Vianet Group (LSE:VNET) — Interim Results

0:02 Good morning, ladies and gentlemen, and welcome to the VIANET GROUP PLC interim 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 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's appropriate to do so. And 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. I would now like to hand you over to the executive management team from VIANET GROUP PLC. James, good morning, sir. Good morning, everyone, and thank you for joining us today with, Mark and and Sarah.

0:50 I'll kick straight into the results. Strong set of results.

0:54 BeverageMetrics acquisition is now fully integrated. The hospitality division is in growth and we're seeing real momentum in the unattended retail division. And there's been further progress in new verticals where we've installed over 1,800 devices in forecourts, so we've got an established presence there. And another period where the group is ahead on key metrics. Top line growth agenda is being delivered. We'll turn over to page two. Quickly for those that are less familiar with the business or perhaps seeing us for the first time, I'll I'll do a quick run through of what we do. Basically, help customers transform business performance, allowing them to do more with less.

1:42 We install hardware that allows us to harvest data, thereby produce dashboards, alerts, alarms, and insights that allow them to address waste, shrinkage, improve productivity, and drive sales. We have two two key divisions. Smart machines is the unattended retail division where we provide complete vendor connectivity and contactless payment solutions. The other division is our hospitality division, beverage metrics, where we're in about nine and a half thousand pubs and bars where we provide the leading comprehensive beverage and bar management system. In the unattended retail division, we cover areas such as the core vending operations, forecourts, and laundrettes.

2:34 And in hospitality, it's The UK pub sector, predominantly leased and tenanted, and with with the the acquisition acquisition of of BeverageMetrics, VNET that's given us the relevance across managed hotels in the wider leisure arena. We're we have a typically, you know, software as a service model. We install the hardware either on the upfront CapEx or a rental model, and then we enter into an agreement with customers for for a subscription model that is varies from three to five year contracts, and that's for service, licenses, and data. Turning to the financial highlights, I want steal Mark and Sarah's thunder. I'll just sort of have a quick run through, you know, top line. Strong financial results ahead on key financial metrics, and, that's a result of our footprint expansion.

3:34 Good to see top line growth focus is paying off. Profitability has increased as is cash generation and our debt reduction. That allowed us to resume a full year dividend at the full year, and, we're reinstating the interim dividend. It's a modest interim dividend dividend that we're reinstating, for the half year. Moving on to unattended retail, strong momentum. The bottom line is that we tick the box for customers in terms of the the quality of our hardware, the customer experience, which rates ahead of the competition, our transaction rates, that we benefit from the partnership with SureSite and and hardware pricing.

4:22 In the period, we've continued to well, for the last twelve months, we've continued to be very aggressive on hardware pricing because what we wanna do is drive the footprint expansion that's gonna drive the recurring incomes. And, again, we continue to benefit from being a trusted adviser, having looked after customers during the COVID period. Our gain and retain strategy around about the three g shutdown and the migration to four g has paid dividends. We've secured all our existing customers on longer term agreements for three to five year agreements, and we've displaced the competition in in in existing customers, and we're picking up new customers where we're, you know, sort of addressing the competition. And we've had some good, you know, wins in buying groups where we've never traditionally been strong.

5:14 We our competitors left the payment payment solutions market for vending, and we're picking up some of that business. And we've also recruited their former EMEA sales director to upgrade our sales team.

5:35 Building a good strong pipeline with 48 new contract wins compared to 37 last year, that's delivered 4,700 new devices in the period of which a thousand are three g upgrades to our existing estate. Clearly, that doesn't give us new recurring income in those thousand, but what it does do, it's extended the period that offers subscription to five years. So, you know, we're very pleased with the progress. Good footprint expansion, long term recurring income is building. Turning now to the forecourts. The groundwork that we've done over the last sort of eighteen, twenty four months has really been paying dividends, working with SureSite, developing key relationships, creating strong foundations.

