Neopost SA (NEO.FR) 27-Sep Q Earnings Call. Total Pages: 19 Copyright FactSet CallStreet, LLC. Corrected Transcript

Transcription

1 Neopost S (NEO.FR) FCTSET Total Pages: 19

2 Neopost S (NEO.FR) CORPORTE PRTICIPNTS Chairman & Chief Executive Officer, Neopost S Chief Financial & Legal Officer, Neopost S Gaële Le Men-Chagnaud Financial & External Communications Director, Neopost S OTHER PRTICIPNTS Mourad Lahmidi nalyst, MainFirst G (France) Jean-Christophe Liaubet nalyst, Exane S MNGEMENT DISCUSSION SECTION Chairman & Chief Executive Officer, Neopost S Good morning, everybody. Thank you for being with us. nd before we start, I would like to say that I'm sorry if I don't have the voice I usually have. I'm fighting a bad cold. nd hopefully, I will keep it until the end of this presentation, my voice. Let's start this presentation. The program will be first to cover the highlights of this first semester of This is what I will do myself. Then, Jean-François will go through the detail of our financial performance during those first six months before I come back and do a quick review of where we stand in each of our divisions as far as transformation of Neopost is concerned. nd then, I will be in a position to conclude confirming the midterm objectives of Neopost. These last six months have been confirming one of the key, I will say, measure of our success in this transformation at Neopost, which is our ability to return to sustainable organic growth as quickly as possible. s you can see on this graph, two of the last three quarters have shown quite a stability of our revenues at group level. This performance can be qualified of being solid because, it's benefiting from the constant improvement of our pace of development of our new activities, Communication & Shipping Solutions. We are not yet at the 10% level that we have as a target for those type of revenues but getting closer. On top of that, to qualify the quality of the performance, you have to realize that in a very disciplined way, we have decided at Neopost to promote essentially SaaS models, recurring revenues. It's a very healthy approach of the transformation of Neopost, but short term, it's penalizing our ability to produce growth to the benefit of the longterm performance FCTSET 2

3 Neopost S (NEO.FR) This being said, we have reached today close to 30% of revenues coming from those non-mail related revenues, CSS, at the end of Q2. The performance in Q2 was exactly 29; 29% of our revenues at Neopost will have nothing to do with Mail anymore. nd last but not least, an element, which is also very encouraging in digitize we are doing at Neopost, to transform Neopost. This is the very strong resilience of our MS revenues. You remember that our view of where Neopost will be in this declining market is minus 4% to minus 6% for our MS revenues. nd, here, again, for the last three quarters, we have been able to stay, I would say, on the lower range of that 4% to 6%, in fact, three quarters in a row, we declined by less than 4% in MS. nd again, thanks to very solid positions and elements, we are doing better than the market today. We are, especially in the U.S., still gaining market share and doing much better, trying to limit the structural decline of our activity compared to the rest of the industry. Other elements in our financial performance this quarter that are very encouraging, pressuring and showing that the transformation we are implementing at Neopost today is working and working in a very healthy way. Number one, we have been able to maintain our EBIT contribution at the high level of 18% compared to last year when we are in the middle of heavy investments. You know about Temando. You know about our innovation programs. You have to know also that today we are investing heavily, for instance, in EDS to maintain the growth at the level we have experimented over the last few years. We are investing in new verticals. nd, yes, it takes resources and it takes time before its payback. So, in spite of that heavy level of investment today at Neopost, we are in a position to maintain our margins at this high level. If you take aside those investments that we know on that driver, we are even better improving our contribution. The group contribution, excluding Temando and the program of innovation, is producing 20.3% at the end of H1 compared to 20.1% at the end of the same semester last year. Even more satisfying, our ability to produce cash, which is measured fundamentally by our EBITD margin is improving. We are improving our EBITD in absolute value to 142 million, but even more important our EBITD margins are increasing by 50 basis points at the end of H1. nd the natural consequence of that situation is that, yes, the cash generation performance of Neopost during that first semester has been very, very strong. Even stronger than last year, that was a reasonable year in terms of cash generation. So, this is very encouraging and this is confirming a few elements. Number one, yes, we are progressing in the deployment of that strategy to transform Neopost and make it much less dependent on Mail. nd, number two, we are showing and confirming that the objectives we have for the midterm are achievable. Yes, it's possible for Neopost to get back to organic growth. Yes, it's possible for Neopost to not drop below 18% during the transition period in terms of EBIT margin. Yes, the 20%-plus of EBIT margin in the midterm are achievable. In fact, if you pull aside the investments we are doing today to support our CSS growth, this is already the case. nd, yes, we are producing enough cash to fund and fuel this transformation at Neopost and keep rewarding our shareholders with a reasonable dividend. t that point, I will let Jean-François give you all the details about this financial performance of Neopost in H Chief Financial & Legal Officer, Neopost S FCTSET 3

