Ingenico Group's (INGIY) CEO Philippe Lazare on Q2 2016 Results - Earnings Call Transcript

| About: Ingenico Group (INGIY)

Ingenico Group ADR (OTCPK:INGIY) Q2 2016 Earnings Conference Call July 26, 2016 12:00 PM ET

Executives

Philippe Lazare - Chairman and Chief Executive Officer

Nathalie Lomon - Chief Financial Officer

Analysts

Alexandre Duval - Goldman Sachs

Stéphane Houri - Natixis

Josh Levin - Citigroup

Sébastien Sztabowicz - Kepler Cheuvreux

Susan Anthony - Mirabaud Securities

Adithya Metuku - Bank of America Merrill Lynch

Christopher Brendler - Stifel, Nicolaus & Company, Inc.

Alexandre Faure - Exane

David Mulholland - UBS Investment Bank

Christophe Quarante - Societe Generale

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Ingenico Group's First Half 2016 Earnings Results Conference Call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, July 26, 2016.

I would now like to hand the conference over to your speakers’ today Philippe Lazare, CEO; and Nathalie Lomon, CFO. Please go ahead.

Philippe Lazare

Thank you. So good afternoon, everybody. So the presentation will be shared with Nathalie Lomon, our CFO. So as you probably can witness that in our communication H1 2016 delivered a very strong performance. Revenue grew by 12% and the EBITDA ratio is 21.5%. We grew in every regions expect Latin America because of the impact of the Brazilian market. But if we exclude Brazil the Latin American region is growing by 24% and the group is growing by 15%.

The performance in Asia-Pacific and Europe will be absolutely outstanding and the U.S. market is still delivering a double-digit growth. On the ePayment front the division is back on track and the double-digit growth is confirmed for H2. So, in H1 as you’ve seen in the presentation if you are on the Page can probably read that that’s probably six. We have been able to launch successfully our Tetra range of products which is the new one started few months ago. We start to sell it in Australia, in Brazil and Mexico and France and Italy and Switzerland and in UK gaining market share against competition.

On the ePayment front we significantly improved our operational efficiency in the online payment and that success has been demonstrated by the Alipay contract and the success is of course revolving the investment that we are making in this division.

On the cross-channel side we have been very successful signing with four significant and major retailer mainly in France, four contracts has been signed in Q2 and there is something like at least in the pipeline which will be delivered in the beginning of H2 and probably beginning of 2017 as well.

And H1 eventually we start our M&A Forum completely in clearance with our 2020 target. We’ve made two acquisitions and the third one is not closed yet it will be closing in the coming weeks. So starting with the very first one which is Think & Go which allows Ingenico to develop on the retailers cross-channel solution using the NFC technology which is embedded into a connected screen. So it’s highly disruptive offer and solution which is very successful with some retailers.

Second acquisition Lyudia, and Lyudia to address the Japanese market not only because it’s a distributor but also and maybe mainly because its matter on the Japanese market bringing perfect knowledge on the software development and we mean that it will be very good support for our strategy in Japan.

And last acquisition which is not closed yet but no doubt that it will be closing in the coming weeks its Nera which is distributor in Southeast Asia, Beijing, Singapore. By the way it’s a terminal distributor of one of our competitor and of course it will help us to keep on growing on the Southeast Asian market which is now completely covered of some of the acquisition we made in Indonesia two years ago.

So before giving the floor to Nathalie and will give more detail on fee risk and evaluation to what I’ve said previously. H1 is bringing the evidence of the efficiency of our operation on [Nordel] which allows Ingenico to compensate the poor Brazilian market by a very strong performance in Europe for example.

H1 demand state that the growth drivers on which we built our 2020 targets are [indiscernible]. The adoption of the payments install in emerging economies. And I think that it’s pretty obvious that [post fiber] is the one helping the Asia-Pacific market to develop, helping the Eastern Europe and Central Europe markets to develop as well.

The second growth drivers is the renewal of install bases, I mean, if you comply with new security requirements and that’s true on the U.S. market with EMV migration. And of course, it’s true in the PCI v1 migration to PCI v4 in UK and Northern Europe which is underlying our significant growth in the top of the world.

The third growth driver is market share and gain which is related to our product and solution in those both in install and online. And the first one, which is the continuing growth of the e-com and we will strongly believe that we will be back in the double-digit growth in H2 for the Ingenico ePayment division.

So Nathalie, floor is yours.

Nathalie Lomon

Thank you, Philip. Good afternoon and good evening to everyone. So starting with the topline. As you can see on the chart, H1 has been able to grow the topline by 12% on the like-for-like basis and growth would have reached 15% if we had excluded Brazil which has a strong impact in Q2 performance.

So the growth is coming from every business segments of the Company. Terminals business is growing by 15%, and Payment Services is growing by 5%, and definitely showing the path for double-digit growth in ePayments in the second half of the year.

If we move to the analysis by segments, you can see that Terminals are still accounting for 70% of the revenue, whereas Payment Services are representing 30% of the Group’s topline in H1.

Now looking at the growth coming from these four different regions and the business line of the Company, we are growing everywhere at the exception of law, but I will get back to this in detail in a few seconds with the comments related to Q2.