6:29 The Wilkomatic and Wilkomatic and ROMTEC installations are now complete. That gives us a substantial base and a reference point for for other customers. The UK self serve market in forecourts, whether that's rollover car washes, jet washes, vacs or air towers, tends to be high ticket, you know, certainly compared with the snacking can vending. And the environment that, our hardware is installed is quite harsh, so we've got to have, you know, high degree of functionality, reliability, and ease of user, and user friendly hardware that allows customers to really maximize their revenues. And of course, the reconciliation is important as well.

7:16 You take someone like Multimatic may have a presence in Tesco as in Sainsbury's where they may have been on a rate revenue share deal. That means there's there's got to be, you know, basically same day reconciliation of the funds so they can take their their share of the the the sales.

7:37 And the the the overall linked opportunity in the in in Europe, Crist car wash systems are one of the, you know, major car wash manufacturers in Europe. They they have a partnership with in The UK. We clearly have been dealing with them to develop our hardware to go into their car washes, and that gives us access to their European operations. So it's a it's a watch this space, and we're do also doing work with some EV charging prospects in Europe as well, field testing our hardware. So overall, we we're making good progress in new verticals.

8:25 Turning now to hospitality. Really pleased with the progress here, delivering growth and demonstrating long term resilience of the, of the least intended sector that we dominate. It's a very stable base, and it's also benefiting as the hurdle rate for running a profitable managed house, you know, increases on the back of increased costs. A lot of there are we're starting to see some managed houses being converted to leased and tenanted where the entrepreneur can spend a lot more, you know, is is committed to that to that business. It's not only his business, it can be his home as well. So there's certainly they're putting a lot more work in than perhaps the average manager would.

9:11 So we're starting you we're we're very comfortable with the strength of the lease and tenanted model. Seeing new long term renewals with Heineken star pops and bars and with Green King in the last, in the last week or so. And in terms of securing, you know, new long term, you know, business, we've got three new contract wins including Marshmans. The other thing that's, quite exciting for us is that the big brewers are increasingly interested in getting their getting their hands on data, and understanding what's selling when and mapping that with, activities that might be Sky TV or TNT, you know, football match, rugby matches by mapping, you volume performance versus activity, and that allows them to, you know, I guess, promote the brands.

10:08 Again, ahead on all key metrics, so really pleased and, you know, I think for me the the bit that's really exciting is the beverage metrics acquisition. That really increases our relevance to the wider hospitality market beyond least intended. In terms of the the FAST scan inventory platform that we acquired and now that we're fully integrated our draft beer module with that, we can do full till variance analysis that gives effectively a view of you have one additional pint a day going through your till that pays for the system and draft beer quality. The great thing about it too is that, you know, the solution, the dashboard is intuitive and user friendly.

10:59 A pub manager can look at that on a on a in the morning, in a minute of the day, it takes steps to see the dashboard and figure out what he needs to focus on that day, if at all. And that's to say, one additional point a day going through the through the through the tailpaste for the system. In the period, we launched the energy saving solution for glycol cooling systems for beer. 20 we've got to 20 initial sites in three brewers, and, there's a further 100 or so installations due in the second half. We charge in the region of about £600 for the management hardware installation, and then it's about £15 a month. It won't go across all, you know, nine and a half thousand of our existing bulbs, but there'll be a fair proportion of them where this is applicable.

11:55 So it's incremental revenue.

12:01 Turning the page, I guess the key drivers of the same regardless of which sector we're dealing or whether we're dealing in The States or whether we're dealing in The UK, The bottom line is the the costs are going up in the recent budget in particular. National insurance thresholds and also the minimum wage, you know, impacts our customers and the BUBS sector in particular. So the increase in wages, utilities, and the cost of goods, and there's less price and flexibility than there ever has been because there's less there's less cash in the pockets of consumers. So there's limited options for for customers, you know, regardless of sector on on what they can do to actually, you know, generate, you know, generate increased profits. They're gonna be able to do more with less, and that's where that's where we help.