4 Neopost S (NEO.FR) Thank you, Denis. Ladies and gentlemen, good morning. I'm going to present to you now the detail of our H financial performance, and it starts with our sales figures, right. We posted sales of 559 million, up 0.4% compared to the first half of We had a positive net scope effect of 1% coming from the acquisition of icon Systemhaus in 2016 and the divestment of DMTI in July The currency impact is slightly positive at 0.3%. If we look at our organic growth, our organic growth stands at minus 0.9% compared to the minus 3.3% that we had in H This performance has been supported by a better trend in the second quarter of 2017 with a quasi-flat organic growth at minus 0.2% after our first quarter at minus 1.6%. Looking at our Communication & Shipping Solutions revenue, in Q2, we posted a stronger organic growth close to 10% as compared with plus 5.1% in Q The revenue coming from the Communication & Shipping Solutions now represents 27% of the total turnover compared to 24% a year ago. For Q2 only, CSS represents 29% of the Neopost revenue. If we look now at our sales by division starting with Enterprise Digital Solutions or EDS. EDS posted an organic growth of 7.1% for the first half of the year and 8% for Q2 only. However, we have not reached our 10% organic target due to our recent investment in resources dedicated to the penetration of new verticals like healthcare for utilities, combined with our last acquisition, icon Systemhaus, experiencing a longer lead time to close large deals. EDS continues to gain market share in each growing vertical markets, bank and insurance companies. Neopost Shipping posted an organic growth of 11.6% for the first half of the year, showing an acceleration compared to the 5.4% produced in Q The strong organic growth is mainly driven by the sale of three CVP-500 and a good momentum of Packcity Japan, our parcel locker solution build in cooperation with Yamato. nd Denis will provide you with more detail later on. The SME Solutions division posted an organic growth of minus 2.5%. The performance comes from a better resilience of our Mail Solutions revenue at minus 3.7%, whilst our Communication & Shipping revenue continues to post a positive organic growth of plus 5.7%. If we dig into the Communication & Shipping revenue of our SME Solutions division, our sales of digital communication software and shipping solutions software posted a doubledigit growth reaching close to 13%, whilst our sales of graphics products continue to suffer from an unfavorable business cycle. The geographical breakdown of our sales only changed slightly with a stabilized revenue coming from North merica, while European revenue is under pressure. This trend reflects the continued growth of our Communication & Shipping Solutions businesses from all our regions, while in Mail Solutions we have a better resilience in the U.S. compared to Europe, reflecting current market performance. The breakdown between recurring revenue and sales of equipment and software licenses remain unchanged. Our recurring revenue represents 68% of the total turnover despite the ongoing transformation of the group. The business model of our Communication & Shipping Solutions favored the development of recurring revenues through Software as a Service or SaaS offers. We are replacing progressively our structural decline of recurring revenue from Mail Solutions by new streams of recurring revenue produced by our Communication & Shipping Solutions activities. The sales of equipment and license fees posted a slight organic growth at 0.9%. If we look now at our P&L, the gross margin continues to stabilize at 75.3% of our revenue. Furthermore, our EBITD rate increased by 50 basis points to reach 25.4% of our revenue compared to 24.9% a year ago, proving that the business model supporting our transformation is healthy and is producing positive cash flow FCTSET 4

5 Neopost S (NEO.FR) Last but not least, our EBIT rate stabilized at 18% of our revenue while our level of investments in the transformation remained high. It demonstrates again that our new activities are as contributive as our legacy business. To have a better understanding on how we managed to stabilize our profitability, we need to look at the evolution of the performance per division. nd I will start with SME Solutions where we have improved the profitability by 80 basis points at 21.8%. This performance comes from the combination of growing Communication & Shipping Solutions business that are not dilutive to the gross margin and the success of our OpEx optimization plan launched at the beginning of I will come back to it in the next slide with more details. In EDS, we posted an EBIT margin of 12.4% compared to 13.9% in H The slight decrease in profitability comes from the intensity of the investment made in our sales force and marketing resources to support our strategy to penetrate new verticals such as healthcare and utilities. For Neopost Shipping, restated from the investment in Temando, our ustralian start-up, the EBIT margin decreased from 8.2% down to 1.7%. The deterioration is mainly due to the intensity of the investment dedicated to the deployment of our parcel lockers in Japan and to the impact of the UK pound versus euro on the last deal we have with Royal Mail, a deal where our cost base is new. Restated from these effects, the EBIT margin of shipping would have been stable compared to H s a result, before investment in both innovation and in Temando, our EBIT margin is already above 20%. It has improved by 20 basis points at 20.3%. Our investments dedicated to innovation in Temando are stable at 11 million. In innovation, we have allocated 5 million to two projects. First, the development of the CVP-500 machines; and second, the rollout of our full web-based distribution platform to provide digital applications for small businesses. During the first half of the year, we have continued to allocate significant resources to Temando in order to pursue the development of our standard platform connected with multiple carriers. Temando impact in the EBIT is the same as last year, i.e., 6 million. s a conclusion on our EBIT performance in H1 2017, thanks to the improved contribution coming from our three division combined, we have been able to pursue our transformation by allocating significant level of investment while protecting the overall profitability of Neopost. I told you, we have improved by 80 basis point the EBIT margin of SME Solutions and this is strongly supported by the rollout of our cost optimization program and the contribution of our digital communication and shipping software. s a reminder, we launched early 2015 an OpEx savings plan targeting to produce a minimum of 50 million by the end of We are well on track to overachieve these targets, and we have generated during the first semester 11 million, representing a cumulative savings since the beginning of the plan of 47 million. The plan is to support the transformation of SME Solutions division and address the following area go-to-market, supply chain, remote maintenance, distribution network, and shared services for support functions. Going further down the P&L, we recorded 6 million repair related to the depreciation of the purchase price allocation, a non-cash item. We booked 6 million expenses related to the financing of our optimization plan. We also recorded a loss of 6 million of non-cash charges mainly related to the divestment of DMTI, as well as the adjusted valuation of Temando following the final conditions to acquire the remaining portions of the minority shareholders FCTSET 5

