IBM says U.S. should adopt new export controls on facial recognition systems By Reuters


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© Reuters. A man wearing a protective mask walks past an office building with IBM logo amidst the easing of the coronavirus disease (COVID-19) restrictions in Sydney

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By David Shepardson

WASHINGTON (Reuters) – IBM Corp (N:) said on Friday the U.S. Commerce Department should adopt new controls to limit the export of facial recognition systems to repressive regimes that can be used to commit human rights violations.

The company said in a statement the United States should institute new export limits on “the type of facial recognition system most likely to be used in mass surveillance systems, racial profiling or other human rights violations.”

In July, the Commerce Department had sought public comments on whether to adopt new export license requirements for facial recognition software and other biometric systems used in surveillance. Comments are due by Sept. 15.

Christopher Padilla, IBM’s vice president for government and regulatory affairs, told Reuters the U.S. government should focus on “one to many” systems that could be used to pick dissidents out of a crowd or for mass surveillance, rather than “facial identification” systems that allow a user to unlock an iPhone or board an airplane.

IBM said the Commerce Department should control “export of both the high-resolution cameras used to collect data and the software algorithms used to analyze and match that data against a database of images” and argued it should “limit the ability of certain foreign governments to obtain the large-scale computing components required to implement an integrated facial recognition system.”

The company’s written comments did not identify specific governments but said “controls on the most powerful types of facial recognition technology should be focused on those countries that have a history of human rights abuses.”

The Commerce Department’s July notice said China “has deployed facial recognition technology in the Xinjiang region, in which there has been repression, mass arbitrary detention and high technology surveillance against Uighurs, Kazakhs and other members of Muslim minority groups.”

The department has added dozens of Chinese companies and entities to an economic blacklist that it said were implicated in human rights violations regarding China’s treatment of Uighurs, including video surveillance firm Hikvision (SZ:), as well as leaders in facial recognition technology SenseTime Group Ltd and Megvii Technology.

China has denied mistreating people in Xinjiang.

IBM said the Commerce Department should also restrict access to online image databases that can be used to train facial recognition systems.

In June, IBM told the U.S. Congress it would stop offering facial recognition software and opposes any use of such technology for purposes of mass surveillance and racial profiling. The company also called for new federal rules to hold police more accountable for misconduct.

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Cisco Systems: Struggling, Underperforming, And Cheap (NASDAQ:CSCO)


Cisco Systems (CSCO) has seen a painful week as quarterly results and the accompanied outlook was very weak, at least in the eyes of investors. While the softer results weren’t unexpected, investors and analysts were betting on a sequential improvement in revenue declines. Instead, sales are expected to take a smaller yet continued beat in the current quarter.

This should not come as unexpected as the company has disappointed investors for years and multiples are low, yet the degree of the shortfall is disappointing. Other than a low valuation, there are few reasons to be very upbeat on Cisco, yet I continue to hold a modest long position, although I lack conviction and confidence to buy shares in greater size.

A Soft End To 2020

Cisco reported a soft end to its fiscal year of 2020 which ends at the end of July. The company reported a 9% fall in fourth quarter sales to $12.2 billion. This, of course, was accompanied by some pressure on gross margins, although I am pleased to see that operating expenses fell by similar percentages as the top line, thereby not causing additional pressure on margins.

Reported operating margins fell 12% to $3.25 billion and with a normalized tax rate, the company reported net earnings of $2.64 billion which translates into GAAP earnings of $0.62 per share. Adjusted earnings fell three pennies to $0.80 per share although this number excludes nine cents in stock-based compensation, for a realistic earnings number of around $0.70 per share.

The fourth quarter numbers are of course impacted by the Covid-19 situation with sales down $1.2 billion in absolute dollar terms for the quarter, yet in the first nine months of the year, Cisco already reported small revenue declines. Yet the overall $2.6 billion decline in sales for the year looks worse than it is, as deferred revenue balances were up $2.0 billion, so adjusted for that the company is basically reported flattish results.

The balance sheet remains very resilient as the company ended the fiscal year with a net cash position of $14.8 billion, as this number even excludes nearly $11 billion in financing receivables being apparent on the balance sheet as well. With a share count of 4.2 billion shares, the net cash balances excluding financing receivables already total $3.50 per share.

Bracing For Tough Times

While many companies have reported the largest softness in the second quarter results (talking about the calendar year here), Cisco is actually guiding for continued weakness. First quarter sales are seen down 9-11%, but moreover non-GAAP earnings are seen at $0.69-$0.71 per share, actually about ten cents lower from the earnings reported this quarter. Note that while the sequential earnings number looks quite bad, the first quarter is typically a bit slower, as the company reported $0.75 per share in adjusted earnings in the first quarter of last year. This indicates that earnings per share are down about 5 cents on an annual basis, which compares to a three-cent decline in the fiscal fourth quarter.

Nonetheless, with earnings power trending around $2.75 per share on a realistic basis, and operating assets at $42.50 per share being valued at $39 per share, valuation multiples come in around 14 times, indicating that expectations are not very high.

That said, there are a lot of moving parts and that is a longer-term trend that Cisco is not growing sales, despite dozens of acquisitions pursued over the last years, with the lack of growth attributable to real organic sales declines and the transition into a SaaS business. Nonetheless, Cisco is a GDP growth play at best, and probably less than that, so it certainly should be regarded as an income stock rather than a growth company.

Some Final Thoughts

The paragraph above already seems to sum up the long-term thesis as Cisco is of course hit by this environment, yet is underperforming in some business areas as well. Its Webex service is lagging significantly compared to Teams and Zoom, as the same can likely be said for its core networks switches, applications, infrastructure platforms and data security, among others. Furthermore, the company should see a benefit from bans of Huawei across the globe, as the company does not seem to enjoy a benefit from the recent dollar weakness as well, certainly not in the guidance for the current quarter.

While Cisco continues to operate with a strong net cash position, I feel that management is more focused on ”shareholder value” by focusing on dividends, share repurchases and M&A, all the easy stuff to ”create” value, while the organic growth rate seems to lag. If not for the fact that the company has a solid net cash position, I would almost believe we are dealing with a (potential) second IBM (IBM) here.

In May, I concluded the following after the company reported its third quarter results in the midst of the Covid-19 crisis: ”Soft performance and cheap,’, as the company has seen weakness in its results. At the time I reckoned that some other parts of the business should thrive in this environment certainly as data usage, teleconferencing and other trends related to work-from-home should see a big boost in that environment.

Shares looked cheap enough for me to stick around given the modest earnings multiple, in combination with a resilient balance sheet, and the fact that the continued transformation should result in better top line sales performance. My hope is that stabilization and conversion to SaaS might even ignite growth, and thereby valuation multiple inflation.

That story seems far removed from now, yet expectations remain modest enough to hold onto a small long position, although I am lacking conviction to hold shares in size here.

If you like to see more ideas, please subscribe to the premium service “Value in Corporate Events” here and try the free trial. In this service, we cover major earnings events, M&A, IPOs and other significant corporate events with actionable ideas. Furthermore, we provide coverage of situations and names on request!

Disclosure: I am/we are long CSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Computer Programs and Systems, Inc. (CPSI) CEO John Douglas on Q2 2020 Results – Earnings Call Transcript


Computer Programs and Systems, Inc. (NASDAQ:CPSI) Q2 2020 Earnings Conference Call August 4, 2020 4:30 PM ET

Company Participants

John Douglas – President, CEO & Director

Matt Chambless – CFO, Secretary & Treasurer

Christopher Fowler – COO

David Dye – Chief Growth Officer & Director

Conference Call Participants

Jeffrey Garro – William Blair & Company

Donald Hooker – KeyBanc Capital Markets Inc.

David Larsen – Verity Research LLC

Joy Zhang – SVB Leerink LLC

Charlotte Kolb – Deutsche Bank

Stan Berenshteyn – Truist Securities

Steven Halper – Cantor Fitzgerald & Co.

Operator

Good day, and welcome to the CPSI Second Quarter Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Drew Anderson [ph]. Please go ahead.

Unidentified Company Representative

Good afternoon, and welcome to the CPSI Second Quarter 2020 Earnings Conference Call. During this call, we may make statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that any such forward-looking statements only reflect management expectations and predictions based upon currently available information and are not guarantees of future results or performance.

Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown risks, uncertainties and other factors, including those described in our public releases and reports filed with the Securities and Exchange Commission including, but not limited to, our most recent annual report on Form 10-K. We also caution investors that the forward-looking information provided in this call represents our outlook only as of this date, and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call.

At this time, I will now turn the call over to Mr. Boyd Douglas, President and Chief Executive Officer. Please go ahead, sir.

John Douglas

Thank you, Drew [ph]. Good afternoon, everyone, and thank you for joining us. Joining me on the call today is Matt Chambless, our Chief Financial Officer. At the conclusion of our prepared comments, the two of us, along with David Dye, our Chief Growth Officer; and Chris Fowler, our Chief Operating Officer; will be available to take any questions you may have.

As our country continues to deal with the unprecedented conditions created by the COVID-19 pandemic, I am very pleased to share that CPSI had another strong quarter on many fronts. Before I talk about the quarter in detail, however, I want to address the critical role of community health care in navigating this crisis and the need for greater support of those providers.

It is no secret that hospitals, clinics and skilled nursing facilities in all parts of the country are facing real hardship during this pandemic. Rural hospitals, in particular, have had to take a larger and more challenging role in providing care to their communities and safeguarding public health. Meanwhile, they are struggling financially to endure the ongoing economic impact of the pandemic.

[Technical difficulty] in our call last quarter, the CARES Act and subsequent supplemental funding through the Paycheck Protection Program and the Health Care Enhancement Act provided a short-term financial lifeline for many of our hospital clients. However, more long-term support is needed from our federal government to help rural health care providers manage the financial strains created by COVID-19, and avoid detrimental workforce reductions during a time of need.

[Technical difficulty] pandemic has increased awareness of the critical role of community health care providers and the need for better support and reimbursement for health care in rural communities. For our part, we continue to work with our clients and others to advocate for long-term sustainable solutions to these issues. Though these circumstances have challenged our business, we are encouraged by our second quarter performance. Most notably, total bookings of $20 million, which are up 36% [technical difficulty] second quarter of last year, and contributed to an increase of 37% compared with the first half of 2019.

TruBridge, our revenue cycle outsourcing business booked $5.9 million, which is nearly double the same quarter bookings of $3.1 million in 2019 despite lower hospital volumes and the financial pressures we discussed earlier stalling the decision-making process. Our acute [technical difficulty] led the quarter in bookings with $11.9 million compared to $8.9 million last quarter and $9.9 million in the second quarter of last year.

Another highlight of the second quarter has been the progress of our development efforts towards the delivery of our single platform solution. In addition to delivering products to help our clients deal with the impact of COVID-19, which we discussed on our last call, releases in the quarter and over the last 6 to 12 months have include — have included improved features, functionality and user experience that we are leveraging across our acute, ambulatory and post-acute products. We believe that this progress is responsible for the increase in post-acute bookings, which reached the highest level since the fourth quarter of 2016.