12:56 If we sort of look at The UK pump base, nine and a half thousand pumps, that's a substantial business. No real competition, all in long term contracts. So that's pretty robust, busted, stable and we continue to drive growth from that. And then beverage metrics, that draft beer module integrated with the standalone stock module allows us to actually make some progress in the wider laser market. If we look at the opportunities in our existing, you know, customers, there's about a thousand sites that do not currently have draft beer monitoring. There's scope for footprint expansion and that was and that has reduced from 1,200 in the last twelve months.

13:44 Then we've got a couple of key pilots going on in The UK. A managed pilot is making has delivered really good results, and, we're we're currently, in in negotiation there. And then we have a pilot at the Oval, and that's with Levy hospitality. They've probably got another couple of 100 sites across The UK. That's helped us actually, you know, work on developing the product further and looking at, you know, real time data. If you think about a test match that you may have temporary staff working your bars, If you if there's some shrinkage you wanna know there and then, you don't want to know next day, you wanna do it there and then.

14:31 Moving on to use of beverage metrics and just touching on what that brings to the party, now that we're fully integrated. Perpetual inventory management platform combined with a fully integrated draft beer management solution. As I said, it's intuitive, user friendly, drill down. I think we've learned lessons over the last sort of five, six years about not not doing data overload with our customers, so it's intuitive and it's straightforward and simple. And, you know, simply the shift point of sale loss analysis by itself, ensuring that everything that's called is going through the till. One additional point a day pays pays for the system. So the bottom line is that that should be a no brainer.

15:20 And the second number and secondly, quality. If you get a perfect point poured right first time, that means that you can improve your productivity and move on to serving the next customer. So big focus on quality, big focus on line cleaning and ensuring that the, you know, beer is served through clean lines. And we've got a high degree of engagement both in The UK and The USA. Looking turning to The USA, I I won't go into a great deal of detail, but the slides themselves say it all, the chart itself. Bottom line is we're working with key players. We've got Chili's, we have a 250 sites, Outback of 700 sites, and Darden 1,800, And then we've started working with Aura Hotel Group.

16:16 They have 40 sites, but they carry the big brand brands, so, they they're a Marriott franchisee.

16:27 So a significant marketplace in The USA, and we're making really encouraging progress, and, you know, relatively limited cost and exposure due to our relationship with fintech. And that that for for me is important because, you know, nothing ever happens as fast as we want it to happen, but the fact that we have got limited cost base, you know, it doesn't hurt us too much. We're not burning we're not burning lots of cash. In terms of the proposition in The States, basically, you know, you're looking at, you know, typical ROI, three to six months. The shift point the shift point of sale loss analysis report itself gives the payback and the return on investment before you let start to look at all the other benefits.

17:16 Just looking at some of these opportunities, Margaritaville that knows a chain of resorts and hotels that also includes Landshark and 05:00 somewhere bars. We're on the franchise technology stack. We've had fast can inventory solution in there for a long time now for multiple years, and, you know, they're in the process of a, you know, a business expansion themselves and we're installing beer for the beer module for for the first time in in January. So it's again making good progress with them. Then Chili's, no. We've had 20 sites with them for some time on the historic the legacy iDraft product.

18:06 They've been upgraded to beverage metrics and delivered excellent results both in terms of, aggressive point of sale loss, but also in terms of, aggression beer quality and line cleaning. Chile's one of their focus one focus area for them is to serve delicious beer, and we help them do that. FAST scan inventory, and we got a 90 site to 90 site initial opportunity, with one of the benchmark players in The USA, and that's that's something that we've working on for a couple of months now, and we expect to see a rollout there during q four. And outback, no. We've got 10 site pilot.

18:57 We've been accepted onto the test onto the test program in the new year. So that will be a draft beer module going into into Outback. And then also there's Aura Aura hotels, and that gives us access to Marriott, two initial installations with a a further 40 to go at. Bottom line is that, you know, we're address we're helping customers, you know, address address shrinkage and improve the productivity, allowing them to do more with less. Moving on to our our partner in The States, you know, Fintech were born of the three tier system in The USA where the brands, distributors, and the retailers, have to be separated and and that's a post prohibition, initiative from the US government, that was to ensure that government regulations were being followed, that taxes were being paid, and that there was no gave up of monopolies, vertical monopolies.