So in H1, in Europe and Africa which accounts for 36% of the total revenue of the Company. The topline has grown by 15% in the first half of the year. And overall, as Philippe said, it is a great year for Europe and Africa. Asia-Pac is representing 23% of the total revenues and it’s also showing an astonishing performance with the revenue growth of 32%.

North America represents 20% of the topline and it’s performing well with 14% revenue growth in H1 and H1 U.S. are growing by 20%. And in ePayments, despite the unfavorable comparison base, the topline is growing by 1%.

Now if we move to the performance for Q2 starting with North America. North America grew by 11% mainly on the back of EMV migration. We see the U.S. bottlenecks in the certification process and it is delaying the migration for small and medium businesses, and we think that EMV migration should also drive sales up in 2017.

We are gaining market shares in large retails with significant deals that have been signed in the course of the quarter. In Europe and Africa, we are gaining market shares and volume in Central and Eastern Europe, Russia, Czech Republic also Greece. And we are benefiting from a strong trend of replacements in the UK and in the Nordic.

And on top of this in-store transaction business is developing well, so all together Europe and Africa grew by 13% this quarter. In Asia-Pac, we keep our market leader position in China which is above 30% in terms of market share. In Turkey, the market is growing fast. Thanks to the enforcement of the local regulation, which is making mandatory for install merchants to have an electronic payment device recording order transactions for tax recording purposes, overall, Asia-Pac is going by 29% in Q2.

In Latin America, Brazil showing a disappointing performance. So we have managed to keep our market share this quarter, but the volumes ordered by the larger chorus have strongly decreased this quarter versus last year. So you may recall that H1 2015 was strong and that 2014 was weaker, so as will restate sometimes hard to predict the behavior of the Brazilian market and more this year given the overall crises at the country is ongoing. On the other hand if we look at the rest of the region, all the countries in Latin America are growing very fast, altogether above 20% in Q2 and in H1 as well.

Now moving to ePayments, during this quarter ePayments total has grown by 4%, but this line is demonstrating a great improvements as well as professional performance is concerned with significant customer wins and this combined with some level of operating performance is making us very confident to come back with the double-digit growth in H2 on this segment.

Now moving to the P&L, the like-for-like growth of the topline as I said is 12% and 15% in Brazil. On an average basis, the revenue is increasing by 7% and the gap between like-for-like and establish growth is coming from the Forex impact only, which is quite significant; it is minus €60 million during H1. Gross profit is 43.2% and EBITDA is 21.5% compared to full-year guidance. Net profit attributable to Ingenico Group shareholders is €122 million is back in line with last year performance.

Moving to the gross profit of the Company and starting with the hardware business. So hardware business the gross profit is 46.7%, it’s a small decrease of 110 basis point in H1 compared to last year. Despite with the good behavior, the [indiscernible] there have been some changes in the product and the geographical mix which I explaining for this decrease.

However, the deployments of Tetra start - really starting this year and will represent significant volumes in 2017. We have reduced the production cost in the coming quarters and so we expect some improvements coming from this new range of products in terms of production cost.

As social services are concerned and in our guidance which decrease in the gross profit that’s coming from change in the customer mix meaning that we have more sales with customers having individually lower margins and this is also reflecting all the efforts that we are putting on the platform to improve the wide of the offer. And we are confident that those efforts that we make in terms of product and business developments will pay off in 2017.

Moving to operating expenses, so as mentioned in previous calls, we have significantly grown our R&D numbers to ensure the proper launch of the Telium Tetra range of products producing certification costs in region, but also amortization of the capitalized R&D. And G&A is increasing but it actually impacted by postings that do not impact EBITDA and that are coming from performance plan based on share prices in the group.

In terms of our net profit moving down from EBIT to net profit, purchase price allocation is lower than last year, some have set related to past acquisitions in Germany and Spain are being now fully amortized. Regarding the financial income, which is minus €1 million for this first half of the year it takes into account the impact of the sale of share in revalue up to VISA Inc.

Last and significant point in this table is the projected tax rate for 2016 which is 30.7%. So the improvement is coming from as we know lower tax rate in France combined with all the better country mix in the rest of the company.

So moving to the free cash flow. In this semester Ingenico Group has generated €64 million of free cash flow. So coming from the EBITDA we have negative impact of working capital change of €69 million which is lower compared to last year. So I may have two comments on this point, the first one is to remind you that the one-off advance payment that we have benefited from some of our Chinese customers at the end of 2016 obviously have negative impact in terms of working capital during our H1.

And the second comment is that adjusted for that the working capital requirements of the company is below to what it was in H1 last year both DSOs and inventor turns have been decreased. So no deterioration in terms of working capital, the CapEx are in line what we did in H1 2015 and we expect some acceleration in the course of the second half of the year. And so as a conclusion to this section this performance of H1 gives us a lot of comfort to meet the EBITDA to free cash flow conversion ratio of 45% which is one of the fundamentals of our business model.

Final comments on the financial structure 35 million it means 45% of 2015 dividend has been paid in cash and the rest in paper. We ended this semester with a leverage of zero that’s five. So as a conclusion was to both financial slides. I would say that again despite the fact that 2016 is high in terms of investments to nurture the future growth of the company.