Our operational flexibility continues to serve CPSI well in confronting the COVID crisis. In [technical difficulty] virtual implementations and support have helped to ensure the majority of our scheduled go-lives remain on track and to allow more than 90% of our staff to continue working remotely, protecting their health and safety.

We expect the value and efficiency of these new ways of doing business will serve CPSI well into the future. Despite the headwinds we faced, these measures and our conservative management of finances have helped us to drive respectable outcomes in this quarter’s revenue, EBITDA and operating cash flows, which Matt will cover shortly.

Looking at the road ahead, we remain conservative and are thinking about the impact of COVID. As we entered the third quarter, our 6-month sales pipeline is up 10% over last quarter, which is encouraging as we look to the second half of the year. We are optimistic that the sales pipeline across our EHR and services business will continue to convert at a respectable rate through the end of the year, albeit lower than pre-COVID conversion. Based on these and other leading indicators that we have been tracking, we are hopeful that business will return to pre-COVID levels in the fourth quarter of this year, and cautiously optimistic that we once again be able to provide guidance.

Regardless of the path this recovery takes, we remain steadfast in our efforts to build long-term value for our shareholders. These efforts are centered around continued [technical difficulty] EHR revenue to a subscription model, driving the penetration of TruBridge into a total addressable market of more than $1 billion, targeting the robust international markets, including those opportunities specific to Get Real Health. And finally, maintaining a strong balance sheet and healthy cash flow that support a more opportunistic capital allocation strategy.

I would like to quickly highlight a few [technical difficulty] of progress that have been made in each of these areas this past quarter. First, I’m pleased to share that more than 60% of the second quarter new system implementations and net new acute care EHR bookings were SaaS contracts maintaining our momentum to convert our EHR revenue from a license model to a subscription model.

Second, TruBridge was once again awarded with the prestigious Peer-Reviewed by HFMA [technical difficulty]. This most recent award was for the TruBridge accounts receivable management service, which means that, together with the cloud-hosted TruBridge RCM product suite, the majority of TruBridge end-to-end revenue cycle management offering now has the Peer-Reviewed by HFMA designation. This is a highly sought after and respected designation that buyers typically look for when considering business office outsourcing.

In addition, [technical difficulty] launched an EHR agnostic price transparency solution that allows patients to easily shop for services based on price. The price transparency offering also improves the collectibility of the amount owed to providers for their services and ensures hospitals can meet the CMS price transparency mandate that goes into effect in January of 2021. Early indications lead us to believe that there is a strong [technical difficulty] new offering from the hospitals we target.

Third, I’m certain many of you saw that we refinanced our credit facilities in June to create flexibility for more opportunistic future uses of capital. This refinancing increased the maximum borrowing capacity under the revolving credit facility from $50 million to $110 million. This refinancing has improved the position of CPSI to execute on its long-term growth initiatives and [technical difficulty] take advantage of the opportunities that the current economic turmoil may present us.

And finally, we’ve seen an increase in our level of involvement with a number of international opportunities in Canada, the Middle East and Asia Pacific that are attributed to Get Real Health, our patient engagement solutions offering. We are very pleased with this uptick in sales opportunities and activity outside of the U.S. market. The progress we’ve achieved here and across all of our [technical difficulty] in the second quarter, has made us cautiously optimistic as we head into the second half of the year.

Before I turn the call over to Matt to discuss the financials, I would like to conclude by saying that I’m very pleased with this quarter’s results, particularly in light of the extremely challenging circumstances. And once again, I would like to express our gratitude on behalf of CPSI and our employees to all those on the front lines during this time, especially health care workers and their families.

[Technical difficulty] I would like to turn it over to Matt for the financials.

Matt Chambless

Thanks, Boyd, and good afternoon, everyone. On today’s call, I’ll provide a high-level overview of the quarter, including some additional detail on bookings performance, a brief walk through our second quarter financial results and some commentary about the impact of COVID-19 on our business.

Starting with bookings. Total bookings for the second quarter of $20 million were relatively flat sequentially and increased 36% over the second quarter of 2019. System sales and support bookings increased $4.3 million or 43% sequentially, and increased $2.5 million or 22% from the second quarter of 2019.

Despite the challenging sales environment caused by COVID-19, we saw strong demand for non-MU3 add-on applications within our acute care EHR base and a resurgence of [technical difficulty] post-acute segment which, as Boyd mentioned, reached its highest bookings in 3.5 years. Including add-on sales, subscription arrangements made up 40% of the second quarter’s total EHR bookings compared to only 14% in the first quarter and 12% in the second quarter of 2019. This is encouraging evidence that our strategy to drive long-term recurring revenue growth by emphasizing our SaaS offerings throughout the sales process is gaining traction.

While the EHR business posted impressive bookings, the headwinds for TruBridge bookings were harder to overcome. Overall, TruBridge bookings were down $3.6 million or 38% sequentially, but up $2.8 million year-over-year, nearly doubling the second quarter of 2019. The sequential impact from the challenging sales environment was most notably felt in our net new bookings, which decreased by $2.7 million or 38% [technical difficulty] previous quarter. Nonetheless, we remain confident about the long-term opportunities to expand the TruBridge footprint beyond our EHR customer base.

We would like to refer you back to the tables in the earnings release for the composition and conversion time frames for quarterly bookings and the historical volumes and license mix for net new Thrive acute care implementations. With regards to the near-term outlook for this metric, we currently anticipate nine new client facilities going live with our [technical difficulty] in the third quarter of 2020, with three expected to go live in a cloud or SaaS environment.

Turning to the financial results for the period. The impact of the pandemic certainly made its presence felt on our top line with challenges to application adoption pressuring EHR revenues and the expected decline in patient volumes suppressing TruBridge revenues. All told, revenues were down 15% sequentially and 10% from the second quarter of 2019.

As we mentioned on the previous earnings call, CPSI made the strategic decision to provide our employees with much needed job security, taking the long-term view that this would strengthen our team, improved customer satisfaction and better position us to capture opportunities as our markets recover. The short-term consequence of maintaining our team was that the second quarter revenue declines had an outsized impact on adjusted EBITDA and non-GAAP net income, with adjusted EBITDA decreasing 38% sequentially and 29% from the second quarter of last year. And non-GAAP net income decreasing 36% sequentially and 21% from the prior year.

Looking deeper at our segments. TruBridge revenues were down 13% sequentially and 6% from the second quarter of 2019. As we mentioned on the previous call, the metrics we use to gauge patient volumes at our client hospitals first showed notable declines during the week ending March [technical difficulty], with volumes bottoming at roughly 40% below pre-COVID levels throughout the months of April and May.

Patient volume showed improvement during June, increasing to 20% below pre-COVID levels and have remained at roughly that level since. With 80% of TruBridge revenues correlated with hospital volumes, the impact of these declines on our revenues was significant. For example, revenues for our accounts receivable management services decreased $2 million or 20% sequentially and $1.3 million or 13% from the prior year.

As I did mentioned, we did not pull all of the cost containment levers at our disposal during the second quarter, sacrificing short-term margin to protect capacity for future growth. As a result, TruBridge gross margins decreased to 45% during the second quarter of 2020 compared to 47% during both the previous quarter and the second quarter of 2019.

Next, system sales and support revenues decreased $6.5 million or 16% sequentially and $4.9 million or 12% year-over-year. The pandemic’s impact was greatest in our nonrecurring revenue streams, which were down $5.6 million sequentially and $3.1 million from the second quarter of 2019. However, our SaaS revenues also faced headwinds as over half of those revenues come from nTrust arrangements where our [technical difficulty] offering is paired with TruBridge services.

Our billings and revenues for nTrust contracts are based on a percentage of the hospital customers’ cash collections, which contracted during the second quarter. The end result was a 10% decline in SaaS revenue sequentially, but these revenues were still up nearly $1 million or 79% from the previous year due to the dramatic shift in license mix we’ve experienced over the past 12 months.

From a margin standpoint, margins remained relatively flat at 55% during the second quarter, despite the large top line declines with decreased travel costs, improved sales mix and lighter third-party software costs preserving margins.

Moving on to operating expenses. Product development costs were relatively flat sequentially. The capitalization of $500,000 of software development costs during the second quarter of 2020 was the leading contributor to a $900,000 or 10% decrease in product [technical difficulty] year-over-year.

As a reminder, the capitalization of software development costs is new to CPSI for 2020, and is the direct result of GAAP capitalization requirements for the investment we are making in the development of our single platform solution for all care settings, a multiyear endeavor that Boyd discussed earlier.

Sales and marketing costs decreased $1.8 million or 26%, both sequentially and year-over-year. Revenue declines [technical difficulty] decreased commissions, travel restrictions drove our related costs down and the impact of COVID-19 on our 2020 outlook resulted in reduced incentive compensation costs.

General and administrative costs decreased $900,000 sequentially, primarily driven by seasonal reductions in legal and accounting costs. Similarly, costs are down $1.1 million from the second quarter of 2019 with the largest contributor being the cancellation of our national client [technical difficulty] originally scheduled for May of 2020.

Closing out the income statement, our effective tax rate during the quarter was a benefit of 4% compared to an expense of 22% during the second quarter of last year. The second quarter of 2020 saw some outsized benefit related to R&D tax credits, which don’t necessarily correlate with pre-tax income, resulting in a heavy benefit to the effective rate.

Turning to one of the clear highlights for the quarter, [technical difficulty] cash flows of $17 million were the second highest in company history and nearly matched the record $18 million quarters ago. This strength in cash flows is a testament to the resiliency of our community hospital customer base in what we view as successful efforts by the federal government to provide emergency funding to health care providers.

The impact to CPSI was a $3 million work down of financing receivables and a $6 million work down of accounts receivable while [technical difficulty] improved to 49 from 50 at the end of the first quarter and 52 at the end of the second quarter of 2019.

Trailing 12-month operating cash flows now stand at $51 million or 110% of adjusted EBITDA over the same time frame compared to $34 million or 67% of trailing 12-month adjusted EBITDA a year-ago. This continued strength in cash flows has allowed for a net reduction in bank debt [technical difficulty] during the past 12 months with balance sheet cash increasing $12 million over the same time frame.

Before we open the line for questions, I’d like to cover just a couple more subjects. First, our current outlook and the return of guidance. When we step back and look at the health of our markets and customers, the continuing improvement in patient volumes and the financial support from the federal government through the overall $175 billion provided relief fund, much of which was specifically aimed at rural and other safety net hospitals, have increased our confidence that our community hospitals has survived the worst of the pandemic economic effects.

All indications out of Washington are that additional substantial funding is likely to follow, which bodes well for our hospital customers’ ability to weather the storm and maintain their commitments to key partners like CPSI. Despite this view, there are still too many unknowns and too much inconsistency in the [technical difficulty] provide guidance at this time.