20:08 The the system differs by state and sometimes by county. FinTech, basically, they, you know, oversee alcohol invoice payment for collection reconciliation, and they do that for 40% of all on and off premise in The USA, and they're used by 240,000 retail customers and 5,000 distributors across the The States. Great news about this relationship for us is that it gives us unique access to decision makers in chains, and they have direct access to the independent sector that's very difficult for anyone. And the other beauty as well is that, you know, the the cost of attending trade fairs and shows in The USA would be quite high, but we share those costs with them and share stands with them. Now why why do why do fintech why are fintech interested in in in VIANET?

21:11 Bottom line is that VIANET and BeverageMetrix are the operational link to the retailer for the full full cycle system, that covers ordering, receiving delivers, deliveries, invoicing, and stock in engineering management. We we provide the ongoing perpetual inventory. We provide automated ordering that that goes into fintech, and then fintech, you know, transmit to suppliers and oversee the shipping of orders and then, you know, we receive that data again and then we do the automated receiving for the customer and that goes back into the perpetual industry. So a full benefit with official circle that reduces labor and increases productivity and then gives

21:59 a point of difference for that will provide a point of difference for VNET GROUP versus the any competitive competitors they have. I'll now hand over to Sarah who will take us through the p and l. Yes. Good morning, everybody. So I'll walk us through the p and l before I hand over to Matt with the cash flow and the balance sheet. Internal debt this year was up 500,000 versus last year, showing a 7% growth. And within that turnover, recurring revenues held very strong at 84%, increasing to 6,450,000 from 6,280,000 last year. Gross margins held strong at 67% overall, with overhead costs being maintained year on year as what we'd expect, all of which led to the operating profit of GBP 1,430,000, which is a 10% growth on last year where we were at 1,300,000.

22:53 EBITDA was up 27% on last year at 1.55, noting that exceptional costs were 200,000 less this year as last year carried the BMI acquisition. Earnings per share was a positive naught point naught six p this year versus last year's loss of naught 0.58 with a small profit before tax of 18,000 for the year versus last year's loss of $17.01. Moving on to the divisions, it's smart zones, specifically UK and US. Turnover was up 300,000 year on year with a 7% growth, and recurring revenues held very strong at 94%. The sales price of September was 9,500, and new installs were 119 for the first half.

23:40 Gross margins remained steady at 81%, and this led to an increase in operating profit one nine four nine versus last year's $171.00. SmartSold UK alone saw operating profit growth of 12% year on year, with The US having like for like rep losses of 250,000 for the period as we'd explained.

24:05 Within smart machines, turnover was up a 190,000 for the year with 6% growth, and recurring revenues are a healthy 70%. Device sales, as we've already spoken of, were 4,716, and of which a thousand of those were for three g replacements, which we've support our customers with. Outside of those, we then have 3,659 new device sales versus last year's 3,141, which was a strong 16% growth increase in overall footprint to 37,000 versus last year's 34,500 with 48 new contracts signed in the period all long term. This all led to operating profit on power last year of 1,000,000.

24:53 I'll hand over to you, Mark, with the cash flow. Thank you, Sarah. Good morning, everybody. So strong cash generative qualities of the business continued to shine through. We had an operating cash generation pre working capital, per the statement this morning, of 1,610,000. Last year, was 1,260,000, so 27% growth year on year, $3.45 k. That's another strong track record of cash conversion of 104% of unadjusted EBITDA in the period. We had positive working capital of of near just over 300,000, principally from reduction in debtors and unwinding of stock, and that improved the cash generation figure to 1,920,000 from 1,280,000 last year pre the tax rebate one offs that we got last year.

25:39 This represents a very positive 124% of EBITDA and $1.34 of 100 adjusted operating profit. The cash we generated was invested in research and development intangible assets of just over 700,000. Tangible assets themselves of just under 300,000. We paid the full year dividend of 221,000 and obviously continue to service our bank facilities in loan repayments and interest. Overall, that led to a very positive 426,000 cash inflow, which is a very positive step forward. Last year was influenced by the refinancing on August 23 on our move to HSBC. So the step forward this year has been very pleasing. We move on to the balance sheet.