We’ve been able to deliver 21 that’s five EBITDA margin in the first half of the year. And more over despite some turmoil if I may say in Latin America the most in local business model of Ingenico remains very robust on a global basis. Hence we have been able to growth on a double-digit basis the numbers [indiscernible] in H1.

So that’s it for me. Philip.

Philippe Lazare

Thank you, Nathalie. So let’s go to the conclusion of this presentation of the H1 results. So maybe before starting the Q&A session, we believe that those H1 results bring the evidence of Ingenico right positioning in the electronic payments industry. This positioning is the result of investments, acquisition, products and development and operational organization.

Thanks to that positioning, we are covering efficiently all the customers segments. I mean the organize retail, very successfully and the banks and acquires retail which is one of key driver for growth in some part of the world. We are covering efficiently all the electronic payment method.

We are leader in the card-present installed payment. We are leader in card-present mobility payments. We have a very significant position in the card-not-present regardless of the million use, meaning that you can use Ingenico solutions, making the payments on the Internet on your laptop, on your tablet, on your smartphone, so we are covering all the technical, all the technical segments of the electronic payments.

This year we are launching successfully a new range of products the Terminals. Terminal, which will represent probably something like 5% of the total volume of the Ingenico product this year, which is perfectly inline with what we are expecting and very similar to the launch – on the launching of the Telium2 solution which was a great success that everybody remember.

We are launching services related to the Terminals and thinking about the marketplace related to the Telium Tetra range. We are launching the Merchant Hub Service, which is a solution to bring reporting to small merchants. We are launching an Estate Manager, which is the Terminal Management System which is probably the best solution in the market.

We are launching our new online product, the Ingenico Connect solution which is now completely available for the GlobalCollect customers and we are working on making it available for the urban customers. We launched elevate successfully and as a completion, we are launching our cross-channel offer. Already four significant customers already signed contract with us for cross-channel offer and we are actively working in turning to the contract and it will be done in the coming weeks.

So 2016 is full of project and opportunities. We confirm our 2016 growth which is above or equal to 10% growth for the topline and around 21% for EBITDA margin and of course, we confirm as well our 2020 objectives, so it’s everything happening in 2016 are completely validating our targets for 2020. No need to read them, you know them; it’s something like 4 billion topline EBITDA ratio from 22 to 23. Free cash flow conversation is 45% of the EBITDA, payout ratio 75%.

So that's it for the presentation and we're ready to answer to your question if there is any.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

Your first question comes from the line of Alex Duval. Please ask your question.

Alexandre Duval

Yes. Hi, there everyone. Alex Duval from Goldman. Just first of all wanted to ask a question on the U.S., it looks like you managed your double-digit growth there in the quarter despite inventory issues. And then you also referenced some market share gains, so I wondered if you could just clarify the latest – because you gain market share there. You also referenced bottlenecks that you saw. I wonder to what degree that means you’ll have sustainability of growth into next year.

And then the next question was just on LatAm, obviously that was tough in the quarter due to the macro issues that are hard to forecast. But clearly in your long-term plan, you talk about a return to growth there, so what underpinned your confidence on that at this point? Many thanks.

Philippe Lazare

Thank you for you question. So starting with Latin American question. In the Brazilian market is probably one of the most difficult markets to I mean which you can make any forecast. We probably remember at the end of 2015, we went very clean on that the behavior of the Brazilian market will be sort of the way to adjust our guidance for 2016.

We are not anticipating such a drop in the merchant acquirers and others in the Latin America, but historically we know that they are able to back a very huge significant volume in the coming months. And for that we believe that there is no fertility on the Brazilian market and that market will come back to level that we knew in the past.

So the U.S. question is are we gaining market share against competition under retail segment? The answer is yes. Are we getting market share on the segment? The answer is yes. Are we getting market share on the what we call the bankcard segment? The answer is so far the bottleneck is not I don’t know the niche from that that is not is reception. Is that correct and it is not completely resolved and it’s ready to make clear forecast, so what’s going to happen in that part of the market in the coming months that again we are I mean getting market share in retail in mobility.

We have very strong hopes coming from some vertical like some of these segments and specialty segment as well. So it’s a bit too early to put figure on that. And we will be more specific in the coming months, but again the U.S. market will remain keep either for Ingenico in the coming months and years and even there is slippery from 2016 to 2017, it’s unchanged the time of target that we have in the part of the world.

Alexandre Duval

That’s very clear. Many thanks.

Philippe Lazare

Thank you.

Operator

The next question comes from the line of Stéphane Houri. Please ask your question.

Stéphane Houri

Yes, good evening. I have two questions if I may. The first one would be on China it seems that the situation there is still okay for you? Can you give us your growth rate there? The second question is one the EBITDA, because you’ve done 21.5% in H1, but you still say 21% for the full-year, so are you expecting any negative impact on this in the second half. And third point is can you update us on your view on the site feedback for the full-year? Thank you.

