Coor Service Management Holding AB (COOR) Earnings Call Transcript

Ladies and gentlemen, welcome to the Coor Service Management Q3 Report 2020. Today, I'm pleased to present President and CEO, AnnaCarin Grandin; and CFO and IR Director, Klas Elmberg. [Operator Instructions] Speakers, please begin.

Thank you, and good morning, and welcome to the presentation of Coor's report for the third quarter 2020. I hope you all are healthy and safe these times. Before we kick off, I will briefly present myself. I took up the position as President and CEO of Coor from the 1st of August. And I have a long experience within Coor for almost 20 years with a number of different positions, latest as Country CEO in Sweden, and before that, in Norway. I know the FM industry by heart, and I know what it takes to succeed, both from a customer perspective as well as a leadership perspective. So during my career at Coor, I have been highly involved in developing core strategic agenda over the last years. I have then implemented and delivered on the strategy in my previous roles. So I'm fully committed to Coor's Nordic strategy, and together with my team, lead the company into the future. And for those of you listening to the quarterly report for the first time and not yet know our company, I will give you a short overview. Coor is the Nordic market leader in integrated facility management, delivering a broad range of services within workplace services, property services and strategic advisory services. We have a turnover of close to SEK 10 billion over the last 12 months, generating an EBITA level of just about SEK 550 million, taking us to an EBITA margin of 5.6% over the last 12 months. We have around 11,200 employees, which translates into approximately 9,000 FTEs. One way to get know Coor is to look at us from a country perspective, and Sweden is, by far, our largest market accounting for 51% of our turnover. Norway is the second largest with 22%, followed by Denmark with 20% and Finland with 7%. Another perspective is to look at us from a contract perspective. And when split in Coor by contract type, you can see that 60% of our turnover is generated from integrated facility management and 40% is single service, mainly related to cleaning and property services. So both in the Q1 and Q2 report, we have provided a summary of how COVID-19 has impacted Coor and how we have handled the situation and I will continue with a similar summary also for the Q3. And our #1 priority is always the health and safety for our employees and our customers' employees. We follow the recommendations from the authorities in the respective countries to support the efforts in reducing the spread of the virus. Now we are proud to see how our services contribute to maintaining critical functions in our community as well as supporting our customers in their efforts to handle the COVID-19 situation. And COVID-19 has had a negative impact on variable volumes, mainly within food and beverage, but also, to some extent, within property-related projects. On the other hand, we have seen an increased demand for cleaning, yet the net effect is still negative. Our subscription volumes, accounting for some 75% of our total turnover, remains strong which is creating stability for us. We have a close partnership with customers to find sustainable solutions, both from a short-term perspective as well as a long-term perspective. And since the early days of the pandemic, we have prioritized cash flow and strong cost control to minimize the negative impact of COVID-19. And from a cost perspective, we have been addressing all types of costs, including subcontractors, purchased goods and internal costs. We have utilized furlough schemes in the different countries, but the level of people affected by furlough schemes is now down to 6% of our employees in the end of Q3 that can be compared to 20% by the end of Q1. And cash flow remains strong without negative changes in payment patterns from corporate customers. Our balance sheet is strong with a high level of unutilized credit lines. So overall, we are happy with the constructive customer dialogues we have, finding both short-term and long-term solutions. In the second quarter, our organization shows great ability and so do we in the third quarter and this is evident when looking at both earnings and cash flow. If we then go into the numbers for Q3, we see that the organic growth is negative at minus 7%. And as you might remember from Q2, the organic growth was minus 11%. So it's still negative, but an improvement compared to Q2 2020. So in the quarter, we see negative growth in all countries, except for Denmark, but more on the country details later on. The positive acquired growth of 2% is fully related to the acquisition of Norrlands Miljövård as we did in November 2019. So continuing with the EBITA margin, we see the results of the strong focus in adaptability across the entire organization on cost and efficiency. The group EBITA margin is 6.1% compared to 5.1% in the Q3 last year. All countries improved their EBITA margin in the quarter, except for Norway, but Norway delivered a strong margin in the quarter. And we'll take you through the individual countries in a couple of slides. So cash conversion is an LTM number and by the end of Q3, it was 133% (sic) [ 123% ], and this is a high number. In addition to the structured work we do around working capital and steering our CapEx levels, we have a positive effect from deferred payments of taxes and fees in Denmark and in Norway. If we exclude that positive effect, we are on par with Q3 last year at 105%, so still a strong performance and above our target of 90%. Leverage is also an LTM number and during the quarter, we have continued to reduce our utilization of the RCF financing. This takes leverage down to 1.8, well below the target of staying below 3. And moving over to the LTM numbers for growth and margins, we see that organic growth is minus 4% and acquired growth is 2%. And again, the acquired growth is fully related to the acquisition of Norrlands Miljövård. The EBITA margin for the LTM period is at 5.6%, and that is in line with our financial targets of approximately 5.5%. So continuing with the highlights from Q3. As I just mentioned, we have continued our strong focus on cost reductions and efficiency as well as securing the large integrations that we have had over the last quarters continue to develop in a positive way. So when it comes to cost reductions, we are moving from temporary solutions like furloughs to more permanent solutions by rightsizing our organization. And the large integrations we started in late 2019 are progressing well. Our new IFM contract with OP Group, a financial institution in Finland, started in May, progressing well. Even though we have passed several development initiatives in Q1 and Q2, we have continued to develop our solutions for a national operating center in Sweden with an ambition to provide alarm monitoring services 24/7 with own staff to Coor customers, and this is an important investment for the future. We see a continued market activity in the SME segments. In Q3, we have made some important prolongations, for example, with ASSA ABLOY, Norwegian Property and Schibsted. And we have also won new SME segments in both Sweden and Denmark. So when it comes to large IFM contracts, we have previously mentioned that several processes are restarted again, and when we are looking at the pipeline going forward, it looks good with several interesting opportunities. And during the third quarter, we have also noticed increased M&A activity in the market. There are now quite a few cases with potential sellers reaching out to Coor. And internally, we have also increased our own activity level around M&A, but without changing our own view on what would be an interesting acquisition target for Coor. So with an interesting pipeline for large IFMs and increased M&A activities in the market, we see growth opportunities ahead, but it will surely be dependent on the COVID-19 development. So, of course, there are some uncertainty for the future impacted by the COVID-19 that me and my team believe that Coor is well positioned for the future. We are the market leader in the Nordics, where there are growth opportunities going forward. And based on my experience, a crisis tends to increase outsourcing. I saw this in the financial crisis in 2008 and '09 as well as 2013 and '14 when the Norwegian oil and gas industry experienced a challenging time. Business and public sectors will look for efficiency after a crisis, and Coor sells and deliver efficiency. And as mentioned, there will be opportunities for M&A, especially when looking at the fragmented single-service sector of the Nordic facility management market. So over to our view of on-site services. We believe that the offices and the manufacturing side will continue to be critical for customers, and therefore, there will be a need for on-site services also in the future. It might not look like the same as before. The need for some services might decrease, while it will deeply increase for others. In dialogues with our customers, we see that the workplace or offices are important. They will be developed to become an attractive destination with demand for excellent experience and increased service levels, an attractive destination where people want to engage and collaborate with colleagues, but perhaps not 5 days a week. And demand for digital and technical solutions will increase. With our strong position as market leader and ecosystems of innovation partners, we are well positioned to engage with our customers to make the workplace services pandemic-safe through smart technology. We see, for example, an increased use of sensor solutions but also new solutions for safer indoor climate, for example, air cleaning solutions. And then a few words about our service lines. Food and beverage, that accounted for 15% of our turnover prior to COVID-19, is expected to be negatively impacted also going forward when it comes to food and beverage deliveries in urban areas or at pure white collar offices. Less or no negative impact is expected on, for example, industrial sites and hospitals. Property services, which are our second largest service line, is expected to remain relatively stable over time. And we expect an increased demand for professional cleaning also in the future. Cleaning is Coor's largest service line, accounting for a bit more than 30% of our turnover. So we are, I think, all experiencing challenging times, but me and my team are confident that Coor is well positioned for the future. And with that, I will hand over to Klas to take you through the details in countries and financial figures for the third quarter.