26:26 Balance sheet remains strong, robust, with improved and reduced net debt and improving cash position. We've talked about the working capital improvement, the cash built to 2,250,000 in the period. Last year at this point was 1,320,000. That's 70% year on year growth with some of that cash now being invested to maximize returns. The net debt reduced to just over 1,000,000 from 2,090,000 last year, and and I would expect that to continue. So it's a strong balance sheet to support the business ambition that Jim's been talking about. Back to you, Jim. Thank you, Mark. Bottom line is that we're in a what I what I think is a really exciting position from a commercial, financial, and also strategic perspective.

27:14 We've got strong financial engine. We're in a position to drive, you know, top line growth, which can assume which will flow straight to the bottom line. You look at the machines business, gross margins, bit lower than hospitality, but the great news about, you know, the the the machines business is that we don't need to layer on lots and lots of, you know, additional costs with new with with scale, which is which is good news. Hospitality, you know, we're it's really in position for a period of sustained growth in a fantastic position. And the footprint expansion that's don't know. We've got a very strong pipeline with existing customers, and then you throw in the new customers that we've gained in in the in the unattended retail business. Real scope for footprint expansion there, and we'll see the the subscription revenues increase, you know, significantly in the next two years.

28:19 And the bottom line is that the levers work in our favor. All sectors, you know, basically need to do more with less as costs increase and pricing pressures mount. Bottom line is that we're in a fantastic position. You know, we've got we're in the right markets. The drivers work in our favor. We've got strong pipeline in both hospitality and and in unattended retail. We've got products that are relevant. We've got good people, and we're trusted advisers. So we're in a we're in a in a very sound position looking forward to a period of sustained growth. That's it for the presentation. I'll move on to the questions. This pre submitted question here.

29:07 In your recent trading update, you say the following with regard to The US business. We are encouraged by the advancements in high engagement levels in key customer pilot programs in this significant market. Is it possible to give us more of an insight into the pilot programs specifically with regard to the number of programs, the size of programs and the time scale involved, and the type of numbers involved if the programs are successful. Okay. We've got about six pilot programs in process at this moment in time. It's quite a quite a time to see. You know, it takes a while to get these programs in place. You've got to get, you know, basically signing off to to have the pilot program because, actually, imagine these these, you know, large businesses in The States have got a number of different initiatives, so getting onto the radar and getting onto the things to do is difficult, but we've managed to do that.

30:08 Again, by the relationship with fintech And those pilots typically last, you know, you sign up for a three month pilot, but then there's the lead in, the silent period, then there's three month pilot, and then there's the valuation period. So it takes best part of, you know, four to six months for a for a pilot, and then it's gonna go through the approval processes. If you look at the pilots that we're currently working on, they will they will they ultimately, those businesses have the best part of 5,000, you know, restaurants and bars that become our immediately addressable market.

30:55 Second question here. You referenced long term renewals with Heineken and Green King. Are there any additional major contracts in the pipeline? And how does this impact your revenue visibility? Okay. We'll start with leasing tenanted. We are we keep we'll start with leasing tenanted. Our existing customer base is now fully contracted on on the long on the long term basis. So we're in a we're in very good shape in that respect. And there are another couple of major contracts that we're working on that you know, so two things. Number one, we've got high degree of visibility on our core revenues, which will deliver which will deliver growth in the in the coming in the coming year.

31:42 And we've got another couple of major contracts that we're actually worked on that will give us enhanced, long term visibility of our revenues. Next question. Given the size of the addressable markets in The UK and US, are there plans to explore additional international markets in the short to medium term? Okay. Well, let's let's start with hospitality. Hospitality, absolute focus on UK and USA. And we pick up bits and pieces elsewhere, but we're not spending money to grow in what are probably, you know, less consolidated markets whereas The UK and US are pretty pretty well consolidated markets in terms of the number of players and that's where we need to be that's where we need to be focused.

