Comments from the President and CEO
Q212 results are encouraging – despite challenging business conditions in some areas of the business – both in terms of top-line growth and underlying operational performance. We are continuing our efforts to improve financial performance, restore the company to a position of strength and enhance shareholder value. We will achieve our objectives through a strong focus on operational excellence, capacity utilization and business development.
The positive revenue trend continued in the second quarter, with our top-line increasing by 9.7% compared to the same quarter last year. This is a very encouraging sign, especially considering that we have seen a significant shift in volume from onshore to offshore delivery in the North America & Asia Pacific region during the year – at a lower unit price – and that we divested two sites in France during 2011. This positive development was mainly driven by higher volumes in our North America & Asia Pacific, North and Iberia regions.
Despite challenging business conditions in our North and West & Central regions, the Group’s underlying business performance improved significantly. Our underlying EBITA, excluding €1.0 million in extraordinary costs this quarter, was €3.4 million, compared to a loss of €1.6 million in the same period last year. The implementation of the restructuring & rightsizing program announced in June 2011 is nearly complete, and we have successfully delivered on the identified savings. During the quarter, we also finalized the additional consolidation of the North American onshore delivery footprint that we announced in February 2012.
As previously announced, we are realigning the organizational structure in our West & Central and North regions in order to capture client synergies between the Baltic and Scandinavian countries, and to streamline and simplify the organization in the new Central Europe region (former West & Central). In addition, our operations in Credit Management Services (CMS) will be managed as a separate business unit, in order to ensure the right level of management attention and focus on driving operational efficiency and growth in this important and distinct area of the business.
Johan Eriksson, President and CEO of Transcom
Establishment of a separate Credit Management business unit, and organizational and management restructuring in Europe
As previously announced, Transcom’s operations in Credit Management Services (CMS) will be managed as a separate business unit, in order to ensure the right level of management attention and focus on driving operational efficiency and growth in this important and distinct area of the business. This change will increase transparency and sharpen the executive team’s focus on positioning Transcom to capitalize on opportunities in the CMS area. The cost for the creation of a separate CMS business unit, recorded in the second quarter of 2012, is €0.3 million. The search for a General Manager for CMS is underway. Until this position has been filled, Transcom’s President & CEO, Johan Eriksson, will head the business unit.
Transcom is also realigning the organizational and management structure in its North and Central Europe regions. The cost, recorded in the second quarter of 2012, is €0.7 million, mainly consisting of severance payments and legal fees. As a result of this change, Transcom’s operations in the Baltic countries now form part of the North region, rather than the former West & Central region (renamed as Central Europe). This change will allow Transcom to maximize the potential from significant client synergies between the Baltic and Scandinavian countries, while also streamlining and simplifying the organization in the new Central Europe region. Jörgen Skoog has been appointed Acting General Manager of the new Central Europe region.
No reporting changes have been made in Q2 2012 as a result of these changes. However, starting in Q3 2012, the changes discussed above will be reflected in our financial reports: Financial performance will be reported by business unit (CRM and CMS), and the regional performance reports will reflect the new organizational structure in Central and North Europe.
Group Operating Review, Q2 2012
Group quarterly development, underlying business performance
Revenue and new business development
In the second quarter of 2012, Transcom reported net revenue of €147.4 million, a 9.7% increase compared to the same period last year. Growth in the North America & Asia Pacific (+30.7%), North (+12.5%), Iberia (+8.4%) and South (+2.8%) regions was partially offset by a decrease in revenue in the West & Central region (-1.8%). Currency effects in Q212 had a €2.8 million positive impact on Group revenue.
Revenue increased by €6.3 million in the North America & Asia Pacific region, mainly driven by new volumes ramped up in Asia. Revenue in the North America & Asia Pacific region also benefited from the depreciation of the Euro against the US dollar, as well as from the fact that volumes which were accounted for in the West & Central region in Q211 are now accounted for in the North America & Asia Pacific region. The shift to Asia of volumes previously delivered onshore continued during the quarter.