6 Neopost S (NEO.FR) Our cost of debt for the first semester is 17 million compared to the 15 million for H The 2 million increases are due to one-off expenses related to refinancing operations that we have done in February You remember that we issued Schuldschein to repay existing debts arriving at maturity at short term. Our normalized tax rates remain at 24.3%, and the evolution of our net attributable income declining by 7 million is fully explained by the impact of the divestments that are non-deductible and the one-offs refinancing costs. fter minority interest, our net attributable income remains very high at 9.1% of the revenue. Let's move to our cash flow generation. Neopost continues to improve its cash flow production. During the first half of 2017, we generated 61 million of free cash flow after CapEx versus 44 million produced in H This performance is sound and doesn't include any exceptional items. How did we achieve such a good performance? First, the EBITD improved by 2.9% at 142 million, demonstrating that the transformation of Neopost support our capacity to produce cash flow. Second, we had a better working capital performance compared with last year with a normal level of deterioration of 25 million due to the seasonality of our deferred income. s in H2 last year, we expect the working capital to recover fully during the second half of this year. Third, we had a positive change in lease receivables, thanks to a 3.1% decline of our lease portfolio, representing a positive cash flow of 26 million. This trend should continue in the future. Our interest and income tax paid are back to our normal level. I remind you that in H1 2016, we had one-off impact coming from a tax payback in the U.S. for [ph] 15 million (00:21:58). In terms of CapEx, our capital expenditure stood at 44 million compared with 42 million last year. It includes 21 million of CapEx for rented equipments, 14 million allocated to R&D development, and 5 million allocated to IT. s you can see, we are very well on track to produce a minimum of 100 million of free cash flow after CapEx for the full year. Thanks to our capacity to generate strong cash flow, our balance sheet structure shows a healthy financial position. Our net debt decreased by 48 million and stands at 715 million. This level of debt is fully backed by our highly profitable leasing portfolio standing at 733 million. In addition to our lease portfolio, we have approximately 218 million of future cash flows coming from rental activities. Our leverage ratio decreased by 2.4 times EBITD versus 2.6 times at the end of 2016 and compared to 2.7 times a year ago. Our leverage capacity continues to increase, and all our covenants are met. It demonstrates, once again, our capacity to operate our transformation strategy while strengthening our balance sheet. nd I will finish my presentation by our debt structure. s you can see, we don't have significant refinancing deadline before Thanks to the Schuldschein placement issued in February, our average debt maturity is now 4.5 years, whilst we stabilize our cost of debt at 3.5%. In July 2017, we completed the renewal of our fiveyear revolving line for 400 million. Our flexibility remains very high as our revolving is currently undrawn. s a conclusion, we are pursuing our transformation with healthy business models, allowing us to maintain a high level of investment while protecting our profitability and cash flows. Thank you. I now hand back to Denis. Chairman & Chief Executive Officer, Neopost S Thank you, Jean-François. Let's have a look now and yeah, I'm going too fast. Let's have a look now at where we stand in each of our divisions as far as the transformation of Neopost is concerned. nd let's start with EDS. I FCTSET 6