32:35 Unattended retail, we we can expand beyond The UK in unattended retail. We've already got our presence with Jakob Doh, Egberts, and a couple of other players in the in the in the Benelux. And, you know, we've got the potential to, you know, work on developing the relationship. We have Chris, the German car wash manufacturer,

33:04 and and basically take it from there. Next question. How are you managing the lower margins on hardware sales? And when do you expect these upgrades to translate into higher profitability? Well, the the bottom line is that any new any new new device installation, you know, when we install a device in an existing installation up upgrading from three g to four g, yeah, there is there's an, you know, sort of a hardware margin hit there. But what we do is we secure that subscription revenue, which is very profitable for the long term five years.

33:50 So that's that's a positive. When we install in a a new site, you know, you know, a brand new site, the bottom line is the hardware is an enabler. We just wanna get the hardware out there because that then gives us, you know, a three to five year, you know, subscription subscription revenue contract that gives us long term earn earning earning's visibility. So it's I'm I'm I'm less concerned on on hardware margin, but we we still make margin. That's the important thing. Next question. Please comment on the nonrenewals on smart machines. If it looks like the rate is running at circa 20% related to this, please comment on the split and the number of machines between three to four g.

34:43 I don't have the three, four g split off the top of my head, but we can we can, we can answer that in due course. The the bottom line is when you talk about nonrenewals, this is about customers refining their estates. It's about rationalization of their estates. It's a it's when they take a machine out of circulation, when they reduce their estates. So we're not losing customers. We're actually, you know, losing a vending machine in a customer because it's been taken off the streets, if that makes sense. So that's the the and, you know, as you can imagine, you know, the the COVID impacted, impacted, this and and the the whole work from home.

35:33 You if an office that was typically pre COVID was running a 100%, It may have been running at 70% post COVID. That's 30% less revenue potential for those vending operators to put a vending machine into an office building. So that's forced them to do a number of things. A, going back to the the, their customer, which could be someone like the Royal Bank of Scotland or HSBC or whoever, and saying, well, you need subsidize cost of this machine. Otherwise, we're gonna have to take it out. Yeah? Or they all they can, you know, just take it out. So that's next question.

36:23 Knowing that US customers prefer buying from US suppliers, how does VIANET address this issue? I think, you know, I think we'll have to say that that US customers buy an awful lot of Chinese goods at this moment in time, so it's not strictly too true. The the second best to buying from The US is buying from a UK supplier. So that's number one. Number two, we have a relationship with, we have a relationship with, fintech that gives us that inside track, and we've and we've been in The States for a while now, and we we have a reputation.

37:10 There's comfort from the fact that one of the benefits of being a listed listed business is that, you know, our accounts are everything's transparent, and we can actually, and we can, you know and our US business is incorporated incorporated in The USA as well, and we bought BeverageMetrics, and we've got a small US team. So it's it's not just about myself. It's, it's about, the team that we have there. That seems to be all the questions for now. I'll hand you back to Jake. Perfect. James, Mark, Sarah, that's great. And thank you very much indeed for your presentation and for addressing all of those questions that came in for investors this morning. But, James, 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 to wrap up with, that'd be great.

38:07 I don't think the future has ever looked quite so attractive for VIANET. Probably not since we gained 5,000 new installations with enterprise back in two thousand two thousand and 2006, 2007. Know, that that was pretty exciting at the time, but that was one sector. We now have growth, strong pipeline across a number of sectors and you know, in some substantial markets where the the key drivers are working in our favor. We've got products that are relevant. We've got strong existing pipeline, strong financial engine, and importantly, you know, we got a tight young team that are trusted by our customers, so we're in a pretty damn good position.

39:04 Perfect. That's great. James, Mark, Sarah, thank you once again for updating investors this morning. Could I please ask investors not to close this session? You'll now be automatically redirected for the opportunity to provide your feedback in order the management team can really best understand your views and expectations. This will only take a few moments to complete, but I'm sure be greatly valued by the company. On behalf of management team of VIANET 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.