Thank you very much, AnnaCarin. So if we then go into the country-by-country details. As AnnaCarin mentioned, we see negative organic growth in Sweden, Norway and Finland, while Denmark is showing a positive organic growth of 3%. From a profitability perspective, we see that both EBITA in absolute numbers and the EBITA margin improves all countries, except Norway, even though the Norwegian margin in the quarter is strong at 6.6%. So looking then at Sweden with an organic growth of minus 9% and an acquired growth of plus 5%, the negative impacts from COVID-19 is most visible within food and beverage, but as mentioned before, it's also a bit of an impact on property-related projects. At the same time, we see, in Sweden, a continued increased demand for additional cleaning and also in some security-related services. From a profitability point of view, Sweden continues to deliver well in terms of efficiencies and cost reductions. And we're also very happy to see that the integration of Norrlands Miljövård continues in the same positive way as in the previous quarter and that is also contributing to the increased EBITA margin. So we're happy to see that Sweden is now 9% -- 9.1% in the quarter compared to 7.6% in Q3 2019. In Norway, we experienced a similar situation in the third quarter as we did in the second quarter with the negative impact from COVID-19, again, mainly related to food and beverage. But then we also have the general restraint within oil and gas that we have experienced for a number of quarters right now. Internal efficiency work and cost reductions have protected the margin level quite well. And as you see, we have a 6.6% margin in the quarter and that can be compared to a very strong 6.9% that we had in Q3 2019. In Denmark, we had a positive volume effect from the expanded contract with the Danish Police. That's our largest contract in Denmark that we expanded and extended in Q4 2019, and the integration is moving along quite well. We have positive impacts in terms of cleaning volumes also in Denmark. And in the same way as in the other countries, some negative impact on the food and beverage volumes. