The slightly positive organic sales growth recorded in 2018 marked a symbolic shift in Neopost recent history. Combined with a lower decline in mail-related activities, it was the strong double-digit growth in business process automation, customer experience management and parcel lockers that fuelled such performance, strengthening the refocusing decided as part of the "Back to Growth" strategic plan.
Indeed, Neopost aims at expanding these solutions through organic investments and bolt-on acquisitions, while streamlining its additional operations. Since the announcement of its plan early 2019, Neopost has already made an opportune acquisition in the fast-growing US parcel locker market and sold its data quality business. The Group's financial strength and strong cash flow generation will enable the completion of further acquisitions, which, in turn, will accelerate Neopost transformation into a more balanced business profile able to deliver sustainable and profitable organic growth.
Named “Back to Growth”, the 4-year strategic plan unveiled early 2019 aims at expanding the Group while accelerating its transformation. The goal is to reach by 2022 a more balanced business profile designed to deliver sustainable and profitable organic growth going forward. To achieve this, the Group has decided to focus its operations on four major solutions, including Mail Related Solutions, Business Process Automation, Customer Experience Management and Parcel Locker Solutions, in two main geographies, i.e. North America and key western European countries. This implies a streamlined management organization matching these priorities and, accordingly, a new reporting format along these lines.
In spite of a business mix that remains strongly dependent on mail-related activities, the Group achieved €1,092 million in sales in 2018, up 0.2% in organic terms. On a reported basis, Group sales were down -1.8% essentially due to currency effects. Major Operations sales reached € 886 million, up 1.3% on an organic basis. Additional Operations reached € 206 million down 4.2% on an organic basis.
In 2018, the sum of Major Operations sales represented 81.1% of total sales. Additional Operations sales represented 18.9% of total sales. They include additional activities such as graphics equipment, various shipping software, automated packing systems, data quality software (which have been sold early 2019), as well as all operations outside the main geographies, i.e. 17 countries where Neopost has a direct presence (including Japan for instance) and the 60+ countries where Neopost products and solutions are sold through dealers.
The Group's sales are underpinned by recurring revenue from services related to mailing systems and folders/inserters (maintenance, services, supplies, rental and financing), but also from maintenance, services and SaaS revenues related to software as well as revenues from the rental and use of parcel lockers in France and Japan. In 2018, recurring revenue accounted for 70% of sales versus 68% in 2017.
In spite of the structural decline of revenues generated by its highly profitable mail-related activities, the Group has managed to maintain a high level of operating income thanks in particular to a steady reduction of its operating expenses. Current operating margin (before acquisition-related expenses) was stable compared to 2017 at 18.2% of total sales with Major Operations enjoying a 23.1% margin and Additional Operations recording a -3.5% margin.
Thanks to a constantly strong cash-flow generation, the net debt, which is fully backed by future rental and leasing income flows, fell further down. As a result, the Group's leverage ratio (net debt/EBITDA) has further improved to 2.3.
Neopost growth ambitions partly rely on bolt-on acquisitions designed to accelerate the Group’s transformation and expand its franchise within its major offers. Strict discipline and stringent financial criteria will be applied to M&A opportunities. Net of divestments, Neopost is setting an envelope of €400 million over the 2019-2022 period dedicated to M&As. In addition, Neopost aims at spending on average €100 million per year in capital expenditure, to be mostly allocated to Major Operations. To achieve these goals, Neopost needs to gain flexibility in its capital allocation. This implies adapting its shareholder policy (see below) as well as the possibility to re-leverage its balance sheet.
To gain flexibility in its capital allocation, Neopost has adapted its shareholder policy, setting its annual pay-out ratio at a minimum of 20% of net attributable income with the dividend being set at an absolute floor of €0.50 per share. In addition, Neopost commits to returning to shareholders at the end of the 2019-2022 plan the potentially unused share of its net €400 million M&A targeted envelope.
Over the 2019-2022 “Back to Growth” strategic plan, Neopost aims at achieving:
- a mid-single digit sales CAGR at constant exchange rates;
- a high-single digit current EBIT1 CAGR at constant exchange rates;
- a minimum annual 50% free cash-flow conversion;
- a rebalancing of its business portfolio leading Mail Related Solutions to represent less than 50% of sales by 2022;
- a low single-digit organic sales growth in a sustainable way, by no later than the end of the plan.
1 Current EBIT = Current operating income before acquisition-related expenses
“We make every effort to ensure timely and appropriate disclosure allowing the investment community to have a thorough understanding of our strategy and its execution. In the context of our “Back to Growth” strategic plan, we are striving to expand our shareholder base.”