7 Neopost S (NEO.FR) will say that the main achievement of EDS during this first semester have been a total rebranding of the suite of products and services we are offering in this division. The new name is Quadient. nd for a few weeks now, we are in a position to present a global unified offer under the flag name, I will say, of Quadient. This should help us a lot in optimizing our go-to-market in leveraging the dynamic of our CCM offer, adding in a very organized and, again, very natural way all the other services like data quality. We are no longer talking about GMC, Satori, HI, and [ph] so on (00:25:51), but we are talking about a global offer Quadient unique and [ph] total (00:25:57). This should also help us in our mission to move progressively to a new market called customer experience, which is a booming market today and very natural complement to CCM. So, again, a big step in the organization of EDS, and one step higher in term of maturity in this new division for Neopost. nother element important during this semester, as we have already mentioned, is the fact that we are investing in EDS Quadient opening new verticals. It's a natural development of our strategy. We are today very, very strong in the financial institutions, bank and insurance. nd, yes, during the end of last year and the beginning of this year, we have hired dedicated resources in marketing, in presales, in sales, in support to penetrate two new vertical that are healthcare and utilities first attacking in North merica. During that period, we have produced organic growth, 7%, a slight improvement from Q2 to Q1, but we are still below the level we are targeting which is, I'm sure you will remember, more than 10% for this new division. The good news is that we are getting closer to the target. We did 6% in Q1, 8% in Q2, and we strongly believe that during H2, thanks to a combination of strong growth in the recurring as we increase our customer base and a higher level of activity in licenses coming from icon where we are learning and progressively building the pipe and the new verticals. Yes, we should be able in H2 to improve again that pace of growth for EDS. nd we will end up the year closer to the 10% for the full year, 10% being again the minimum we have in mind for this division. The example we are showing you here is rather indicative of where we stand today with our key product with EDS inspire our CCM products. Pacific Life, as you probably know, is one of the biggest financial institution in the U.S., one of the biggest insurance institution in the U.S. Two years ago, they decided to place a tender to find the solution to replace the obsolete CCM solution they were using so far. They had a double or triple objective. They wanted to be more efficient in the way they were still treating their mail communication. But they wanted to open their way to communicate with their customers through the digital environment. So, they wanted to equip themselves with a real omnichannel communication device. nd to do that, they placed that tender. Just to tell you that we were against the usual competitors and since we have such a great relation today with Pacific Life, they told us after the fact why they made that choice and why they are so happy with Inspire. In fact, on each category they had selected to make the difference between the [ph] various sectors who answered that (00:30:46) tender, we won in every category. Either we were qualified as having a better solution or even better, it was best-in-class. Nobody was close to what we were offering to Pacific Life. nd yes, the solution since then has been implemented and Pacific Life is very, very satisfied. They have gained more in terms of economy and efficiency than they were expecting. Their customer satisfaction has [ph] rised (00:31:32) to the roof and [indiscernible] (00:31:36) fact once we had negotiated everything that their payback period was probably 18 months, meaning that we should we could have charged much more for such a solution. But again, it's giving you [ph] an idea (00:31:54) of the kind of leadership we have today with Inspire in the CCM market. nd yes, our ambition today is to really capitalize and leverage on that situation to, first, reinforce our FCTSET 7

8 Neopost S (NEO.FR) leadership in the financing verticals, to increase our reach with new verticals, as we say, healthcare and utilities, but progressively also, moving out of CCM to enter an even more exciting segment of the market which is called today customer experience. So, this is it for EDS. Let's look now at where we stand with our Shipping division. With our Shipping division, we have made a lot of progresses during those last six months, one of them being the growth of the division. We improved a lot compared to last year, Q2 to Q1. In Q2, we can talk of a strong double-digit growth, again, a performance that is very satisfying for that younger division that has not yet reached the level of maturity of EDS but is on the right track. We are very excited about the way the markets reacted to what we have to offer with Packcity, this network of parcel lockers, and especially in Japan. However, when you look at the figures, you can see that even if we are growing fast in Japan, we are still much bigger in France than in Japan if you look at the number of positions we have available, the full capacity of our network. In France, we have only 400 machines, but the machines we have in France are much bigger than the average machine in Japan. The ratio is about 1 to 3. The average machine in Japan is 20 to 30 positions when the average machine in France is 80 to 90 positions. In France, we are progressing, mainly thanks to that click-and-collect offer that we are deploying with big customers like [indiscernible] (00:34:44), Decathlon, [indiscernible] (00:34:46), for instance. But the real amazing performance is coming from Japan, and I will come back to it to show you exactly the specificities of Japan and what we are doing over there. nother reason to be satisfied with the performance of our Shipping division is the CVP-500. We have placed in Q2 three new machines. When I say placed, we have delivered and installed three new machines. nd the very encouraging piece of news is that three of those machines were repeat orders, meaning people who have been using for a year, two years that machine and are so satisfied that they are ordering and using an additional machine. That move should continue since, again, what we have in backlog already signed for the second half of the year is also coming from a good share from repeat orders. One element you have to keep in mind with the CVP-500, again, we are still looking at the kind of model we have to use to support and deploy that wonderful piece of technology. nd we are still thinking about the best way to commercialize in a industrialized way this machine in the future. Last but not least, we are making very good progresses with Temando. We have studied a pilot in the UK with a British customer using the Neopost platform merged into the Magento offer. It's a very satisfying pilot so far. The next move will be to start a pilot in the U.S., and we are getting organized for full-scale launch somewhere during H nother element which is important about Temando is the fact, as I do believe we have announced it separately or it was already announced six months ago, we have taken the full control of Temando, meaning that we got freed of the minority interest that we are still there about 35%. nd we are in a position to accelerate the integration of Temando within Neoport Shipping, something which is very important. s you can see, we are repositioning our offer as, I will say, a suite of product and services that can be combined as the demand of our customers FCTSET 8