In Iberia, revenue benefited from higher volumes on- and offshore, both with existing as well as with new clients.
In the North region, revenue increased due to higher contact center volumes and growth in the interpretation business.
The revenue decrease in the West & Central region is due to the fact that volumes which were previously accounted for in the West & Central region are now accounted for in the North America & Asia Pacific and South regions, since these volumes are delivered from sites in these regions. Net of this change, revenue in West & Central increased by €1.3 million compared to Q211.
Revenue increased slightly in the South region. The region benefited from the fact that volumes which were previously accounted for in the West & Central region are now accounted for in the South region. Volumes increased in Italy, counterbalanced by lower revenue in France, mainly due to the disposal of two French sites during 2011.
Underlying operational performance
Gross margin was 18.5% in Q212, a 2.5 percentage point increase compared to Q211. This was driven by margin improvements in North America & Asia Pacific (+10.8pp), as a result of an increased proportion of offshore delivery and increased operational efficiency. Gross margin also improved in the South region (+4.0pp) due to higher volumes and operational improvements in Italy and Tunisia. There was also a slight improvement in Iberia (+0.9pp). Gross margin was flat in the North region, while it decreased in the West & Central region (-0.9pp) due to lower efficiency.
Transcom’s EBITA in Q212 amounted to €3.4 million, an improvement of €5.0 million, which is illustrated in the table below. Currency effects had a positive €0.2 million impact on EBITA. As expected, Transcom managed to deliver €3.6 million in EBITA improvement in the quarter through the restructuring & rightsizing program launched in 2011. All regions generated net savings. Overall, savings from the restructuring program and volume-related or efficiency-driven improvements were partly offset by efficiency deterioration in some regions as well as by additional costs related to the ramp-up of new volumes and investments in sales and support functions, as shown in the table below.
||West & Central
||North America & AP
|Additional costs related to ramp-up
|Investments in sales & support functions
|Net EBITA impact
Please refer to the regional performance overviews on p. 9-13 for a detailed discussion of performance by region.
Group Financial Review
Depreciation & Amortization
Depreciation in the second quarter of 2012 was €1.6 million (€2.2 million in Q211). The main reason behind the decrease in depreciation is reduced CAPEX and significant write-offs related to the restructuring plan.
Amortization of intangible assets was €1.0 million. In Q212, €0.3 million in costs was reclassified from depreciation to amortization, reflecting a more appropriate accounting classification. Historical data has been adjusted to reflect this reclassification.
SG&A costs in Q212 amounted to €25.0 million, compared to €29.2 million in Q211. In Q212, SG&A costs included €1.0 million in non-recurring costs, and SG&A costs in Q211 included €7.2 million in restructuring costs. The savings on SG&A generated out of the restructuring plan launched in Q211 were offset by investments in additional capacity, additional sales force and additional support functions.
Net working capital was €41.3 million, an increase of €5.0 million (€36.3 million in Q112). The slight increase in Q212 is primarily the result of a lesser usage of factoring, and continued strong focus on timely collections and controlled disbursements. Year-on-year, the improvement of working capital was €36.1 million. Net working capital as a percentage of revenue was 7.2% in Q212 (6.5% in Q112). Transcom considers a normal working capital level for its activity to be 10-12% of annual revenue.
Net financial result
The net financial result amounted to €-0.7 million this quarter (€0.0 million in Q211). The interest charge was €0.8 million (€0.9 million in Q211). The foreign exchange impact on the income statement was a gain of €0.5 million (€0.6 million). This is mainly due to the significant appreciation of the USD during the quarter.