Philippe Lazare

There is a lot of question from [Stéphane], but I will start from the – with the answer to the first one, so we don’t give any specific details on how the Asia-Pacific revenue between China and rest of the Asia-Pacific. You probably notice that sincere we are putting a lot of effort to be a key player in China and outside of China, so now we are market leader in Indonesia, we believe that stands together in the acquisition of – we will strengthen our position in the rest of Southeast Asia.

We are very strong player in Australia and we start with good results in India and of course not now and not yet, but we believe that the Japan will bring its contribution to that. So the only thing that I can give you as an information about the Chinese market, we are still number one on that market and as far the volume is concern, we are going to deliver in 2014, 2016 very significant number of terminal probably far higher than the one we delivered last year, but we don’t give information to our competitors on exactly what we are doing on the Chinese market itself.

So question for Nathalie related to Forex and to EBITDA margin in full-year or H2 as far as them.

Nathalie Lomon

Yes, maybe first starting with your previous one which is – I don’t know whether it’s a new one, but anywhere Forex given the trend that we see in the first half of the year, we think that on a full-year basis, the Forex impact for under [indiscernible] of the company should be somewhere between €80 million to €90 million negative impact in 2016.

Regarding the EBITDA margin you are right we have achieved our target of providing under the EBITDA margin around 21% despite the fact that H1 was slightly broad that I think that’s there are some items namely revolution of the situation in Latin America we chose mid-year may have an impact on the EBITDA of the company hence for the time being we stick to do our guidance that we gave to you at the beginning of the year.

Stéphane Houri

And the Forex impact does it have or so the impact on the margins or is it totally hedged?

Nathalie Lomon

So in terms of EBITDA margin as we said when we guided for 2016 there was a small negative impact so we only guided for 2016 there was a smaller and limited impact when compared to 2016. Now most of our exposure is hedged so we don’t expect any deterioration coming from FX condition in the rest of the year.

Stéphane Houri

Okay. Thank you very much.

Operator

The next question comes from the line of Josh Levin. Please ask you question.

Josh Levin

Yes, thank you good evening. Can you talk about the growth drivers in ePayments how you see them playing out over the next few quarters and was those ePayment growth during the first half was it in line with your internal expectation?

Philippe Lazare

Yes. I mean the behavior of the ePayment dividends since the very beginning of this year is completely consistent with what we were expecting from it. We worked hard on bringing the level of services that the customer asking for, we are working on the conversion ratio which should be [indiscernible] in that space. The new contract that we signed recently with Alipay and some under the volume that we gained against competition recently as well just bringing the high level of confidence to deliver the H2 double-digit growth and of course the idea is not to limit our ambition to H2, but we’ll keep on growing in 2017. So to certainly operation no need appointment coming from this part of the company.

Josh Levin

Sure and my second question Brazil. Can you tell us the percentage of total sales what Brazil constitute?

Philippe Lazare

The total sale Nathalie is going to give us it’s not at the end of the day I am going to answer differently and Nathalie looking at the information you asking. The 60% of the total revenue of the company are coming from Asia-Pacific and Europe and Africa. And those two regions are significantly growing and we know that will keep on growing in H2. Put on the top of fact that the ePayment division is going to rule by the H2 as well. The level of certainty coming from the order market within Ingenico is not suppose to bring a negative impact on our fully-owned guidance that’s why we are very comfortable to confirm that we will very well [indiscernible] in H2. Nathalie?

Nathalie Lomon

So breaking giving investment [indiscernible] less than 5% of the total revenue of the groups in H1.

Josh Levin

Thank you.

Operator

Your next question comes from the line of Sébastien Sztabowicz. Please ask your question.

Sébastien Sztabowicz

Yes, hello everyone. It seems that you regained some market share and the clients you last in ePayment in Q3 last year. Was it already in the Q2 number or this is more to come in the back half of the year. And also on the Alipay deal, did you have any revenue already booked in Q2 which is more something that we should – in the back half of the year. And also you had some forecast or some comments you made for China and the U.S. for this year targeting the Chinese market to double-digit and the U.S. too was well double-digit is still valid or is bit ambitious based on what you see today in the market? Thank you.

Philippe Lazare

So I mean your question about the Alipay contribution, it will not be a significant contribution in H1, because it was not a significant contribution in H1, so it’s going to be more relevant in H2. Of course, volume that we have been able to get back from the clients we lost last year our part of – will be part of the recovery in H2. But all in all we’re not concentrating only on those two significant clients and working with all the opportunity that we can get.

Again, on the U.S. market, the only answer I can give you today that USA is still a significant component of our strategy. We are growing on the Internet market, growing on the mobility market, developing some vertical and we are looking very cautiously to what's going to happen in the reduction and the speed of the reduction of the inventory within the stock I mean delivering inventory.

So no reason to be anxious, good reason to look at that market very carefully, but again, of course U.S. market is a really important one for us and we are not going to neglect it and we are still working to gain market share and we will keep on gaining market share in the coming months. But if you look at the rules that we are expecting from the rest of the world, we are completely insulated from the news coming from such market even if we’re not expecting bad news coming from that market.

Sébastien Sztabowicz

Okay. Thank you.

Operator

Your next question comes from the line of Susan Anthony. Please ask your question.