9 Neopost S (NEO.FR) gain, we are no longer a bit like with Quadient and EDS. We are no longer talking about Temando, ProShip and all the bits and pieces we have acquired in the recent past to build up this division plus what we have built on our own, but we are talking about and extensive offer covering maybe 80%, 90% of the value chain of the package. nd then, we are in the position with that common platform to build up this solution that each of our customer will need, depending on its own specificities, everything perfectly whatever segment of the market we are targeting. nd, again, you know that we are targeting the large shippers, retailers, and e-retailers, as well as the large carriers. So, this positioning, we do believe, is quasi-unique. We don't know of any competitor being in a position to cover such a huge range of services in the value chain of a package. We don't know either any other competitor having such a global position. gain, Neopost Shipping is able to deploy in Europe, in North merica, in sia-pacific. So, this unique positioning is a very, very strong differentiator for Neopost. nd to finish with Shipping, let's look at what we are doing in Japan. In Japan, we have partnered with Yamato to develop a unique network of parcel lockers. Yamato, as you might know, is the leader on the Japanese market. They had moved in billion packages. Just to put things in perspective, it's 2.5 times the volume of the French market. nd you know what, they only have 45% of the market. So you can imagine how big the Japanese market is compared to the French one. So, it's a huge player in that business, and that huge player has chosen Neopost to develop that parcel locker technology in Japan. Yamato, when they came to us, were under pressure because of three main problems they had to address. The move to B2C even more than in Europe, the piece of package delivery which is growing and growing especially in Japan is B2C, again, driven by the e-commerce and the new economy. But in Japan, you have a very specific environment. Number one is shortage of labor. Japan is a country that is becoming old and, yes, Yamato has huge problems today to recruit drivers and sustain the growth and the investments they are making to follow the evolution of the B2C. nd as you know, Japan is a country of very, very high density in terms of population and suffering from huge constraints in terms of pollution and optimization of traffic and sun in large cities. So, they are under huge pressures from the Japanese government to develop processes and ways of [indiscernible] (00:43:25) in the large cities that will respect the new regulations in terms of hours of deliveries and traffic in the big cities, as well as respect [indiscernible] (00:43:43). So, those are the reasons why they were so excited, were so eager to do something, and they were very excited by the Neopost approach of parcel lockers. gain, I do believe we explained this when we started in France with Neopost, but the specificities of what we have to offer are that we are talking of an open network. We are talking about sharing the positioning of Neopost not being a carrier, not being a retailer, being independent, is allowing us to develop a network and make it accessible to anybody. We are not competing with anybody. We are there to help and make the access to package easier. The other element that was important in their decision is that I will say we are hardware agnostic, meaning that our added value is in our expertise and in the way we are able to manage a network composed of different machines. The intelligence, the added value is not in that metal box. It's in the software you are using to optimize the way that network is used. nd obviously, yes, Neopost is that global player on which somebody like Yamato can rely to deploy such an important solution for them FCTSET 9

10 Neopost S (NEO.FR) So, this is how we ended up setting up that joint venture together. nd the success of that joint venture since then is amazing. fter a bit more than a year, I think the JV was started in May or June last year, we have deployed already 1,000 locations through Japan. ll those machines today are used mainly in what we call second instances, meaning that Yamato is using them when they have missed the first delivery at the home of a customer. They are sending a message saying, we came, you were not there. So, you will find your package in the machine two minutes away from you live. It's the way it's used so far. However, we have already signed several retailers who are offering directly to their customers to be delivered in parcel lockers. nd the plan eventually is to use the full potential of that technology, I mean, that we are already with Yamato considering click-and-collect solutions, [ph] conciergerie (00:47:14) solutions and so on. But first, we will concentrate on the basics, which is the ability to deliver in the first shot and to the satisfaction of the end user that package. The short-term objective is to have something like 3,000 locations equipped by, let's say, the H1 of next year. It's huge. That means that we are installing today 200 machines to 300 machines per month. nd what I can already tell you, at the base, we are progressing. The revenues are growing fast, revenues again that are full SaaS revenues. We are paid as the machines are used. nd the breakeven for Packcity Japan should be reached as soon as somewhere during So, in less than two years, we shall be breakeven. I'd just remind you that when we started such projects like France or Japan, we told you that it will take at least three years to breakeven. In Japan, we will breakeven as soon as next year. nd again, just to underline the success and the popularity of such technology in Japan, I can tell you that the Japanese government has decided to subsidize the deployment of those machines. nd we have already promised by the Japanese government that the JV will benefit from subsidies for 400 machines to 500 machines out of the first 3,000 machines we are installing. So, it's a great success, and I would say it's also a great pride for Neopost, a French company of our size, to have been agile enough and aggressive enough to some extent to be recognized in Japan as a potential partner for a company as big and as efficient as Yamato. Let's move now to SME. In SME, for sure, one of the key points of this semester is as Jean-François explained, the very strong resilience of our traditional business. Yes, for sure, the business is relatively easier in the U.S. than in Europe. nd yes, this performance is mainly due to the fact that in the U.S., we are still gaining market share against the competition, and we are in a position to really control the decline. I mean, mail is going down in the U.S. as everywhere in the world, but not at the same pace. nd on top of that, we are gaining market share. So, again, we are very, very excited to be able to maintain the decline of MS at group level below the 4% and at the bottom range of what we were expecting and we will do our best to maintain that position but this is where we have difficulties to commit ourselves for the future. gain, the range will be in the long-term somewhere between 4% and 6% and we'll do our best to be closer to the 4% than the 6% but it's difficult to predict how the market will evolve if it will the decline will accelerate or not in the future. The very good news is the fact that our CSS revenues are growing nicely, especially in the two key areas that are digital communication and shipping. Yes, we know it's not yet enough, 13% for those type of revenues. What we have in mind is closer to 20%, 25%. The base of revenue of CSS revenue we have in that SME division is still too small. If you exclude graphic, we are doing less than 10% of our SME revenues with shipping solutions or digital communication solutions. However, we have already demonstrated that there is room for those type of services and a strong demand. We are doing very well in France with that omnichannel approach where we offers FCTSET 10