Debt & Financing
Transcom increased debt by €6.1 million compared to Q112 (of which €1.1 million adverse foreign exchange impact), to €71.0 million. Net debt/EBITDA in Q212 was 0.77, marginally higher than the Q112 level of 0.71. Consolidated net financial expenses/EBITDA in Q212 was 5.42, compared to 4.19 in Q112. Both covenants are well within the thresholds and Transcom expects to continue to be in compliance with its covenant terms for the remainder of the year.
The tax charge in Q212 amounted to €1.4 million, compared to tax charge in Q211 of €1.1 million.
Ongoing tax audits and tax litigations
The Group is currently subject to seven tax audits, of which three have given rise to a tax reassessment notice and have been provided for by an amount of €2.5 million.
The other material tax reassessment, which has given rise to litigation, and is currently in a Supreme Court appeal process, has resulted in a provision for an amount of €15.6 million, as previously announced. Regarding this tax litigation currently in progress in one EU jurisdiction, Transcom has been requested in Q112 and in Q212 to make provisional tax payments (€2.7 million for the 2003 financial year, €3.2 million for 2004 and €1.4 million for 2005). These provisional payments will be refunded should Transcom win the corresponding cases. Transcom is expecting additional cumulative tax provisional payment requests for about €1.5 million for the 2006 financial year.
Segmental operating review – underlying performance
North America & Asia Pacific
The continued expansion of our offshore operations in the Philippines is the main driver of the revenue increase, adding approximately €7.8 million in revenue. This growth in Asia reflects both a shift in the demand from our installed base clients for more offshore delivery, and the ramp-up of new offshore business. Revenue was also positively impacted by foreign exchange effects, contributing approximately €2.9 million, and by the fact that volumes which were previously accounted for in the West & Central region are now accounted for in the North America & Asia Pacific region (+€1.1 million). These positive effects were counterbalanced by a decrease in volumes delivered onshore in North America, lowering revenue by approximately €5.5 million. Four sites in North America were closed during the quarter, while we continued the ramp-up of offshore capacity.
The 10.8 percentage-point increase in gross margin is primarily a reflection of the shift in delivery to offshore operations – where revenue per hour worked is lower, but margins are higher – and increased operational efficiency in North America resulting from the restructuring and rightsizing plan implemented in 2011.
The region delivered an EBITA of €1.0 million (€-2.1 million in Q211). Savings from the restructuring program in the region (€1.7 million) were offset by investments in the expansion of operations in Asia and sales & marketing investments.
West & Central
The slight revenue decrease was mainly driven by the fact that €1.8 million in revenue which was previously accounted for in the West & Central region, as it was the lead contractor, is now accounted for in the North America & Asia Pacific and South regions. Net of these reporting adjustment effects, revenue increased by €1.3 million compared to the same period last year. Revenue increased in the CRM business, counterbalanced to some extent by lower activity in the CMS business. Volumes from our installed base CRM clients increased during the quarter, most notably in Hungary, Estonia and Germany. In addition, the ramp-up of a recently signed contract with a consumer electronics client in the Netherlands had a significant positive effect.
Gross margin fell by 0.9 percentage points, driven by lower efficiency and activity in the CMS business. Margins were flat in the CRM area, despite ramp-up costs related to new business in the Netherlands.
The €0.5 million EBITA increase was driven by lower SG&A costs, mainly as a result of restructuring savings.
Revenue increased by 8.4%, mainly driven by additional volumes with one of our largest clients in the telecommunications sector, both onshore in Spain and offshore in Chile. We also experienced volume increases with other clients in Spain, as well as in Portugal.
The gross margin increase was driven by higher efficiency, partly offset by severance costs incurred during the quarter related to organizational changes in Chile, and higher salary costs in Chile following a new labor agreement.
EBITA increased by €0.3 million, driven by higher revenue and gross margin. SG&A costs increased €0.3 million, mainly driven by higher volumes and start-up costs for a new site in Peru.
Revenue in the North region increased by 12.5%, despite volume reductions with one client in the media sector during the year. The growth was driven by higher contact center volumes from our installed client base, and by expansion in the interpretation business.
Gross margin was flat compared to Q211. The revenue increase had a positive effect on margins. However, operational efficiency fell as a result of higher-than-expected attrition, which resulted in increased training costs and higher costs for temporary personnel. Recruiting and training of temporary personnel for the summer season also increased costs. While these factors were significant, performance gradually improved throughout the quarter.
While investments in strengthening our sales force and support functions increased SG&A costs slightly, EBITA increased due to higher volumes.
Revenue increased in Italy, mainly as a result of higher volumes with existing clients, but also due to new business delivered from our offshore centers. This was offset by the revenue loss associated with the disposal of two French sites during 2011, amounting to approximately €2.2 million. Revenue in the region also benefited by €0.7 million from the fact that volumes, which were accounted for in the West & Central region in Q211, are now reported in the South region.
The 4.0 percentage point improvement in gross margin was mainly driven by volume increases and efficiency improvements in Italy and offshore, as well as by the successful execution of the restructuring program at the Vélizy site in France.
EBITA improved by €0.7 million, due to the factors explained above. SG&A costs increased slightly, mainly due to increased costs for factoring and guarantees.
The financial information in this report has been prepared in accordance with accounting principles consistent with those used for the 2011 consolidated financial statements, which were prepared under International Financial Reporting Standards (“IFRS”) as endorsed by the European Union. While the interim financial information included in this announcement has been prepared in accordance with IFRS applicable to interim periods, this announcement does not contain sufficient information to constitute an interim financial report as defined in International Accounting Standards 34, “Interim Financial Reporting”. Unless otherwise noted, the numbers in the press release have not been audited. The financial information and certain other information presented in a number of tables in this press release have been rounded to the nearest whole number or the nearest decimal. Therefore, the sum of the numbers in a column may not conform exactly to the total figure given for that column. In addition, certain percentages presented in the tables in this press release reflect calculations based upon the underlying information prior to rounding and, accordingly, may not conform exactly to the percentages that would be derived if the relevant calculations were based upon the rounded numbers.
Results Conference Call and Webcast
Transcom will host a conference call at 10.30 am CET (09:30 am UK time) on Thursday, July 19, 2012. The conference call will be held in English and will also be available as webcast on Transcom’s website, www.transcom.com.
To ensure that you are connected to the conference call, please dial in a few minutes before the start in order to register your attendance.
Sweden: 08-503 364 34
UK: +44 (0) 1452 555 566
US: +1 631 510 7498
For a replay of the results conference call, please visit www.transcom.com to view the webcast of the event.
Notice of Financial Results
Transcom's financial results for the third quarter 2012 will be published on 18 October 2012.
19 July 2012
Transcom WorldWide S.A.
45 rue des Scillas
+352 27 755 000
Company registration number: RCS B59528
Notes to Editors:
The following provides a breakdown of which countries are included in each reportable geographical region in Q2 2012. Starting in Q3 2012, Transcom’s operations in the Baltic countries will be reported as part of the North region, rather than the West & Central region (renamed as Central Europe). In addition, starting in Q3 2012, financial performance will be reported by business unit (CRM and CMS), as well as by region. Performance reviews will focus on EBIT and EBITDA, rather than EBITA, starting in Q3 2012.
- North: Denmark, Norway, and Sweden
- West & Central: Austria, Belgium, Croatia, the Czech Republic, Estonia, Germany, Hungary, Latvia, Lithuania, Luxembourg, the Netherlands, Poland, Romania, Serbia, Slovakia, Switzerland and the United Kingdom
- South: France, Italy and Tunisia
- Iberia: Chile, Peru, Portugal and Spain
- North America & Asia Pacific: Canada, Philippines and the United States of America
For further information please contact:
Johan Eriksson, President and CEO +46 70 776 80 22
Marcus Süllmann, CFO +352 691 755 060
Stefan Pettersson, Head of Investor Relations +46 70 776 80 88