Susan Anthony

Yes. Good afternoon. A couple of questions if I may please. First, I mean I know you won't give numbers on China, but should we understand that you're seeing the growth there slowing, because I think that one of your competitors PAX is saying that well they just – they simply don't believe the growth numbers that you are looking for China whether this year or out to 2020 and maybe that's because of the way they are positioned in the way you are positioned and you are doing a better job. But can you talk a little bit about if there are any trends there that we should be alert for?

Second, PAX is also saying that they're being very aggressive in terms of the U.S. and winning contracts against you in the U.S. which seems a bit unlikely, but maybe you could give your take on that. And also in Brazil, obviously, Brazil is a very difficult market, so maybe that trying to undercut prices and I know that's not something you like to copy. And then finally, Turkey has been a good market for you. Is there any risk with what's going on there that that will fade away in the second half of this year, do you think?

Philippe Lazare

Okay. So thank you Susan for your question showing no risk whatsoever on the Turkish markets, which is already 100% in the books, so we don't anticipate any difficulty related to the political turmoil in Turkey. Back to the question of what competition is saying about Ingenico. The only thing I can tell you about the Asia-Pacific in those regions as we grew by 32% stocking with very permanent position in China.

I think it’s a very good performance, and I hope for PAX that they will be able to deliver something and – coming year. For the rest, we are still number one in the Chinese market so far, of course we will not be delivering 20% growth as we did in the previous years, but it will remain a key driver for those within Ingenico in the coming months and years and anyway that top of the world is probably the place to be with some other market that one of the place to be for the terminal business in the coming years.

Even if Europe is bringing from time-to-time some very good news as we have been able to – as we’ve seen on – in H1 in 2016 it will probably view full-year effect until even beginning of 2017 will be positively impacted by the behavior of local market. And your last question not short to remember.

Philippe Lazare

That’s it Susan.

Susan Anthony

Okay. Well, the impact was also saying that they were winning against you in the U.S. and Brazil?

Philippe Lazare

Quite frankly Brazil I heard about it I mean its saw renew we are not yet delivering the thing, so we will see in that business, we are trying not be local and which is trying to deliver the figure that we are forecasting for the market.

Susan Anthony

And do you see them in the U.S. at all or is that more which we are thinking on that top?

Philippe Lazare

Frankly, I don’t see that they have any significant market share on the U.S. market as far as I know that again I’m not able to say that it’s wrong or I’m not able to say if its – if the statement coming from PAX.

Susan Anthony

And then just finally if I may, so what for you do you see as kind of the biggest risks to your – either to your ambition for this year or looking further out as anything change I mean I know Brazil is obviously a bit of a wildcard still, but is there any other areas where you’ve got bigger concerns than you had a few months ago?

Philippe Lazare

No, the 10% organic growth on the full-year basis in 2016 taking to account risk and opportunities, so we are – there is no reason for us to add other risk on the one that we already put in our figures.

Susan Anthony

Okay. Thank you very much.

Operator

Your next question comes from the line of Adithya Metuku. Please ask your question.

Adithya Metuku

Yes. Good afternoon guys. I had three. Firstly, on the Alipay agreement, can you elaborate a bit more on what exact services will you be providing? Will you be acting as a backup PSP and [indiscernible] or is there anything more than that. Secondly, Europe and Asia were pretty strong, can you talk a bit about what drove growth in these two regions in the second quarter especially in Europe and what risks do you see to the growth slowing in these regions like you did in North America in this and the last quarter.

And finally, if you look at the Brazilian Central Banks comments recently, they said that leasing cost in the country was too high. One of the reasons for the high refresh rates of terminals and is the high ROI for the Brazilian acquire it on terminals. Now as there is a risk that regulation could lead to leasing prices coming down. How do you see the impact of this and replacement demand pricing and on the market share in Brazil? As it possible to the replacement gets longer and it ends up being negative for demand there over the longer-term? Thank you.

Philippe Lazare

So it’s a very comprehensive question, let’s start with the Alipay, that is not only being back of PSP, it’s being a key player for PSP for Aliexpress, of course there is not only one PSP supplying services to Alipay and Aliexpress are pretty sure for some of our competitors are doing it as well, so we don’t think that we have been chosen as back up PSP, all I want to see that we are been chosen as bank of PSP [indiscernible] that we’ve been chosen because we are able to deliver very high number of transaction. Second that – summary asking for and the level of conversion that we are able to bring to them which is of course key in their business model.

So your question on the Brazil market - and probably it’s a bit too early to put figures on such hypothesis to just to summarize your question I slightly understand it – it’s in the new regulation we are probably bring the acquirer to extend the lifecycle of - we are I mean in the past it was not that at all it was [indiscernible] the Brazil market was extremely active and the terminal was considered as a marketing into and most of the time they were putting on the market.

The very new version of terminal and are not showing that they will change their mind if they go back to normal growth in the coming months, but again I don’t see that anyone is able to make decent forecast or we are able to forecast on the Brazil market in the coming months. We have hypothesis for H2 which of course better than the figure that we get from the beginning of Brazil market in H1 that we have to make sure that this hypothesis would be turning to others are being that relates.