11 Neopost S (NEO.FR) the ability to our customers to move at the pace they want, at the pace their customer want from traditionally mailbased communication to digital. nd we are in the same situation in the U.S. with our shipping offer. We have in the U.S. today a rather comprehensive offer addressed to those SME customers that goes from, I will say, the shipping room, you know the equipping the mail room with whatever is needed to receive and send packages to more complex solutions with shipping kiosk and parcel lockers when needed for those companies that are having more sophisticated needs. It's selling well. It's growing fast. But for the time being, it's only in the U.S. So, to accelerate the growth of our CSS revenues within SME, we will, in the coming months, export the expertise we have developed in France to other markets, the U.S. first, but UK, Germany and our other key markets. nd we will do this with our shipping offer coming from the U.S. and being progressively deployed in the UK, in France and, generally speaking, in Europe. So, yes, we do believe that having made that demonstration, we will be in a position in the coming months, in the coming year to grow much faster those revenues within our SME division. What is very important and what we believe again we have demonstrated during this last few months and especially this last semester is the fact that this transformation of SME that we are working on is sustainable to the extent that the new models are not deteriorating or negatively impacting our profitability or our ability to produce cash. We are attacking this transformation situation with a very healthy approach, pushing again the SaaS solution, the recurring income. It's a bit longer at the beginning to show higher revenues, but we are replacing the declining recurring income of MS with growing recurring income on the CSS side. nd therefore, preserving our margins and preserving the strengths of our SME P&L in the long term. To illustrate what I was saying about the strengths of the offer we have today in digital communications, you will see another example and those are compared to the one we showed you six months ago. Hobart is, in that case, the French subsidiary of a U.S. company. gain, the typical SME customer at Neopost, 54 million of revenues, 240 people (sic) [340 people], 90,000 invoices per year, the typical upper high upper level of our SME customers. They were looking for solution to organize, I would say, their transition from mail to a more digital solution. They wanted to have the flexibility. They were looking for an omnichannel solutions. nd after looking for 18 months, two years, they finally found Neopost because they were not customer of Neopost. That's very interesting and very important to know. We deployed the solution. nd yes, today, they are in a position to organize, drive their transition, progressive transition to digital at the pace they want or at the pace their customers want. fter I do believe a bit more than a year of operating with our Neopost solution, they are doing 70% of digital communication compared to 30% mail only. nd mail being a hybrid solution, meaning that they are outsourcing the [ph] protection (00:59:16) of their mail in a physical location outside of their mail room. gain, we are not sharing the figures here. But I can tell you that the revenue we are producing with that customer is much higher than the revenue we will have produced providing them with a simple franking machine [indiscernible] (00:59:43), especially because they were not with Neopost before. They were U.S., so you can guess who was providing them with mailing technology before. So, we are at that time in France, where there is a real convergence between the technologies we have available and we are deploying and pushing for close to four years now in France, and the expectations of our customers FCTSET 11

12 Neopost S (NEO.FR) nd again, the new regulation, I'm sure you're aware of [indiscernible] (01:00:33) that the government is forcing companies to use when they have to communicate with the CTO Department, [indiscernible] (01:00:46) generally speaking. Most of the SME world has understood that it was time to move to digital. nd this is exactly when Neopost is ready to do it. nd it probably explains the success of this offer in France today. gain, what we have to do now is to be in a position to offer the same new omnichannel offer outside of France, and it is being done now. In fact, we have launched more or less the same service in the U.S. in September, but again, because of the type of model we are using, SaaS recurring income, you won't see it in the next six months. It probably take at least two years of recurring layers of recurring income that we add one over another before we start seeing the strengths of that new stream of revenue we are creating. Now, it's time to conclude, and you understand probably why we are so confident in telling you that, yes, we will return to positive growth, that, yes, we strongly believe that we will be able, as we did in H1, to maintain a minimum of 18% of EBIT margin during this transition period. We are also very confident since outside the investments we are already at those 20%, we will get back in the future to 20% of EBIT minimum. nd I'm sure you have understood also that, yes, we have the resources. We have the bandwidth. We have the cash flows to keep supporting the investments we have to do in new technologies, in innovation to support the growth of our new CSS incomes as well as, as I said before, rewarding our customers with a dividend. We are done with the presentation. Now, we will be available, Jean-François and myself to answer questions you might have about this presentation. QUESTION ND NSWER SECTION Mourad Lahmidi nalyst, MainFirst G (France) Mourad from MainFirst. I have four questions, please. Chairman & Chief Executive Officer, Neopost S Four? Mourad Lahmidi nalyst, MainFirst G (France) Yes. But very quick. The first one is on how much graphic represents in the 67 million you make in the CSS part of SME and what is the rate of decline here and where do you expect it to land or if it's landing at some point? The second question is on cost savings. You're almost on target. Should we expect 3 million in the second half or is it going to be more? The third question is on EDS. What's your visibility in H2? What are the type of signing that you have in the pipeline? re they on these new verticals that you talked about? nd the fourth question is on Temando. If I'm not mistaken, the offer was supposed to be launched in September. So, why the delay in yeah, that would be it. Thanks. Q Q FCTSET 12