Directionally, we continue to expect hospital volumes to return to near-normal levels by the end of the fourth quarter, alleviating much of the top line pressure on TruBridge revenues. Likewise, a return to normal operating environments for our hospital customers, paired with continued federal support for safety net facilities and the prospects for a vaccine in early 2021, all point to a more normal sales environment as we enter the new year.

We feel it’s important to lay out these expectations as they’ve influenced our response to the pandemic so far. As I mentioned earlier, we have been uniquely committed to our employees during the past 4 months with the expectation that the pandemic’s impact on our financials will be both temporary and short-lived.

If the pandemic’s impact on our hospital customers’ volumes and our financials extends beyond our current expectations, we will revisit our response to this challenge, [technical difficulty] additional rightsizing of our cost structure makes sense. We’ve pulled very few of the levers at our disposal so far and feel we have ample room to right size in the event of a prolonged downside scenario.

Second, I would like to spend a little time on our recent refinancing. We mentioned on the last earnings call that we were comfortable with our capital availability with March 31 cash of $4 million and revolver capacity of $34 million. With the strong cash flows this quarter and the successful [technical difficulty] of our credit facilities, the balance sheet now boast $19 million of cash and $81 million of revolver capacity nearly tripling our overall capital availability from a quarter ago.

June’s refinancing marked the successful completion of a goal we’ve set towards the end of 2019, the aim of which was to create additional dry powder for more opportunistic uses of capital. We now have the flexibility to act decisively on strategic tuck-in M&A opportunities, invest in existing products and services and potentially pursue value-driven share repurchases. This enhanced optionality has us excited about the opportunity set in both the current and eventual post-COVID environments.

And with that, we would like to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Jeff Garro from William Blair & Company. Please go ahead.

Jeffrey Garro

Yes, good afternoon, and thanks for taking the questions. I think I will start off by just asking a little bit more about the health of the end market. Clearly, it shows some resiliency. But I think it would be helpful from here if you could parse out the near-term survival of community hospitals and rural health facilities generally with the appetite of those providers to pursue strategic IT initiatives.

John Douglas

I think, Jeff, with the increased attention from the government, they seem to be financially viable, even as recently as yesterday, there are some new initiatives coming from President Trump. So we still feel good about it. It’s really, I think, brought to light how important rural health care is to overall — to delivering health care in the U.S. And so we feel good about where the end market is at this point.

David Dye

Jeff, David Dye here. I will add to that a little bit. We touched on this in the prepared comments, but another thing that we are happy with in the first half of the year is that in the deals that we’ve won from an EHR perspective is if the average contract size is up rather significantly from where it was last year. And we’ve seen that as hospitals are buying systems, and in particular, they are buying — they have in an EHR system that they are contracting for the entire suite of products. And that’s — again, that’s an increase that’s substantial over last year. And the hospitals are out there in the marketplace are looking for the full suite, and they are coming off of whatever system they are on. Now they’ve got all the products already installed. So we continue to see that in the second quarter. We actually saw the average contract size continue to go up. So there’s a few less hospitals that have actually made decisions, but those that have seen an increase in what they are buying. That’s on the Evident side. As we touched on the TruBridge side, on the TruBridge side of the business, the volume there from a total bookings perspective in the second quarter was overall disappointing, but given that we were in the COVID environment, we don’t believe that it was disappointing. But that’s where we’re going to be more curious to see in the second half of the year is how that comes back as we resume more of a normal environment.

Jeffrey Garro

Great to hear. Great validation of the product suite and of your efforts to partner with your clients. I’ll dive a little bit deeper on bookings and maybe how — put a quant of aspect to it and help us frame expectations. Last year, the first half was a little bit slower, but you finished stronger in the second half of the year. That momentum has continued in the first half of 2020 despite the challenging environment. So where you stand now? Where is the confidence in delivering full-year bookings growth or maybe even year-over-year growth for bookings in the second half of the year?

David Dye

Sure. Great question, Jeff. Yes, we did [technical difficulty] to put more simply, we had a relatively easy comp for the first half of the year, and we’re excited that we were able to execute and significantly outperform that comp in the first half of this year, especially with COVID being so predominant since the mid-March. We do have a more difficult comp in the back half of the year. As Boyd mentioned in his prepared comments, our 6-month weighted pipeline as of June 30 is at an [technical difficulty]. So that gives us some confidence that we will be able to perform well in the second half of the year. In order to achieve on that, we are going to need to pick up on — we’re going to need to continue to execute on the Evident EHR front, which we’re confident we can do. We are going to need to continue to execute on the nTrust front, which we’re confident that we can do. And we’re going to have to see some pickup in what we’re seeing from a TruBridge standpoint, more like what we saw in the first quarter as compared to what we saw in the second quarter. It’s in the pipeline. It’s just a question of, A, of course, can we [technical difficulty]? But B, are our customers, in particular, that up-market, those MEDITECH hospitals, et cetera, we’re having a lot of early success in penetrating with TruBridge. Are we going to be able to do that in the second half of the year? We are optimistic that we can, but it remains to be seen.

Jeffrey Garro

Great. I understand — understood the optimism and that TruBridge is where there’s a little bit more uncertainty. I have one last question. I want to dive in a little bit more specifically on the Trump initiatives announced yesterday. And clearly, it’s very early. But maybe you could just speak more broadly about how CPSI can further public health in the U.S. and maybe dive more specifically, the ability to help clients navigate efforts by CMS to pilot new reimbursement schemes for rural hospitals.

John Douglas

Yes. And you hit the nail on the head. What — just for everybody on the call, what Trump came out with yesterday was basically a voluntary pilot program value-based program. And his comment, which I thought was spot on, was it’s going to help streamline the reimbursement from CMS for Medicare patients. A lot of times, we see the reimbursement ebb and flow significantly from month-to-month and part of his initiative is to streamline that out and make it easier, I guess, to run those businesses because it’s obviously, it’s difficult to run a business when you have the changes you have with [technical difficulty] from month-to-month as our clients experience it. As far as what we can do, we think we continue to offer products and services that are affordable to them that fit their cost structure of their facility that help deliver — that help them deliver the best patient care they can to their communities. And that’s everything from — obviously, that starts with the EHR, but that goes over into the TruBridge with the services, with chronic care [technical difficulty] and the patient portal services and patient engagement services that we’re offering now.

Jeffrey Garro

Great. Thanks for taking the questions, guys.

David Dye

Sure.

John Douglas

You bet. Thanks, Jeff.

Operator

The next question comes from Donald Hooker from KeyBanc. Please go ahead.

Donald Hooker

Hey, great. Good afternoon. Congrats on making it through a tough quarter, though. So I guess my question around TruBridge, I know you’re not providing guidance, but there are a number of moving parts within TruBridge. And my understanding is that the revenue recognition for some of those parts lags the underlying client patient volume. So would it be fair to assume that there’s another step down in Q3 before then there’s a sharp recovery in Q4 into 2021? I just want to make [technical difficulty] the cadence of expectations, correct?

Matt Chambless

Yes. So Don, I don’t necessarily think that Q3 is going to be a step down from Q2. It’s going to be more of like a lateral step from where we were in the second quarter with Q4 significantly outperforming versus where the middle two quarters of the year were.

Donald Hooker

Okay. That’s fair. And then the other thing that jumped out, I did see you guys had that press release around the [technical difficulty], which is interesting. And I know there is these requirements from CMS, as you mentioned, around interoperability provisions of the CARES Act. Is this something that you can put a — is this a requirement for your entire client base in some way that can we put a number on that? Is there a particular sale — revenue associated with an install like similar to MU1, 2 and 3, can we sort of think about that in terms of kind of a …

Christopher Fowler

Yes. Great question, Donald. And that’s a really good way to think about it, very similar to the meaningful use. So — and I will give you an analogy kind of staying with that idea. So physician documentation is an application that was available to be purchased standalone, but was a requirement through the meaningful use initiative. Very similar to that, the price transparency service that we are now offering is built upon other applications that we’ve available [technical difficulty] customer base. And when we are looking at the installed base, the price transparency by itself is not a huge needle mover per customer. However, when we look at the add-on applications that are required to get to the — prerequisite applications required to get to price transparency — sorry. We are looking at about an $11 million add to [technical difficulty] with about a potential at $10 million in implementation fees. So it’s a nice sort of bump that could be recognized. I think the question is going to become — I think the big questions that are outlying right now is, one, will it be delayed? And two, will there be any changes based on the rural hospitals. So we will see how that plays out by the end of the year. The feedback that we are receiving from our customer base right now is very positive that they [technical difficulty] seeing and assuming that there’s no changes to the deadline, we anticipate that continuing to uptick as we go.

Donald Hooker

Great. And then just one last I think you could add — one last one. You guys canceled your user conference, you commented on that in your prepared remarks. Is there something to think about around there? Does that feed your sales and marketing in some way? Is that a concern, or are you going to kind of reinstate that next year?

John Douglas

We are certainly planning on reinstating it. And I don’t know that it has — I think it’s more of an educational experience for our users. There’s certainly a sales and marketing touch to it. And certainly, people find out about maybe a new application or a new service that we are offering from TruBridge. But the whole focus of the conference is client education and clients really communicating with each other, collaboration with themselves and with us, so that we can get feedback. So I don’t — I wouldn’t expect to take a big hit from a sales and marketing perspective.

Christopher Fowler

Yes. And to that point, Donald, we are going to be offering some of the classes virtually. We are in the process right now of building that out. Obviously, we are disappointed that we are not able to get together face to face, but we are going to make sure that, that education is available throughout the year.

Donald Hooker

Great. Thank you. I will let someone else jump on. Thanks.

Operator

The next question comes from David Larsen from Verity. Please go ahead.

David Larsen

Hi. Can you remind me what the number of installs are for the third quarter? And I think it’s a pretty significant sequential increase. And then how are you actually doing those installs with the pandemic? Can you do those installs remotely? Thanks.

Matt Chambless

Yes. So Dave, we mentioned in the prepared remarks that we’ve got — currently, we have nine net new system implementations for Thrive scheduled for the third quarter. And again, three of those are going to be on a cloud or a SaaS environment. And I will let Chris kind of speak to whether — what the mix is virtual versus kind of on-site implementations.

Christopher Fowler

Yes. So David, I think our success in doing those implementations remote obviously shows the resiliency and flexibility of both the customer base and our employees. I think Matt gave the number, our travel costs are down, obviously, significantly, and that points directly to those implementations. And so through our ability to do either Webex conferences or have classes available for the implementations. The feedback has been quite positive of us being able to install the software remote.

David Larsen

Okay, great. And then, Matt, I think you had taken some steps to improve the cost structure of the organization. Can you just remind me, like where are you in that process? And what is the incremental benefit expected to be to either operating income or adjusted EBITDA?

Matt Chambless

Yes. So David, I think you’re referring to some initiatives that we had underway, say, maybe 12 or 15 months ago, where we had initially announced a $10 million cost savings initiative that we executed on. And then later identified, I believe it was $3 million of additional savings to layer on top. We have achieved all of that run rate cost savings. So related to those initiatives, there’s nothing on the come.