Adithya Metuku

Thank you. And just on the second question was on Europe and Asia being pretty strong. Can you comment on this one what’s exactly the growth drivers were within this regions? And what is the risk that growth could slow as it did in North America in the quarter? Thank you.

Philippe Lazare

Yes. Sure. The Europe the biggest growth driver is the migration from terminal which were PCI v1 compliant terminal which our PCI v4 or v3 compliant so its probably very significant renewal or being so that it really have been partly in the UK between the last in the second part of the year same for the Asian market for the Central Europe and Eastern Europe its much more related to the first equipment of merchant and government we are seeing to have less cash economy and more foreseeable economy where it seems to be the electronic payment. And you know the last region on which you are wanting more color was it Asia-Pacific.

Adithya Metuku

Yes.

Philippe Lazare

So Asia-Pacific is a mix of material market like Australia and in Australia we’re selling some very complex solution of cross-channel. And then on the other countries in that part of the world is mainly the deployment of install base to make sure that all the consumer are going to be able to use their card as it’s the case in China significantly, its not to be the case in most of the Southeast Asian countries and of course we’re all looking at Indian market very closely because it could be next in [indiscernible] if it happens in that part of the world what’s happen in China for example.

Adithya Metuku

Okay. Thank you.

Philippe Lazare

Okay thank you.

Operator

The next question comes from the line of Chris Brendler. Please ask your questions.

Christopher Brendler

Hi, thanks good evening. A couple of questions please. On the ePayments business if you could talk a little bit about through the pricing trend in the GlobalCollect side of the business I mean a little bit the [indiscernible] legacy business as well. The gross margin was down I don’t know that was because of the contract I know you are projecting double-digit revenue growth in the second half if you could comment on the gross margin outlook for ePayments that would be very helpful.

And then on the U.S. business the double-digit growth was very impressive I was wondering if you could try to quantify it all any drag on that growth from the certification delays we’ve seen in the bottleneck among the U.S. acquirers to slowdown their Terminal purchases. Was it a material impact on your results and that you were able to offset with just good execution?

And also do you think that the – what do you think we are from a terminal opportunity with EMV upgrade in the U.S. Are we still right around 50% or is it getting higher than that I would think certification delays, it may help elongate this cycle. And was wondering if you've also seen any pickup in some of the new terminal opportunities like restaurants and hospitality where they're forced to add terminals. Is that part of your other growth story at this point? Thank you.

Nathalie Lomon

Okay. So starting with your question on ePayment and the evolution of the margins. As I said mainly two reasons for definition of the decrease compared to last year and then compared to H2 2015. The first one is really coming from the customer mix. We have more and more – let’s say large customers on the platform and so those customers are bringing up some volumes, but from unit margin standpoint some of them have a lower contribution to smaller customers, so this is one of the reasons for extending the decrease.

And the second one, as we said at the beginning of the year that there would be more people working on product developments and offer development to – and large – the capacity of the platform and also to enlarge the offer on the platforms, so in terms of payment methods and so this is an investment that we are going to make now in 2015.

And as I said, we expect to redeem from that investment in the course of 2017, so that there would be – to be inline with the target that we have in our 2020 plan, a slight increase in our margins.

Christopher Brendler

Okay. And in the U.S.?

Nathalie Lomon

And so on the U.S., the situation as we see today that there must be something slightly above 50% of EMV migration completed. You may have seen from comments from competition in the quarter regarding bottlenecks in the year certification process. So it is true that it will easier for large retailers to certify their EMV environment, because they have in-house which it seems to deal with the complexity of the new EMV certification.

Now, when we're talking about our smaller businesses, they rely on ISOs and to handle the certification for them. So it's taking more time because it's a brand new process and that has many customers to deal with. However, we think that the impact of the other charge back on the small retailers starting to develop and so it will definitely push small retailers to push their ISOs to move faster as for as their certification of their segment solution is concerned.

On the other hand, as Philip said, we are not only working with small and medium businesses, we’re working with large retailers, we have signed significant deals in the course of the semesters or namely I think of Domino's Pizza, Choice Hotels, Red Lobster so many chains or retail chains that people are very familiar with in the U.S. And those years that we have won are definitely markets share increase for us.

On top of that, we are working on developing our new verticals to ensure stronger growth from a mid-term perspective to mainly in the health and the hospitality sector, where we have designed our [indiscernible] dedicated to players in that area, so all in all we are confident and actually said maybe some bottlenecks in the quarter 2016 for the EMV migration that we are very confident and the U.S. will still remain a very strong part of the Ingenico history in the coming quarters and coming years.

Christopher Brendler

Great. Thanks, Nathalie.

Nathalie Lomon

Thank you.

Operator

The next question comes from the line of Alex Faure. Please ask your question.

Alexandre Faure

Hi, good evening. Thanks for squeezing me. I’ve got two questions and just filling up on one of the previous question, you are still confident you can do 10% growth in the U.S. this year despite of bottleneck situation. And second question would be on your gross margin in payment, I mean also towards down year-over-year and had the impression that Europe was strong and North America is strong, China is strong, so all the regions that used to be let’s say above group of the range in terms of gross margin and Brazil being weak actually just to be a drag on gross margin for U.S. just trying to get my head around that if you could help in anyway? Thank you.