13 Neopost S (NEO.FR) Chairman & Chief Executive Officer, Neopost S Okay. Maybe, Jean-François, you can answer to the first two about graphics and savings. Chief Financial & Legal Officer, Neopost S So, graphics is where it is, roughly 50% of the CSS for the new [ph] produce (01:05:14) by the SME division. Chairman & Chief Executive Officer, Neopost S It's a bit less than 50%. Chief Financial & Legal Officer, Neopost S Bit less than 50%. It's declining slightly over H1. nd as we'd said, it's a business that is based on the business cycles made of large contracts, where you renew the equipment every three years, okay? So, we are still in a phase where we have not renewed or churned the equipment of these large contract. Probably that will happen next year, that what is planned. So, this is why we have a minus 1% or minus 2% of decline in graphic at this stage. So, we expect at the end over three years to be graphics to be a business quasi-stable or slightly growing. But that's not a business on which we based our transformation strategy. The transformation strategy is based on what we sell to our SME customers with shipping solutions and digital communications software, okay? In terms of cost savings, I didn't tell you that we will overachieve our target. No, I didn't tell you that. Okay. Probably, we will overachieve our target of a minimum 50 million. We are already at 47 million. We have already earned back savings for H2 because the savings are based mainly on head count reductions, so we have pretty good visibility. So, I will not give you exactly the estimated impact for H2, but, yes, that will be above the 50 million. [ph] Denis, for EDS (01:06:57). Chairman & Chief Executive Officer, Neopost S s far as EDS is concerned, the visibility is coming from two elements. big component of our growth today is coming from the service side. We are drastically increasing every year our base of customers, even in finance and insurance and banking, we are relatively new. nd almost every license we are signing today, every customer we are signing today is a new customer. So, in year one, you see the license. In year two, you see the support and the maintenance starting to produce. So, on the recurring side, we know that we have the potential to grow by 20%-plus for the full year. nd H1 will still be strong. Then, everything is depending on our ability to sign more new customers than last year. nd this ability will come from the success of those new verticals, health insurance healthcare, excuse me, and utilities. We made the investment end of last year, beginning of this year. ll the new team we have built is probably less than six months with Neopost FCTSET 13

14 Neopost S (NEO.FR) You are talking about a business where the average sales cycle is at least six months to nine months. Six to nine months in the banking and insurance where we are pretty well used and trained. So, in new verticals, where we are discovering a new environment, it might end up being at least for the first year a bit more. So, maybe 9 to 12 months instead of 6 to 9 months. Meaning, that yes, it was impossible to expect this investment to pay before the second semester. We are more or less in the same situation with icon. With icon, we are discovering a new world, the world of mainframe. nd you can be sure and this is something we have discovered over the last year, those guys who are still using mainframes today are not the most [ph] adventurous (01:09:37) customer. So, they are much more present than the average customer. nd to get them, to make the investment is probably a bit more difficult than with usual customer. So, it was very difficult to imagine that we will be in a position to start signing in volumes licenses with icon before the second semester of this year. What makes us confident is that, yes, we are following all those deals on which we are working with tools like [ph] Salesforce (01:10:22). We are comparing the portfolios to producers. We are comparing the closing stats and so on. nd yes, with the kind of portfolio we have in front of us, we should see an improvement during H2, but we are also very prudent because each of those deals are pretty big, especially in the new fields we are going today, there is not a deal of less than 0.5 million or 1 million. So, you can see that at the size of this business today, EDS, it will be, let's say, 150 million by end of the year. One, two, three deals moving from one quarter to the other, from one year to the other, can have a significative impact. But you can be sure, and I can tell you, that if we add some delays in our ability to close some of those deals, we did not lose a deal during this first semester. So, yes, we are reasonably confident, but when we say that we will get closer to the 10% we are targeting, that means that we will be doing better probably than Q1 and Q2. Will it be enough to put us at plus 10% for the full year? I cannot promise it. Your last question was about Temando. Temando is progressing, as I said, very well. You have to understand also that when we do what we are doing, we are not alone. We are depending a lot on what Temando what Magento will want to do and will do. Magento will not be ready to launch this new set of services because they are not only it's not only with Temando. They are adding specific services to the platform they have. nd the new launch, the full launch of their services has been programmed for the beginning of H2 the beginning of 2017 okay of 2018, the beginning of You also have to understand that especially in the shipping business, it's totally useless to try to promote new services starting end of October because the peak season for them is November, December, and January for the returns. nd usually, e-retailers will never take the risk of switching from one technology to another or changing the processes during that peak period. So, the decision again to launch beginning of 2018 is a decision that has been taken with and because of Magento. Honestly, we are very happy that they decided to wait until [ph] the year end (01:13:51). It will give us more time to be ready, do the pilots and make sure that everything is perfect. But I'm trying to remember what we said, but I do believe that we are talking about the end of 2017 and the beginning of nd again, Magento is the one deciding on what will be the best time to do it. Other questions? FCTSET 14