David Larsen

Okay, great. Thanks a lot.

Operator

The next question comes from Stephanie Davis from SVB Leerink. Please go ahead.

Joy Zhang

Hi. This is Joy on for Stephanie. Thanks for taking my questions. This was asked a little bit earlier, but I just wanted to dig into volumes a bit more. Can you speak to how you’re internally modeling volumes through the rest of the year? And whether you’re expecting a stabilization at the 80% level you mentioned or if you’re baking in a potential second wave?

Matt Chambless

Yes. So we are looking at a handful of indicators. Our RCM claims transmission volume, medical coding, the accounts receivable management volumes. Those are the leading indicators that we’re looking at. Right now, we’re hovering in about a 15% to 20% off of pre-COVID volumes. We have not assumed any sort of second wave into our thoughts to the [technical difficulty]. But obviously, that’s a concern, which I think speaks to the uncertainty and why we stayed where we are relative to guidance for the rest of the year.

Joy Zhang

Got you. That’s helpful. And as a follow-up, understand that you’re offering your telehealth solution at no charge through 2020. But looking ahead, are you planning on monetizing it and maybe adding in more features for a larger value prop? And if that’s the case, what kind of pricing model? And what kind of new features would you implement? Thanks.

David Dye

Yes. Thanks, Joy. We are continuing to offer that at no charge to the end of 2020. We do plan to begin to charge for that on a per physician — our per clinician license basis recurring revenue basis beginning in January of 2021. I can give you some rough figures at the penetration rate where we are right now, that would come out to about $315,000 annually in [technical difficulty] additional revenue. We stated on the last call, I believe, and we still believe that as we enter 2021, we will be on at least a rate of about $500,000 or $0.5 million incrementally annually with the TalkWithYourDoc product going into next year. We are certainly — to answer to your question, considering new features and are actively receiving client feedback now for those features. But I think it’s important to note that we also — that product is integrated with instant PHR, which is to get real health to patient engagement portal product. And it’s also integrated with our care management feature that we are rolling out now with TruBridge, which will help us as we try to penetrate our market with those products and services.

Christopher Fowler

Yes. And one additional follow-on there, Joy, is that I think the final piece of that secret sauce from an integration standpoint is into the [technical difficulty], which makes the product that much more appetizing to our installed customer base.

Joy Zhang

Great. Thank you very much.

John Douglas

Thanks, Joy.

Operator

The next question comes from George Hill from Deutsche Bank. Please go ahead.

Charlotte Kolb

Hi. This is Charlotte on for George. Thanks for taking my question. Given the mid quarter financing activities, does increase flexibility change the way you’re thinking about M&A? And what functionality do you not have that you would like to have, and where do you see the [technical difficulty]?

Matt Chambless

Yes. So I mean, obviously, one of the primary motivations behind our refinancing was to create this additional dry powder. And when we reference more opportunistic uses of capital it’s clear that M&A is a priority with that. We mentioned in the earnings or in the press release announcing the refinance that not only do we increase the — or upsized the size of the revolver, we also removed some of the dollar amount restrictions on both an annual basis term of the credit agreement around M&A activity. So absolutely have an eye towards increased activity in that area going forward.

Christopher Fowler

Yes. As far as areas of focus, obviously, from a TruBridge perspective, efficiency is one of the key value drivers for us. So areas where we can identify opportunities to make our service much more scalable and deliverable to both the [technical difficulty] the net new market are obviously a high area of focus. I hate to throw the word artificial intelligence out there just because it’s such a catch all. But obviously, when we are thinking about how we can leverage the ability to use that from an automation standpoint to, again, deliver more value to the customers as we are providing the service for them. That’s a key focus for us.

Charlotte Kolb

Okay, great. Thanks.

Operator

The next question comes from Sandy Draper from Truist Securities. Please go ahead.

Stan Berenshteyn

Hi. Thanks. This is Stan on for Sandy. Thanks for taking my questions. Maybe if you can start off, can you tell us the contribution Get Real Health had in the quarter?

Matt Chambless

Yes, Stan. So Get Real Health had revenues of about $400,000 for the quarter. That brings them to $1.7 million year-to-date and $4.9 million over the past 12 months. From a booking standpoint, bookings for GRH were between $200,000 and $300,000.

Stan Berenshteyn

Got it. And then maybe looking at bookings, maybe particularly on the cross-sells. I’m just curious is there any change in the product mix that you’re seeing now versus a year ago?

David Dye

Yes. From an EHR standpoint, Stan, we did have, as Matt mentioned in his prepared comments, we did have a nice quarter. I think the best quarter we’ve had now in a couple of years in terms of add-on sales. We are seeing a good volume of our ED product now, and we’re also seeing a good volume of our ambulatory solution into our current customer base. I think other than that, again, compared to last year, we are down in terms of the number of [technical difficulty] that we’ve signed, but the average contract volume has more than made up for that. So those would be the key differences from a year ago.

Stan Berenshteyn

Got it. That’s helpful. And then maybe leaving it off on an open-ended question. Obviously, a very weak quarter for you guys on the industry at large. I’m just curious, has anything surprised you positive or negative and whether you’re looking internally or on the client side kind of as you manage through this quarter?

Christopher Fowler

Yes. I will start. This is Chris. Probably one of the biggest surprises has been our ability to move the workforce home and not really miss a beat. Again, I think that’s a — sometimes timing and luck play a little bit a part of the things, and we have made some conscious decisions prior to COVID or actually prior to the beginning of the year as far as our hiring policies looking more at a diversified workforce across the U.S., which put us in a [technical difficulty] workforce environment. Our IT staff has been a huge part of the success as far as getting all of our employees to the house. And then just being able to see that the productivity and the customer satisfaction levels have not decreased at all through the period. So I would say, from my perspective, that’s probably been the largest highlight.

John Douglas

And I would add to that on a positive note, just the resiliency of our customer base. I think it needs to not go unnoticed. They’ve been there on the front lines. They’ve been, in some cases, dealing, lots of COVID patients and in other cases, not having many COVID patients at all, but dealing with a severe drop in volume. And as you can see from cash flexes and everything that — and the government played a big part in this, but they’ve been very resilient in delivering care to their communities and working with us and still installing new software that helps them deal with COVID and other issues. So I [technical difficulty] with the resiliency of the customer base.

Matt Chambless

Yes. So I guess maybe to give you one on balance on the other side of negative would be just a slowdown in the TruBridge bookings. And obviously, that’s based on just the uncertainty from the hospital standpoint. I do think there’s an opportunity for nTrust to catch even a higher demand. So if we are going to make some lemonade out of something, just based on the fact that right now, the vast majority of our customer support is a static monthly fee and moving to nTrust would make that variable based on the volumes that they are seeing. And so I think that there’s an opportunity for us to use that as a lever to help continue to drive the interest demand going forward.

Stan Berenshteyn

Got it. Very helpful. Thank you.

Operator

The next question comes from Steve Halper from Cantor Fitzgerald. Please go ahead.

Steven Halper

Hi. The operating cash flow was quite impressive. As you called out, you had a couple of good line items on the receivable side, both account receivable and financing receivable. So should we be thinking about the same levels of operating cash for the second half of the year?

Matt Chambless

Yes. So Steve, I wouldn’t necessarily expect the same level of operating cash flow for the second half of the year. It’s important to remember that the second quarter’s cash flows were mostly the collection of pre-COVID revenues. So we do expect the back half of the year to come down just a little bit based on TruBridge invoicing coming down due to lower volumes. But even with that, we are still thinking that somewhere in the ballpark of $20 million of operating cash flows in the back half of the year is achievable.

Steven Halper

For the 6 months?

Matt Chambless

That’s right. For the back half of the year.

Steven Halper

Yes. Thank you so much.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Boyd Douglas for any closing remarks.

John Douglas

Thanks everyone for being on the call today. I would just like to reiterate that we are pleased with the results this quarter. And in spite of the COVID pandemic, we are very proud to support the health care providers that play such a critical role in community health care. All of us here remain focused on the efforts and opportunities ahead of us, and we will build long-term value for our shareholders. Thanks, everyone for your time today, and have a great afternoon.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.





Original source link

Rite Aid deployed facial recognition systems in hundreds of U.S. stores By Reuters


6/6
© Reuters. Tristan Jackson-Stankunas poses for a portrait at his apartment in Austinu000d

2/6

By Jeffrey Dastin

(Reuters) – Over about eight years, the American drugstore chain Rite Aid Corp (N:) quietly added facial recognition systems to 200 stores across the United States, in one of the largest rollouts of such technology among retailers in the country, a Reuters investigation found.

In the hearts of New York and metro Los Angeles, Rite Aid deployed the technology in largely lower-income, non-white neighborhoods, according to a Reuters analysis. And for more than a year, the retailer used state-of-the-art facial recognition technology from a company with links to China and its authoritarian government.

In telephone and email exchanges with Reuters since February, Rite Aid confirmed the existence and breadth of its facial recognition program. The retailer defended the technology’s use, saying it had nothing to do with race and was intended to deter theft and protect staff and customers from violence. Reuters found no evidence that Rite Aid’s data was sent to China.

Last week, however, after Reuters sent its findings to the retailer, Rite Aid said it had quit using its facial recognition software. It later said all the cameras had been turned off.

“This decision was in part based on a larger industry conversation,” the company told Reuters in a statement, adding that “other large technology companies seem to be scaling back or rethinking their efforts around facial recognition given increasing uncertainty around the technology’s utility.”

Reuters pieced together how the company’s initiative evolved, how the software has been used and how a recent vendor was linked to China, drawing on thousands of pages of internal documents from Rite Aid and its suppliers, as well as direct observations during store visits by Reuters journalists and interviews with more than 40 people familiar with the systems’ deployment. Most current and former employees spoke on condition of anonymity, saying they feared jeopardizing their careers.

While Rite Aid declined to disclose which locations used the technology, Reuters found facial recognition cameras at 33 of the 75 Rite Aid shops in Manhattan and the central Los Angeles metropolitan area during one or more visits from October through July.

The cameras were easily recognizable, hanging from the ceiling on poles near store entrances and in cosmetics aisles. Most were about half a foot long, rectangular and labeled either by their model, “iHD23,” or by a serial number including the vendor’s initials, “DC.” In a few stores, security personnel – known as loss prevention or asset protection agents – showed Reuters how they worked.

The cameras matched facial images of customers entering a store to those of people Rite Aid previously observed engaging in potential criminal activity, causing an alert to be sent to security agents’ smartphones. Agents then reviewed the match for accuracy and could tell the customer to leave.

Rite Aid told Reuters in a February statement that customers had been apprised of the technology through “signage” at the shops, as well as in a written policy posted this year on its website. Reporters found no notice of the surveillance in more than a third of the stores they visited with the facial recognition cameras.

Among the 75 stores Reuters visited, those in areas that were poorer or less white were much more likely to have the equipment, the news agency’s statistical analysis found.

Stores in more impoverished areas were nearly three times as likely as those in richer areas to have facial recognition cameras. Seventeen of 25 stores in poorer areas had the systems. In wealthier areas, it was 10 of 40. (Ten of the stores were in areas whose wealth status was not clear. Six of those stores had the equipment.)

In areas where people of color, including Black or Latino residents, made up the largest racial or ethnic group, Reuters found that stores were more than three times as likely to have the technology.

Reuters’ findings illustrate “the dire need for a national conversation about privacy, consumer education, transparency, and the need to safeguard the Constitutional rights of Americans,” said Carolyn Maloney, the Democratic chairwoman of the House oversight committee, which has held hearings on the use of facial recognition technology.

Rite Aid said the rollout was “data-driven,” based on stores’ theft histories, local and national crime data and site infrastructure.

Cathy Langley, Rite Aid’s vice president of asset protection, said earlier this year that facial recognition – which she referred to as “feature matching” – resulted in less violence and organized crime in the company’s stores. Last week, however, Rite Aid said its new leadership team was reviewing practices across the company, and “this was one of a number of programs that was terminated.”

‘ORWELLIAN SURVEILLANCE’

Facial recognition technology has become highly controversial in the United States as its use has expanded in both the public and private sectors, including by law enforcement and retailers. Civil liberties advocates warn it can lead to harassment of innocent individuals, arbitrary and discriminatory arrests, infringements of privacy rights and chilled personal expression.

Adding to these concerns, recent research by a U.S. government institute showed that algorithms that underpin the technology erred more often https://www.reuters.com/article/us-usa-crime-face/u-s-government-study-finds-racial-bias-in-facial-recognition-tools-idUSKBN1YN2V1 when subjects had darker skin tones.

Facial recognition systems are largely unregulated in the United States, despite disclosure or consent requirements, or limits on government use, in several states, including California, Washington, Texas and Illinois. Some cities, including San Francisco, ban municipal officials from using them. In general, the technology makes photos and videos more readily searchable, allowing retailers almost instantaneous facial comparisons within and across stores.

Among the systems used by Rite Aid was one from DeepCam LLC, which worked with a firm in China whose largest outside investor is a Chinese government fund. Some security experts said any program with connections to China was troubling because it could open the door to aggressive surveillance in the United States more typical of an autocratic state.

U.S. Senator Marco Rubio, a Florida Republican and acting chair of the U.S. Senate’s intelligence committee, told Reuters in a statement that the Rite Aid system’s potential link to China was “outrageous.” “The Chinese Communist Party’s buildup of its Orwellian surveillance state is alarming, and China’s efforts to export its surveillance state to collect data in America would be an unacceptable, serious threat,” he said.

The security specialists expressed concern that information gathered by a China-linked company could ultimately land in that government’s hands, helping Beijing to refine its facial recognition technology globally and monitor people in ways that violate American standards of privacy.

“If it goes back to China, there are no rules,” said James Lewis, the Technology Policy Program director at the Washington-based Center for Strategic and International Studies.

Asked for comment, China’s Ministry of Foreign Affairs said: “These are unfounded smears and rumors.”

‘A PROMISING NEW TOOL’

Rite Aid, afflicted with financial losses in recent years, is not the only retailer to adopt or explore facial recognition technology.

Two years ago, the Loss Prevention Research Council, a coalition founded by retailers to test anti-crime techniques, called facial recognition “a promising new tool” worthy of evaluation.

“There are a handful of retailers that have made the decision, ‘Look, we need to leverage tech to sell more and lose less,” said council director Read Hayes. Rite Aid’s program was one of the largest, if not the largest, in retail, Hayes said. The Camp Hill, Pennsylvania-based company operates about 2,400 stores around the country.

The Home Depot Inc (N:) said it had been testing facial recognition to reduce shoplifting in at least one of its stores but stopped the trial this year. A smaller rival, Menards, piloted systems in at least 10 locations as of early 2019, a person familiar with that effort said.

Walmart Inc (N:) has also tried out facial recognition in a handful of stores, said two sources with knowledge of the tests. Walmart and Menards had no comment.

Using facial recognition to approach people who previously have committed “dishonest acts” in a store before they do so again is less dangerous for staff, said Rite Aid’s former vice president of asset protection, Bob Oberosler, who made the decision to deploy an early facial recognition system at Rite Aid. That way, “there was significantly less need for law enforcement involvement,” he said.

‘TOUGHER’ NEIGHBORHOODS

In interviews, 10 current and former Rite Aid loss prevention agents told Reuters that the system they initially used in stores was from a company called FaceFirst, which has been backed by U.S. investment firms.

It regularly misidentified people, all 10 of them said.

“It doesn’t pick up Black people well,” one loss prevention staffer said last year while using FaceFirst at a Rite Aid in an African-American neighborhood of Detroit. “If your eyes are the same way, or if you’re wearing your headband like another person is wearing a headband, you’re going to get a hit.”

FaceFirst’s chief executive, Peter Trepp, said facial recognition generally works well irrespective of skin tone, an issue he said the industry addressed years ago. He declined to talk about Rite Aid, saying he would not discuss any possible clients.

Rite Aid originally piloted FaceFirst at its store on West 3rd Street and South Vermont Avenue in Los Angeles, a largely Asian and Latino neighborhood, around 2012.

Of the 65 stores the retailer targeted in its first big rollout, 52 were in areas where the largest group was Black or Latino, according to Reuters’ analysis of a Rite Aid planning document from 2013 that was read aloud to a reporter by someone with access to it. Reuters confirmed that some of these stores later deployed the technology but did not confirm its presence at every location on the list.

Separately, two former Rite Aid managers and a third source familiar with the FaceFirst rollout said the systems were concentrated, respectively, in the “tougher,” “toughest” or “worst” areas.

Reuters reviewed a 2016 spreadsheet from the company’s asset protection unit in which Rite Aid rated 20 higher-earning Manhattan stores as having equal risk of loss – labeled “MedHigh.” Two of 10 stores where whites were the largest racial group had facial recognition technology when Reuters visited this year, whereas eight of the 10 in non-white areas had the systems.

One spot ranked “MedHigh” was a store at 741 Columbus Avenue in New York’s whiter, wealthier Upper West Side. Another was the pharmacy’s West 125th Street store in nearby Harlem, a majority African-American neighborhood. The Harlem store got facial recognition technology; the Upper West Side one did not, as of July 9.

(See graphics here https://tmsnrt.rs/2EpMRhF?losangeles=true and here https://tmsnrt.rs/2EpMRhF?manhattan=true and here https://tmsnrt.rs/2EpMRhF?scatter=true)

‘LOOKS NOTHING LIKE ME’

Starting in 2013, as Rite Aid deployed FaceFirst’s technology in Philadelphia, Baltimore and beyond, some serious drawbacks emerged, current and former security agents and managers told Reuters.

For instance, the system would “generate 500 hits in an hour all across the United States” when photos in the system were blurry or taken at an odd angle, one of the people familiar with FaceFirst’s operations said.

FaceFirst’s Trepp said the company has high accuracy rates while running “over 12 trillion comparisons per day without any known complaints to date.”

During that earlier period, Tristan Jackson-Stankunas said Rite Aid wrongly fingered him as a shoplifter in a Los Angeles store based on someone else’s photo. While Reuters could not confirm the method Rite Aid used to identify him, the store had FaceFirst technology by that time, according to a Rite Aid security agent and a Foursquare review photo showing the camera.

According to a complaint Jackson-Stankunas filed with the California Department of Consumer Affairs a week after the incident, he was looking for air freshener in September 2016 when a manager ordered him to leave the store. The manager said he had received a security image of Jackson-Stankunas taken at another Rite Aid in 2013 from which he allegedly had stolen goods, according to the complaint.

When Jackson-Stankunas viewed the photo on the manager’s phone, he told Reuters, he saw nothing in common with the person except their race: Both are Black.

“The guy looks nothing like me,” said Jackson-Stankunas, 34, who ultimately was allowed to make his purchase and leave the store. Rite Aid “only identified me because I was a person of color. That’s it.”

The California department told him his complaint fell outside its purview, directing him to another state office, email records show. Instead, he said he decided to write the store a bad review on Yelp (NYSE:).

Rite Aid and the manager who allegedly was involved declined to comment on Jackson-Stankunas’ account.

At one store Reuters visited, a security agent scrolled through FaceFirst “alerts” showing a number of cases in which faces were obviously mismatched, including a Black man mixed up with someone who was Asian. Reuters could not determine whether the incorrect matches resulted in confrontations with customers.

FaceFirst CEO Trepp said that his company takes racial bias seriously and would not work with any business that disregarded civil rights. “We cannot stand for racial injustice of any kind, including in our technology,” he said.

Generally, Trepp said, Reuters’ findings about his company contained “extensive factual inaccuracies” and are “not based upon information from credible sources.”

A NEW SYSTEM

Early in 2018, Rite Aid began installing technology from DeepCam LLC, ultimately phasing out FaceFirst in stores around the country, interviews with Rite Aid loss prevention agents and internal vendor documents indicate.

Six security staffers who used both systems said DeepCam’s matches were more accurate – sometimes to a fault. The technology picked up faces from ads on buses or pictures on T-shirts, three said. One famous face captured in DeepCam was Marilyn Monroe’s, one of the agents said.

At least until 2017, FaceFirst had employed an older method of biometric identification that compared maps of subjects’ faces, two people familiar with its system said. Only later did it move over to software based on “artificial intelligence” like DeepCam’s. Though the data and algorithms differ by brand, these systems draw upon potentially millions of samples to “learn” how to match faces.

DeepCam cameras photographed and took live video of every person entering a Rite Aid store, aiming to create a unique facial profile, Rite Aid agents said. If the customer walked in front of another DeepCam facial recognition camera at a Rite Aid shop, new images were added to the person’s existing profile. Two agents said they lost access to the images after 10 days unless the person landed on a watch list based on their behavior in stores.

When agents saw someone commit a crime – or just do something suspicious, one said – they scrolled through profiles on their smartphone to search for the individual, only adding the person to the watch list with a manager’s approval. The next time the shopper walked into a Rite Aid that had the technology, agents received a phone alert and checked the match for accuracy. Then they could order the person to leave, agents told Reuters.

Rite Aid said adding customers to the watch list was based on “multiple layers of meaningful human review.” The company told Reuters its procedures ensured customers were not confronted unnecessarily.

If a person was found to be engaging in criminal behavior, Rite Aid said, “we retain the data as a matter of policy to cooperate in pending or potential criminal investigations.”

Other U.S. retail stores have tried DeepCam. Independent 7-Eleven franchise owners in Virginia told Reuters they conducted trials of the software starting in 2018 and later dropped it. They said they largely found the system accurate but not user friendly and too expensive to maintain. The system was advertised online as costing $99 a month.

7-Eleven Inc did not answer requests for comment.

THE CHINA CONNECTION

The two founding owners of U.S.-based DeepCam LLC were Don Knasel and Jingfeng Liu, who set up the firm in Longmont, Colorado, in 2017, state records show. Liu’s residential address in Longmont was listed as its headquarters.