Philippe Lazare

Thanks Alex for your questions, so I mean what we are seeing from since the beginning of that call that we are confirming the 10% growth for full-year at a growth level whatever the rate that we are going to deliver it. Of course we are looking carefully to the U.S. market because we are in a position to look at all the opportunities.

Retail delivering very high level of growth, mobile POS are delivering high level of growth. The only question is the speed of the decrease of the level of inventory within inventories plant. We don’t know yet what’s going to happen in that part of the market before we know it will chance our confident in the fact that Ingenico will deliver full-year guidance at group level.

For the rest, it seems that is important to underline one more time that even in the very, very negative performance on the grocery market which is of Ingenico performance which is market performance and market behavior. We have been able to offset such a level of underperformance we delivery high level of performance coming from Asia-Pacific and from Europe. And you probably remember that Europe plus Asia-Pacific is versus more than 60% of the total revenue of the company, so no reason to be nervous on our full-year guidance or whatsoever.

Alexandre Faure

Thank you. And on the gross margin point in hardware compared to your original mix that looked strong from a gross margin perspective?

Nathalie Lomon

So coming to the regional mix, actually it’s more you are right that than anything else extending for this decrease plus some of your cost coming from the state of empress those you see they have a lower margin than the most sophisticated payment that in Ingenico – and so this what is extending the decrease in the hardware and regarding the ePayment, as I said to the sectors this is one evolution of your customer mix is as I said some customers, very strong customers and large customers bringing volume on the platform, but with the lower margin and on the other hand some key step that we are putting on the platform will increase the – also flatten the further development and to enlarge the product offers.

Alexandre Faure

Sure. Thank you very much.

Nathalie Lomon

You are welcome.

Operator

Your next question comes from the line of David Mulholland. Please ask your question.

David Mulholland

Hi, thanks very much for taking the questions. Firstly, just coming back on the Alipay agreement and I just wonder if you could help us to understand what the scope of the agreement is obviously its going to be external to China with respect. But is this for a couple of specific regions you’ve been choosing, I just asked partly because obviously with the structure of your offer where you work with sort of many different acquirers. I guess that would make sense, but I’d love to get clarification on that?

And then secondly I am just coming back on Europe obviously being driven by quite a strong upgrade cycle today. I just wonder if you could talk about the longevity of this driver is it something that’s kind of one-off upgrade cycle this year maybe next and then we slow down or do you think you can carry on growing from the levels you will get to probably to 2020 in Europe?

Philippe Lazare

Yes. Thank you for your questions. So I mean we’ve been selected by Alipay because of our ability to provide the global credit card processing in a full service model, which is the one which was required by Alipay which is our International offer.

Our [indiscernible] acquire acquisition is of course interesting for them because it bring them the ability to have better conversion ratio probably better that if you are seeing the required. So the combination of this two reason put us in a good position to be part of Alipay and Aliexpress sorry in the coming months and years.

Your other question was related to growth in Europe so of course given the very high market share that we have in the part of the world and delivering such a growth is not something that we put in our 2020 plan. Of course if we are able to keep on growing at that pace we will be happy to do it but probably it will not be so high in the coming years.

Even if we believe that 2017 at least the beginning of 2017 we’ll keep on growing at significant pace in that part of the world, but we would be more specific in the coming months [indiscernible] budget exercise which is on its way.

David Mulholland

Great. Thanks very much.

Philippe Lazare

You’re welcome.

Operator

Your next question comes from the line of [indiscernible]. Please ask your questions.

Unidentified Analyst

Hi, thank you. Maybe just following up from David’s question. When you look at the way the PCI upgrade cycle works to different markets to say that’s a mature. Can you give some sense please as to maybe how that should role through different markets in Europe and maybe also ex-Europe?

And then the second question is just shortfall in the U.S., do you see any real traction from the resource increases the distributors are making to try to pull through that bottleneck at this stage, is that still to come. And then two short ones on cost. On the R&D you had relatively flat sequential development versus H2 last year in R&D cost, does that – is this more or less the new level or do you have anything stepping through in H2 that you would like to describe.

And on G&A, you mentioned that share plan was part of the step up and causes, maybe if you could quantify the share plan impact?

Nathalie Lomon

Sure. Maybe talking with the tough part instance of R&D you are right, it’s continues effort. It is nicely – slightly increase in the course of H2, as you know that your certification process in region to make sure that one new range of terminal which it produce can work actually say between six to 12 months depending on the country and the local regulations.

So we think that we would still have an effort to make in the course of H2 to certify on your range of products. On top of that, it is not because we are launching a new range of products that we start maintaining the current range of product, because our current customers rely on this for the maintenance of the current range, so we have in our OpEx those costs the cost for certifying the new range of products plus the cost for maintaining the Telium2 range of products which are kind of double dipping and that will last until we decide to end of life, the Telium2 range of products.

