring business and growing from trades people coming into those stores.

29:14 I don't know if I'm running out of time. No. Not forgot then. Izzy, can you scroll up? There is another it's annual. Do you charge an annual fee for Master Key Systems? Right. The second part of that question. Right. So we do not charge an annual fee to Master Key customers. Those customers are locked in every time they want a new lock, every time they want additional keys. They have little choice but come to us to expand their system for them. So unless they want to write off their investment and switch to another supplier, they are very much locked in to coming to see us for that service. The only area where we do charge annual maintenance fees in the locksmithing business is on one of our very large entertainment clients across the country where we have annual servicing of safes and safe deposit tubes and locks on their site. So we have maintenance contract to perform those duties for them.

30:23 Ah, very good very good point from Teo. Thank you. So there is a reoccurring revenue for EyeLock. EyeLock being a hybrid well, I mentioned this earlier. It's a locking system that is mechanical but draws power from mobile phones to activate it. Because it's a software driven product, there are annual licensing fees for the app on the telephone of the the user as well as a license fee for each lock that's installed. So we've installed 1,200 plus now of those locks in the country, and each one of those brings in reoccurring revenue in terms of software licenses. Next question.

31:19 Can't read that. Sorry. As the business grows good question there. As the business grows, do you consider adopting some sort of apprenticeship program to expand the business? It's inevitable that we have to do that, and we're very active in our locksmith branches bringing in when we acquire a business, sometimes one of the first things we do is bring in a a youngster, an apprentice that can start learning from us because our industry is an aging industry. The targets that we're buying tend to be people that have run their businesses for some time, but have not had the ability to invest in bringing new people through apprenticeship.

32:06 So yes is the answer. We're already actively doing that and training people within our business, and we plan to continue doing that for obvious reasons. So, Matt G, are you likely to move towards larger mergers and acquisition targets as the scale of the group operations increase? I think the answer is, of course, we have to be mindful that this is a fragmented industry, as I mentioned earlier, and therefore, there aren't a a great number of big targets out there, but there are certainly some larger ones. And, we have an appetite to pull them on board with CROMA.

32:55 I think that's my question. So thank you very much, and I better hand back to Jake. Perfect, Roberto. Ted, that's great. And thank you for your presentation and for being so generous of your time then addressing all of those questions that came in this morning. But, Roberto, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments just to wrap up with, that would be great. Thank you, Jake. Well, really, in my closing comments, I want to thank everyone for their interest in CROMA. I hope they're as excited and passionate as I am about what we're doing here at CROMA, and I look forward to really giving everyone further updates in due course because we find this a use useful way to communicate what it is that we're up to here at CROMA. So I will just say thank you very much for your time, everyone.

33:54 Perfect, Roberto. That's great. And thank you once again for updating investors this morning. Could I please ask investors not to close this session? Shall now be automatically redirected for the opportunity to provide your feedback in order the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of CROMA SECURITY SOLUTIONS GROUP PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.