A Chinese native with U.S. citizenship and a doctorate from Carnegie Mellon University, Liu had the skills to do business in both the United States and China.

According to China’s official business registration records, he is chairman of another facial recognition firm in China called Shenzhen Shenmu Information Technology Co Ltd, whose website is DeepCam.com.

For a time, the U.S.-based DeepCam LLC and Shenzhen Shenmu were closely connected: In addition to Liu’s role in both companies, they shared the same website and email accounts, according to internal records seen by Reuters.

Internal correspondence reviewed by Reuters suggests that DeepCam reached a deal with Rite Aid by March 2018, when a colleague emailed Knasel to congratulate him. Internal records also indicated that China-based Shenzhen Shenmu helped its American counterpart with product development and that Liu was expected to pay at least some of the bills. That same month, a U.S. executive wrote: “Hi Jingfeng- Thanks for the credit card. Here is the receipt for the Indianapolis Trade Show.”

In an interview, Liu confirmed the financing, saying of Knasel: “Whenever he needed money, I give him some money.” Liu said Knasel told him about the Rite Aid project but left him in the dark about the business. Knasel “never let data cross between the two countries,” Liu said.

As the Rite Aid rollout proceeded in 2018, correspondence among DeepCam staff, seen by Reuters, expressed concerns about publicly revealing any links to China, as well as using the term “facial recognition” in the U.S. market for fear of attracting the attention of the American Civil Liberties Union.

Days after the ACLU wrote a March 2018 blog post https://www.aclu.org/blog/privacy-technology/surveillance-technologies/are-stores-you-shop-secretly-using-face critical of retailers’ suspected use of the technology, including Rite Aid’s, Knasel emailed staff: “It looks like the ACLU may be starting to stick its head up….We need to tone down facial recognition, which I have tried to do….If they come after us, we are dead….so we have to avoid.” The punctuation in the message is Knasel’s.

Today, both Liu and Knasel say no ties exist between the U.S. and Chinese businesses.

“We never do any business in USA,” Liu wrote in a brief email to Reuters in March. “We focus in China market.”

More recently, in an interview and an email, Liu said he had not spoken with Knasel for more than a year and, to his disappointment, had not benefited from the U.S. venture.

In a statement to Reuters, Knasel sought to distance himself from Liu, Shenzhen Shenmu and DeepCam.

He did not address questions about DeepCam’s deal with Rite Aid. DeepCam, he said, is “winding up” its operations and now has no assets. He added that DeepCam never supplied China-based Shenzhen Shenmu with any data.

In February, Rite Aid told Reuters that DeepCam had been “re-branded” as pdActive. PdActive is a facial recognition company run by Knasel, who said it is not a rebranding of DeepCam but a different company that has no owners who are Chinese citizens.

Knasel remained connected to DeepCam through another company he runs, dcAnalytics, which Knasel said licensed DeepCam’s technology until November 2019. Since then, Knasel said, U.S.-based dcAnalytics has been using “proprietary” technology, as well as facial recognition cameras purchased from DeepCam.

Knasel said dcAnalytics is “committed to upholding the highest standards possible to make sure facial recognition technology is used fairly, properly and responsibly.”

SENSITIVE QUESTIONS

Steve Dickinson, a Seattle attorney who practiced law in China for more than a decade and writes about cybersecurity, said geopolitical tensions have added sensitivity to any work Chinese surveillance firms do in the United States.

Last year, the U.S. government blacklisted several Chinese companies – including Hikvision (SZ:), one of the biggest surveillance camera manufacturers globally – alleging involvement in human rights abuses. China has deployed facial recognition cameras widely within its borders, providing a level of monitoring unfathomable to many Americans.

At the time, a U.S. Hikvision spokesman said the firm “strongly opposes” the decision and that punishing Hikvision would harm its U.S. business partners and discourage global companies from communicating with the U.S. government.

Liu described his company as nothing like the Chinese video surveillance giants. With about 20 employees, he said, it is “a tiny company pretending to be big,” struggling unsuccessfully to get government contracts and nearly bankrupt.

Reuters found that he and his company have financial and other ties to the Chinese government, however.

Most notably, Shenzhen Shenmu’s largest outside investor, holding about 20% of its registered capital, is a strategic fund set up by the government of China. Called the SME Development Fund (Shenzhen Limited Partnership), it has built a 6 million yuan ($855,000) stake in Shenzhen Shenmu since early 2018, Chinese public business records show.

A person with the same name as a Shenzhen Shenmu board director has also worked for the venture firm managing the SME fund, according to the records and the investment firm’s website.

The fund acknowledged investing in Shenzhen Shenmu and said it “does not participate in the daily operation and management of the enterprise.”

Liu is a member of China’s Thousand Talents program, according to a local government website. That program was started by Beijing as a way to bring top academics working in important fields abroad back to China. According to allegations https://www.justice.gov/opa/pr/harvard-university-professor-and-two-chinese-nationals-charged-three-separate-china-related by the U.S. Justice Department, the program aimed to steal foreign technology.

In a statement, China’s Ministry of Foreign Affairs described such allegations as false and as “stigmatization” by the United States.

Liu told Reuters he tried to get into the program but does not know if he is. The achievement was reported in an article on Shenzhen Shenmu’s website, but Liu said he only wanted to use the distinction to help him sell products. Reuters was unable to confirm with China’s government whether Liu was a member.

Another website, that of a Shenzhen Shenmu subsidiary, Magicision, claims its technology has helped officials arrest fugitives and suspected criminals in China.

Liu was vague about the firm’s public security work, saying his company has tried unsuccessfully to get contracts with Chinese law enforcement. He called the website’s information “bullshit marketing.”

About the Chinese government’s interest in his company’s data, however, he was clear.

“The China government never care about us,” he said. “We are too small.”

“I know (the) China threat is a hot, eyeball-attractive topic. But what you have in mind is totally untrue.”





Original source link

Tomra Systems ASA (TMRAY) CEO Stefan Ranstrand on Q2 2020 Results – Earnings Call Transcript


Tomra Systems ASA (OTCPK:TMRAY) Q2 2020 Earnings Conference Call July 17, 2020 2:00 AM ET

Company Participants

Bing Zhao – Investor Relations

Stefan Ranstrand – President and CEO

Espen Gundersen – Deputy CEO and CFO

Conference Call Participants

Operator

Good morning and welcome to our Second Quarter Results Presentation. My name is [indiscernible]. I am responsible for the Investor Relations in Tomra and with me today I have Stefan Ranstrand, CEO and Espen Gundersen, CFO.

Thank you for joining us today. You can ask us questions via the Q&A link on the webpage and we will answer them towards the end of the presentation. Because there is a small time lag to the web stream, we encourage you to ask the questions as we go along or as soon as possible at the end of the presentation just to make sure we get everything in time.

Those being said, I wish you welcome and I will pass on the word to Stefan.

Stefan Ranstrand

Dear all, thank you for dialing in. What a quarter we had. I would label it challenging crisis and in many ways a totally new situation. In our Tomra, we have some 4,500 employees at the peak 2,800 of them were working from their home offices. We’ve had due to the pandemic total system people infected, 11 are recovered, four are still active, but no severe conditions.

I have seen highest dedication and commitment from our people, more than could have been expected. We have extreme cases where people have chosen to go and live at the customer site in order to serve the customer because it was not possible for them to travel between their home and the customer on a daily basis. They have stayed here for months.

I dare to say our culture and our people is a differentiator making Tomra more resilient and strong and for me definitely a reason to be proud of. We have also seen an extraordinary customer loyalty. The customers have understood that it’s been difficult to operate and they have worked with us here on that. We have not been able with our sales people in some instances to meet the customers and we have therefore turned over to remote communication like telephone or video and that has worked well.

We’ve even had customers who we have never met before who have bought equipment from us. We have even installed remotely equipment together with customers. These are extraordinary conditions but they’ve been mastered very well. We’ve advanced now from a period with very many new dimensions and I would say a big uncertainty to a situation where we feel that we are now having good control and much more certainty.

In the second quarter and here in particular in April and May, we saw the most challenging period, but already in June and in most parts of our business, we see stabilization and I dare to say in some cases even return to normal. We’re now having a state return of our employees to offices, our operations and supply chain is fully up to speed and this partly also thanks to our footprint that we are in different parts of the world both from a production point of view and also service point of view.

We don’t need to ship people across countries. We have them locally so that we can operate and we have for instance been able to capitalize in our manufacturing capabilities in China whilst we had lockdowns in new sea land. So actually we have in under all times been able to deliver on all our commitments and today we are fully normal again.

We still have some service challenges and that related to some regional restrictions when it comes to travel or in some cases even our customers especially in the food sector are saying they don’t accept any visitors due to hygiene conditions and we respect that of course apart from that we are operating also with a service as normal.

I also dare to say if there would be further pandemic waves, we are well prepared. When we entered this crises, everything was new to us. We put up a crisis team and worked through a lot of different methods and ways to handle the situation. Now we’ve learnt a lot. So we will be better prepared if there will be a second wave.

So what we can control we feel that we will be able to handle well, but certainly the uncertainty around the market conditions as a result of any new potential counter measures will remain.

With that I choose to turn page and go into the result numbers. We saw a decline in revenues of 11%. The currency played a strong game here in the quarter. So if you were to ignore the currency effects, you would actually have the same topline result as last year, but in reality to be prudent, revenues were down 11% and the biggest reduction came from Collection Solutions and that is very much thanks to our throughput lease or volume-related models and I will talk more about but that was for us unavoidable clearly a result of governmental or local regulators restrictions put in place.

Sorting Solutions showed strong resilience and use you see that when we look at the totality of the figures, but also then they were down 8% in revenues. The gross margin was reduced from 44 to 42.9, 44.9 to 42.9 and that was all related to the lower volumes in Collection Solutions again here Sorting Solutions showed strong resilience.

We have acted, I date to say with speech to address cost situation and to make sure Tomra as a company remains strong in this period. So all unnecessary costs have been avoided or cut and we have been able to reduce our operating expenses on a quarter-by-quarter basis compared with Q2 last year by 8%.

We have however not altered our strategic direction. So we have continued to invest in that we think it’s important for our future and that as an example is certain economy, but also on product and technology development and we’ll show you some exciting new technologies today in fact.

So we see that our strategic direction remains intact. We believe in it. We’re committed to it and we’re convinced about that while we move in a way we are convinced about that while we move in a way we are heading in certain economy and food. Therefore, we continue to invest, but we have been active in reducing all this cost we could to safeguard the maximum result in the quarter.

But however, also important is we are having made this in a way that we are ready to ramp up if the market conditions improve and we are ready then to capitalize on the opportunities. So this has been the balance for us. We could have done more, but we have done it this way in order to be able to bring sense the strategic initiatives and to be able to come back quickly if the market calls for that.