15 Neopost S (NEO.FR) Jean-Christophe Liaubet nalyst, Exane S Hello. Jean-Christophe Liaubet from Exane. follow-up on Temando. Can you give us more detail on the buyback of the minority? What price and [ph] where are you, for the investor, for the manager, and these managers did they (01:14:42) stay in the company? Second question regarding the leasing portfolio, which is down 3% in H1; do you expect such decline to continue in the coming years, quarters, on the portfolio, leasing portfolio down 3% at the end of H1? nd last question on Mail Solutions, Denis, you indicated that going forward, you expect a 4% to 6% decline for the market. You were at minus 2% roughly 2.5% in organic in H1. You will have total comps in H2. So, do you believe that your performance could go back in [ph] this trend as soon as (01:15:19) H2? Thank you. Chairman & Chief Executive Officer, Neopost S Okay. On the Temando acquisition, I don't know what we published or what we shared at that point. But we took care of all the minority interests, and, yes, it was a combination of financial institutions and management. nd as far as the management is concerned, we have tweaked the formulas of, let's say, the earn-out formula, to base it on the more global performance of the Temando product, as we are integrating Temando into the rest. One of the objectives we're trying to achieve with what we did was, to get rid of the earn-out that, at that point, was a limitation to what we could do to speed up the integration and really get the synergies in between the products, the R&D and whatever, okay. So, we got rid of the financial institutions that were part of... Jean-Christophe Liaubet nalyst, Exane S Minority? Chairman & Chief Executive Officer, Neopost S...the investments. nd as far as the management was concerned, we handpicked, I will say, the managers we wanted to keep [ph] interested (01:16:55) into the earn-out using the [indiscernible] (01:16:58) experience we have [ph] added (01:17:00) over the last few years, and it has been replaced by another type of incentive to make sure that they are converging with us and helping us into the integration instead of walking on the individual success of Temando. So, that's what has happened. s far as the amount and the... Chief Financial & Legal Officer, Neopost S In terms of the amount, if you remember what we paid to the shareholders, the former shareholders is, the following upfront, we paid UD 30 million when we acquired or when we take the majority stake of Temando. nd I would say, to take the full ownership of the shares, we added UD 15 million on top of the UD 30 million. That's the deal amount we are talking about... Chairman & Chief Executive Officer, Neopost S So then... Q Q FCTSET 15

16 Neopost S (NEO.FR) Chief Financial & Legal Officer, Neopost S...which is roughly then the UD 15 million is roughly 10 million. Chairman & Chief Executive Officer, Neopost S Your question about what to expect especially with SME on the H2, yes, we are at minus 2.5% at the end of H1 and it's an excellent performance if you compare to last year and it's going in the right direction. Can we sustain that level of performance? Honestly, it's still a question mark. There are things we know will happen. We do believe I do believe that on the CSS side, we should keep improving our pace of growth because of all the programs we are launching because we are exporting the digital approach from France to other countries [indiscernible] (01:18:49). It will help us to do better on the CSS side. But again, the big question mark is on the MS side. nd it might be that we do better in CSS and a bit worse in MS. nd at the end of the day, we are still at the same level. It might be that the acceleration of CSS is not enough to cover the deterioration of MS, if anything happen to the U.S. economy or whatever. So, that's the reason why we have such difficulties to commit ourselves on a given [indiscernible] (01:19:31). But something [ph] is sure (01:19:34), as far as the transformation is concerned, as far as the ability to grow the CSS side of the business to eventually compensate an MS between minus 4% and minus 6%. Yes. We are progressing and, yes, every month, every quarter is making us stronger and is putting us in a better position to counter whatever decline of MS we have in that range of minus 4% and minus 6%. But I cannot guarantee that we will stay below the 4% for the rest of the year. We are doing whatever we can to get there. nd for the time being, we have a very good dynamic in North merica but it will change at some point. [indiscernible] (01:20:24) is directly a function of is a model we are using today. nd the change from the model we were using in MS and what we are using in CSS. You understand that favoring again a SaaS model for the new incomes, we will have less and less opportunities to lease because you can lease a license but, no, if you have a SaaS contract and there is no more licenses and nothing to be leased. So, the leasing portfolio will probably keep evolving, not at the pace, but with the direct correlation of what is happening with MS. Other questions? Chief Financial & Legal Officer, Neopost S Gaële, you had a question? Gaële Le Men-Chagnaud Financial & External Communications Director, Neopost S Yes. I do have some questions online regarding the cost of refinancing. Jean-François, you said that it was a 2 million cost in H1. There is a question, what will be the saving going forward with respect to the refinancing. Chief Financial & Legal Officer, Neopost S So we are not talking about savings as such, in fact, the 2 million that we had are one-offs related to [indiscernible] (01:21:53). s we refinance existing deadline, we had to write off the costs of the refinance line, FCTSET 16