Regarding G&A and the impact of the plan it’s between 60% of the increase of the G&A that is related to this [indiscernible]. Coming back to the PCI, PCI evolution I would say every four to five years there is a new regulation coming from PCI which is making the requirement of security in the terminals more stringent. So the very first requirements from PCI were more I would say related to the physical security of the hardware.

Now the evolution of the PCI or the - before it’s putting more pressure on the logical security of the hardware, so having stronger requirements regarding the quality of the software that is running in the terminal on top of the operating system that is developed by Ingenico.

So as we said during our session in London during our Capital Market Day the fact that we are – regulation is changing is definitely a driver for renewal and in some cases just like what we weakness in the UK in 2016. It’s a very strong acceleration when some acquirers or some banks will be placed in abating their estate. And I think I have forgotten your second question.

Unidentified Analyst

Okay. Well there was another part of the PCI question was just to understand how this may roll through other markets maybe also outside of Europe. And then the other question remaining related to the U.S. it’s just whether you've seen the efforts of the distributors to try to put some resources and whether that actually was having some effect at managing the bottleneck backlog they have or not yet?

Nathalie Lomon

Okay. So we are monitoring to our best the version of the I would say the estate at least Ingenico estate which is PCI v1 in all the countries and this definitely something that we will look at carefully in the coming months and especially after the budget process we will start very soon because this PCI v1 terminals are supposed – that they're not supposed to work anymore at the end of 2017.

Regarding the distributors and so called the bottleneck that we see in the U.S. the chain between the hardware manufacturer and the small medium businesses is quite long, we are selling to distributors, then those distributors are selling to ISOs and those ISOs are in charge of handling the certification process because they will integrate the payment rules, why their payment solutions that takes also into account the requirements from the cash register.

So the entire market if may I say pushing to fasten the EMV migrations. On the one hand the small merchants are suffering from charge backs. On the other hands distributors are pushing also the ISOs to speed up their certification process so that they could get rid of their inventory.

And last but not least you may have seen that the schemes are for – decided to help the certification by providing more guidelines and by simplifying the test cases for EMV payment, EMV compliant payment solution in the U.S. So I would say [indiscernible], but I think as you know all the stakeholders in the market are pushing to reduce those inventory and to make the good process for this factor.

Unidentified Analyst

Okay. Thanks very much for the answers.

Philippe Lazare

Thank you, Peter. We will take the very last one.

Operator

The last question comes from the line of Christophe Quarante. Please ask your question.

Christophe Quarante

Yes. Could you hear me?

Philippe Lazare

Yes.

Christophe Quarante

Okay. Good evening everybody. And just a quick question if I may. Could you give us the contribution of distribution of the transaction segment in Q2? Second question could you give us, as you would give some details on the Forex. Do you think that Foxex impact was bigger than the one you expected, is it related to one specific currency? And last question could you give us the contribution of the acquisition on the first half and for the full-year and may be should also an impact on the margin at EBITDA level then could you give us the figures?

Philippe Lazare

And then starting will you very last question there is no figures I mean there is no impact from income acquisition in the figures that we deliver in Page 1. We are expecting few contributions coming from [indiscernible] in H2 but it will be a marginal. Then Nera after closing will probably bring us something like in also gather I mean with two others million euros in the H2 as well which are not today in our forecast. So it will be on the top of what we already have in our books. And the question of Forex going to answer you and sorry about the view very first question I didn’t…

Nathalie Lomon

The transaction, yes.

Christophe Quarante

Yes, then on the transaction I am just sorry to interrupt Nera is €15 million sales on marginal impact on EBITDA as you post.

Philippe Lazare

Yes.

Christophe Quarante

Okay.

Nathalie Lomon

Yes. So coming to the first your question on Forex you know also the best of currency we are dealing with so its [indiscernible] we will so has the DPT of course Russian ruble and Brazilian reais for the most significant, so all of those currencies are evaluated against the euro when we would compare H1 2016 average to H1 2015 average. The biggest impact that we have in our model is coming from the Brazilian reais, so this is something that we have already commented earlier in the year that on top of the uncertainty of the whole economy and the consequences for us in terms of revenue.

We also expected something that we could not I would say forecast that we see which was the devaluation of the reais versus euros and then the other currencies so you would know them is Chinese ren GDP and Turkish lira which had a largest impact on the – in the FX. Now coming to the question on transaction, you are asking for the number of transaction?

Christophe Quarante

The revenues of transaction?

Nathalie Lomon

The revenue of transaction is €345 million in H1 and €181 million in Q2.

Christophe Quarante

Okay. Thanks a lot.

Nathalie Lomon

Okay. Thank you.

End of Q&A

Philippe Lazare

Okay. Thank you very much for all your questions. Just as a conclusion, keep in mind that our guidance for 2016 is insulated from any bad news coming in H2. We don't anticipate any bad news, but just keep in mind that even in that case you’ll be able to deliver what we commit to deliver to you and to our showrooms. The next publication for Q3 is now supposed to be in the October 26. And we will give you figures concerning the revenue of Q3 at the date. So thank you very much for your time, for you question and for your support. Have a good day. Bye-bye. Thank you.

Operator

It does conclude the conference for today. Thank you for participating and you may now disconnect.

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