Our earnings EBITDA are down aiming at NOK288 from NOK352. Cash flow from operations ended at NOK123 up from NOK45 million of last year. We had a reduced order intake in Sorting Solutions slightly down by 5% and order backlog is down 2%. From a business point of view, the biggest impact we had on the results, as a result of COVID was on the North America impact on Tomra Collection Solutions and order intake which was down 5% in Sorting Solutions.

With that I ask to turn to next page. This page illustrates some of the highlights of the Collection Solutions business. I start on the left here. Here you see a graph, you see a dotted line. You hopefully see a pink line and light blue line. What is unique in our Collection Solutions business is that not only are we a global leader. We have also by now connected most of the machines to our center. So they are connected on the web and we have direct access to the machines seeing what’s happening. That means we instantly see how many bottles are going through every machine placed out here.

In time of a crisis like this is an extreme advantage because if there would be any changes, we would be able to respond much quicker. So if you look at the graph here again, I will use that to illustrate that represents the status of volumes going through the RVMs out in different regions.

We can see from the dark blue line, which represents Europe that we have seen no disturbance no ups and downs. It’s been very stable operation. So Europe RVM operations have shown very strong resilience during this period. If we look at pink line, that illustrates this situation in Australia and he we’re talking about the installations we have in New South Wales and in Queensland.

Here we could see that in early April and in May we had a volume dip, but you can see that recovered fairly quickly and it was all due to the lockdowns by the regulators and we are back to normal in Australia and in fact it’s a little bit higher than last year because you have continued to expand and we see that these two markets Queensland and New South Wales still are growth markets. So we expect that market to continue to grow slightly going forward.

The light blue line then indicates North America and here is where we saw the biggest effect with volume decrease of in the magnitude of 50% for also a more extended period of time but then gradually starting in May, we — end of May and into June, we saw recovery of the operations and we are now back to normal. So we can say Collection Solutions as we operate now in all three main regions are back to normal.

You can also see on this light blue line that we have a certain recovery. People have probably stored a lot of beverages doing this period in the garages or in their sewers and once the locations open up, they have utilized the opportunity to return more than normal. We don’t this to continue. It will be flattened out but again we consider the collection business more or less back to normal.

If we look at the market, we see that I don’t have global evidence but I can talk for Norway figures right now. We see that people actually are consuming more than before and latest figures indicate that people buy 20% more bottles than before. So if that is remaining effect, we will certainly also see more volumes going through our machines going forward, but again these are early indicators. The positive is that they’re not showing a decline in consumption, they’re not showing an increase in consumption possibly for our operations here but we’ll have talk so how that goes forward and how it looks on the grounded scale than Norway.

If I then go to the right page here, one question we have asked ourselves would this COVID situation now lead to delays in legislative processes around deposits and I am pleased to tell you we have not seen that effect. Western Australia have now announced their commencement date and that is October 2020 and in fact that is ahead of the original time. So they were struggling a little bit in determining the dates due to the situation and they were playing around with either November or June next year. They now decided they will go live October. We see that as positive.

This is not a big market for us. We’ll have about five location or precisely five locations with some 10 RVMs. There will be more high-volume locations than we see in many stores in Europe. There is more mirroring what we’ve seen in Queensland and we’re excited to go live there and we’re prepared in all ways to do that both from a technical and operations point of view. So we look forward to their starting in Western Australia in October this year.

Netherlands have for quite some time been debating whether to extend DRS system or not. They have now on April 24 decided to extend their DRS system. So that already had the system, but the new system will also include small bottles and more tax and they have set the deposit value for the small bottles to €0.15 and for larger bottles to €0.25 and a targeted return rate of 90% as of January 2022. We have had no new information since April. So this is the latest what we’ve got from the authorities.

And finally Scotland, also here moving ahead on May 13, the Scottish Parliament approved the deposit and return constant scheme for Scotland regulations 2020 and they are committed to start the system 01 July, 2022 and that has been passed into law.

So on the question whether legislation has altered their view on deposit as a result of the Corona, we dare to say they have been staying put, they have continued with their strategic approach and that’s good news for their word.

With that I’ll turn to next page and talk about the food business. In essence, food is not eaten less during these times. What happens is that people have less opportunity to eat at restaurants. There would be less — since there are less people working, the whole catering sector is also reduced, less conferences, less office supplies or food and of course a lot of hotels are being shut down and this whole hotel, restaurant and catering sector is quite significant especially for the processed food sector.

We rely on numbers, official numbers here telling that in United States about 50% of food value generation is coming from the HoReCa sector and in Europe about 40%. These sectors are down now and they are significantly affecting the processed food suppliers. They now live on to big uncertainty.

If you want to make it even more complex, we also have to remember that there is a trade war going on between China and United States and we have reported before that, that affected US exports from round numbers of $20 billion of food was exported to China two, three years back and in last year, that was down to estimated $11. So $9 billion reduction in a rather short period of time.

We have no evidence for that that has been resolved. So that still remains as an uncertainty over this sector. So you have for the US food processing industry, you have two really big effects affecting them here in a short period of time. The China-US trade war, and you have the big reduction in volumes in the HoReCa. Therefore, that sector in US and the HoReCa affect impact in Europe has made this sector processed food really pressed.

We are still not seeing evidence for recovery here. So we actually remain cautious also going forward about the processed food sector. It makes in our food business about 60% where 40% is the fresh sector. So it is not insignificant and we just want to be prudent and say here we still see an uncertainly.

On the fresh side however, we have seen very good momentum. Most of the food is sold over retail. There has been an uptick here. We’ve seen good activity levels in many new capacities being installed in both the berries and the food sector and we’ve seen strong orders growth in that sector. So to date good momentum in fresh, low momentum in processed food, going forward certain uncertainty around the food sector given the big impacts of the pandemic. I hope that is clear the way I communicated here.

I’m pleased that we in Tomra have now due to our strategic development established ourselves in both sectors, both in processed and fresh making us more resilient to such swings. This is the first time we really experienced this and I’m pleased to see, so that makes our food organization much robust.

I’m also very impressed with how the team has been working here, really very active with the customer contacts. We’ve made more than 1,000 interviews in last month alone in the process food sector. So we really stay close to the customers and try to sell them so that we are at least here to support them and that I feel that Tomra is a good look partner when times returns because that I can show you.

This is a temporary situation. It will return — will recovery. Food is such an essential social society. So a recovery is guaranteed. It’s only a matter of how long this challenge will remain for the industry. We have also good evidence that we have maintained our market shares. So we see rather delays in investments and here one delay of a couple of months can actually lead to a delay in a year because of their seasonality effect in food.

So I hope this is enough to explain it. I do not want to send too strong negative messages, but I also want to be prudent and say we are a bit cautious about the outlook here.

Looking at the right side, here you have some numbers really Quality Control and it’s robot not in a normal sense, because this is a robot with advanced and multi-sensor system. So also here using artificial intelligence and sensors, we’re able to do things we could not do before. And again, this final product quality control is so critical for enabling of circular economy.

As you can say, these new launches are very fit for our attempt to be a leader in the circular economy area. So I’m really excited about this. In addition, I tell you, we had 1,000 participants on this launch event and the feedback was overwhelming. But before I talk more, let’s turn page look at the video and I hope you will like it as much as I try to make you understand about here.

[Video Presentation]

So as you could see, this was aimed for customers. But it was a snapshot of the live streaming event we had just compressed it in short time. But it’s truly exciting. And I convinced that with this new launches and our strong team and our deep knowledge and our global presence, we will be able to continue to compete on the top ladder of the recycling industry. And I would not be surprised if we can continue to gain market share in a market where we already have some 50% to 60% market position. Now, my last piece in my presentation is about circular economy. As I said before, we’re committed to this and I see TOMRA as a obliged partner for the collaboration we are doing and for the evolution of the society from linear to circular economy.

We’re pristine position, we have a leading position in collection and sorting and they are essential technologies for making this happen. We have invested significantly in creating and positioning ourselves in this collaborative platforms. For instance we are members of Alliance to End Plastic Waste to have strategic partner with the Ellen MacArthur Foundation, et cetera, et cetera and we’re working on many, many different dimensions on the technology side but also in enabling this because many big corporations, brand owners today have committed to sustainable packaging and some very high ambitions but they really need to know how to do it and here I think TOMRA and our collaboration partners can play a vital role. And that’s our ambition. And with that of course, we intend to create more demand for our collection and sorting technologies, as we want to process much more products in the future.

I will not go too deep into that. But the legislation again and authorities are staying put, they are focusing on this transition. We have the European deal as a part for resilient recovery of their COVID-19 where Ursula von der Leyen really talk about scaling up investment in the fields of sustainable mobility and the circular economy.

So it’s a commitment for European Union. We see the Green Deal as a green recovery. We are seeing short-term now the economical situation creating challenges for many of our customers, especially in the metals and general plastic waste. As I mentioned before, we see the brand commitments, we’re in dialog with many companies, I can show you that many leading global brands we are in close contact in cooperation with and we see that they’re not altering their agenda, they are committed and they know that they have to do this and that they know that the topic will not disappear because of the pandemic, it will be the year and they just really need to show and demonstrate how they become more sustainable in the way they package and promote their products.

And we see that the legislation continues to be a major driver for implementation of circular economy. So this is one of the strategic highlights of TOMRA as you know from before and we are totally committed to it. We’re continuing to invest in the technology, in the collaboration, inter centers and in different ways to make this happen. And with that, I will actually stop here and pass over to Espen to present the numbers for you, thank you for listening.

Espen Gundersen

Thank you, Stefan. If we move to Slide 10, as always currencies as you know Norwegian Krone depreciated significantly during first quarter this year, and continue to be weak compared to all major currencies and we are 16% down versus dollars and almost 13.4% down versus zero in the second quarter 2020 versus second quarter 2019. And this of course influence the figures as we will see. Moving to the next page, you see as Stefan said our in nominal figures flat versus last year. But more sense to the currency adjusted figures of the right column and consequence we are down 11% on the group collection.

Gross margin is down two percentage points due to the lower margins in collection, operating expenses is down 8% due to strong cost control in the quarter, travel cost is down for obvious reasons. Salaries is down due to furlough and German court, some government grants and very limited use of consultants, marketing is cooked and so on.

At the same time, as Stefan said we have increased costs on retrenchments related to the circular economy. This thing in particular and the gross saving is consequently more than 10%. But since the margin is down, the EBITDA is also down to 2.8 compared to 3 last year.

Moving to Collection Solutions on Page 12, there are significant difference in performance between the regions. Europe is not impacted retail is open. People can return, we have service techs living close to the machines. So you should get access to the machines and total Europe is actually 5%, currently suggest it’s also regional, really impacted in that region. North America as touched upon down 38%. The lockdown particularly in New York, but also in the older states like Michigan and the New region has hitting us significantly as in North America we also have manual machines on places and redemptions and our revenue is a direct consequence of the volumes hitting our infrastructures and also material recovery part of our business where we take responsibility the bottles and cans after they go onto the machines. This is also new activities, limited return rate.

So we haven’t done that. That’s the main reason why we see on longer revenue [indiscernible] for the quarter, rest of the world is mainly Australia and as Stefan said, we had a small dip in April but ultimately going into May we were back in other normal levels in Australia. So with lower volumes, the gross margin is also going down. Even though we haven’t had significant layoffs for a period in North America, we also have fixed costs under costs due to rent lease depreciations and so on. So that’s the reason why margins temporary has come down in connection in this world.

Operating expenses is down 9% and then EBITDA NOK 180 million. Moving to Sorting Solutions on Page 13, revenues are down 8%, currency adjusted was similar or slightly on top line but recycling has a stronger decline.

And this is partly because of high configures in the recycling business. In total, this is margin about 60% to 65% backlog conversion rate should be indicated at the end of first quarter. So overall the management activity up but it’s still hard to get machines part from people across the borders. Some of our customers do experience challenges. Therefore installations has been postponed and some services been not been executed according to original schedule. We are happy to see gross margin maintained at 46% unchanged despite that we’re in challenging environment when it comes to transportation.

That’s an increased cost for us, there are some obstacles in that respect, but we have managed to compensate them and report 46% on the margin side, operating expenses is almost 10%. So bottom line, we are actually nominal figure up compared to 2019. But slightly below the current suggested figures and we got NOK 260 million.

Moving to that order situation on Page 14. As in the first quarter presentation, we assume that the second quarter order intake would go down and it is been 5%. So the pandemic has made it more challenging to meet customers in particular new customers as travel is restricted and are closed. So intake a bit higher, if it wasn’t for the current situation.

Assets also down, we only reduced the backlog, asset revenue is also down 8%, the backlog is only down two percentage points from the end of the first quarter. Therefore going into third quarter we have high backlog. Our backlog business estimated conversion rate of 70% this year rather decent quarter coming. As we also said this estimated backlog conversion ratio is not guiding, it’s just an indication for those [indiscernible] more loss on the quarter basis.

Moving to Page 15 balance sheet, there is of course always currencies in here. Regardless of six or 12 months back, they’d have higher balance sheets because of the depreciation of Norwegian Krone. Due to seasonality it usually makes more sense to go 12 months back and if you do, the balance sheets has currency invested increased with 1% sort of most line items are rather similar what you had look at 12 months ago.

Working capital is down compared to 12 months ago. Despite the inventory which has increased also currency adjusted and inventory increase is because of the currency situation, we are more cautious. We are building some buffers. And it’s not strictly just in timeshare combined anymore because of all the uncertainties. One comment on intangibles also in turbulent times, you have an obligation to revisit your impairment every quarter. We have done. It just confirmed a lot from before also that there’s significant headroom when it comes to impairment testing on our income level, meaning the assumed net present value of the cash flow generating from those investments is more than sufficient to cover typically all these assets. So it’s good to know.

Page 16, how to position maybe this slight debt maturity on to the years on average. So we consequently work on installing after summer to redefine on some of them their short-term debt. We have learned that access to financing is easy. We’re very privileged in that respect. So we see that it will be easy to get sufficient funding at very attractive rates. Something I’m confident that that will not be a problem at all. And we also feel comfortable with [indiscernible] committed credit lines of NOK 850 million that we currently have available.

Moving to Page 17, and now it’s about looking forward. Yes in collection, back in second quarter collections now in many ways, business as usual RVMs are operational and we get access to machines, volume on containers going to our infrastructures is stable. So all except growth of course newer lockdowns and operational COVID which is beyond our control. This can have negative impact but if not, we see a stable quarter coming up for connection.

Since we feel the underlying momentum in finished goods at the same time, the short-term challenges experienced during the second quarter will also continue into third quarter. There are regional outbreaks of COVID-19 which still makes this harder to meet and interact with customers. And as I mentioned consummation of fears there is a problem, building pipeline of new opportunities.

Post work borders make access to seasonal workers harder this has and will continue to have a negative impact on the order intake in processed foods. In TRM, as Stefan said the majority of the business is going into the waste recycling, some segments which is dependent on commodity prices has a setback. This however comes from the minor part of the commerce mining business. So if you look at sorting division combined due to the challenges, the short-term challenges within finance and order intake assumed to be down versus third quarter 2019, in third quarter 2020 we’ve been down versus the third quarter 2019 will probably also be down versus second quarter 2020.

So this is assumed to have a negative impact on the performance in fourth quarter 2020 as we might move into fourth quarter in some of the lower order backlog. Our operating expenses maybe even future to build organization to prepare for this, already carrying significant costs related to this. And again as I said, we want to bring these activities because they’re very important for us for executing upon new future opportunities are started.

At the same time we are more cautious on spending and non-essential costs has kept up momentum. So, this is a balancing act to variable both perspective and internal at the same time simultaneously. But [indiscernible] round figures, we believe to be flat on operating expenses in third quarter but there was the third quarter 2019 suggested meaning increased costs in group functions related to circular economy will be compensated with somewhat lower cost in businesses. And as always, currency will play a role and will continue to have tailwind from the Norwegian Krone if the routine that we have today will stay out through the third quarter. That concludes the presentation and opening up the questions from the web.

Stefan Ranstrand

I could only say few final words.

Bing Zhao

Yes, please.

Stefan Ranstrand

We might have some customers and employees listening in here and I just want to express gratitude to you all for your commitment, your dedication, and your passion during this period, TOMRA could not be successful without your support, and we are here for you today, we are here for you tomorrow. And we will return to normal conditions and we’re ready for it as you have seen. And I hope that you see that most of our business is back on a normal situation right now. And we are committed to serve you going forward. And thank you very much all employees for your commitment during this difficult period. Thank you.

Question-and-Answer Session

A – Bing Zhao

Thank you, Stefan. With that, we can start on the Q&A section. We have a first question from Knut Erik Løvstad from Kepler Cheuvreux. Do you have an indication of the size of the market in Scotland?

Stefan Ranstrand

Okay, maybe I should take that. Scotland has communicated their targets under the setup is now pretty clear. They have the high ambitions available for modern system using use of systems, collection targets increasing to 90% by 2025. All material titles included pets, can, glass and all gene types is included and it’s a high deposit. So we believe that this will be a good system and in many ways it looks like the Nordic systems that we know from before.

In modern systems using automated software, you usually see between [indiscernible] citizens per machine and little ambitions we see in Scotland we record closer to 2000 and 6000 is our just for the time being, and it’s 5.5 billion citizens in Scotland. So then you have your figures needed for doing estimates based upon what you know today.

Bing Zhao

Okay, the next question is from Mikkel Nyholt from Carnegie. What is TOMRA stake on chemical recycling with for example getting more and more attention as a way, or at least an attempt to recycle plastics. Could it ever be a possible path for TOMRA to either collaborate with or acquire such companies?

Stefan Ranstrand

This will be a Stefan question. And so, yes you can say in general, thank you for the question Mikkel. In general, you have two main ways to do recycling. You can have a mechanical recycling or you can have chemical recycling, mechanical recycling is what we see to largest degree today and chemical recycling is innovation. Chemical recycling, I hope will evolve to become good and effective and it is complementary to the mechanical recycling. It is most likely more intense in capital investments and in use of energy and process equipment.

So it will again be complementary. We’re working with already, we’re in close contact with the main companies doing and aiming for doing chemical recycling. And not the least thanks to our participation and membership of the Alliance to End Plastic Waste. You have many other chemical and chemical recycling companies in there. So we are definitely working on that, for us as TOMRA it will not alter anything because for recycling either mechanical or chemical, you will need to collect the material and you will need to sort it.

So it’s not that you just dump general waste into a bin and then you make chemical recycling. No, you make a pre-sort of it. And then you can use more contaminated plastic can be through chemical recycling graded to much higher degrees, where you could actually not recover it in a mechanical recycling or if you have multi-layer type of material chemical recycling would hopefully be the answer to that.

But for us, it will actually only be more opportunities because it would be more recycling made if chemical recycling is successful, but you will still need collection technology. You will need a sorting technology and the chemical recycling takes place after that. So either if it’s mechanical or chemical, it would be both our customers. And I hope I was clear we are in deep collaboration with these partners, not the least thanks to Alliance to End Plastic Waste.

Bing Zhao

The next question. There are actually two questions from Daniel [indiscernible]. The first question OpEx was lower. Could you comment how this was split between collection sorting and what drives it? For example, lower travel expenses. Should one expect OpEx to increase again when revenues come back or is the OpEx reduction more permanent?

Espen Gundersen

Yes, I think I saw this question came in but I think we answered good on it after the question came in, if you go back to what we said on the earnings presentation, I’ll look at it. It was pretty clear there and you can read the splits between out of the differences also. So I don’t think we need to elaborate more on that.

Bing Zhao

The second question also from Daniel is order intake lowering sorting. Could you please comment on the decrease and whether it was driven by food or recycling or method?

Espen Gundersen

Yes, it’s evenly split between the units about those units we mentioned that has experienced the most challenges due to the situation are also the one within some of lower order intake thought process first and metal recycling.

Bing Zhao

Thank you. And the next question. Also two questions from Frederick. Any update on the 2019 dividend payout?

Espen Gundersen

Yes, I think what was agreed at the AGM was the board go to proxy to the side dividend. And it’s really a question for the board for management. So I assume that they look at the development in general both for TOMRA and what other companies in similar situation because many companies has postponed their dividend. So let’s wait and see. I know that they monitor the situation closely and we come back to this at the later stage, but there’s nothing more to communicate at this stage.

Bing Zhao

And the follow-up question any news on Canada and New Zealand also from Frederick.

Espen Gundersen

Canada is territory, and they like U.S. who can do this territory state-by-state. So there are some news from British Columbia that they want to modernize their system. And the same is going for Quebec better also more generic government announced the plan to modernize and expand but the details in these systems or initiatives is not known, but that’s the two that’s worth mentioning from Canada.

In New Zealand, the government has sent signal that they wanted to reduce deposits by 2020. But they’re working on dates and I don’t know what that might be need to. It’s too early to say but yes, there is activities in New Zealand where deposit is planned and they are looking into this, no doubt about that.

Operator

The next question is from Jack, [indiscernible]. Could you please clarify what you mean by slowdown of growth of ramp-up expenses in Collection Solutions? Was the origin forecast plus NOK100 million, where do you go from there? Will the saved costs be pushed out to 2021?

Espen Gundersen

Well figures, we use NOK200 million additional OpEx in 2019 to clear ramp-up in collection and currently we have the same run rate on let’s say ramp-up related costs which is future oriented of all what we have dominated kind of a statistic situation.

So we’ll not add some significant on top of this amount. We’ll be maintaining this cost which is now related to us being present in markets where the cost is of ultimate, but currently it doesn’t seem that we can add additional cost on top of the current run rate.

All certain coming in, we continue to invest year-over-year and even [indiscernible] continue to see that good numbers when we report higher cost in both third and fourth quarter, compared to the same quarter last year and since then from the certain [ph].

Operator

We have no further questions. So I think we conclude the Q&A session here. Thank you for listening in and I wish you a nice summer.





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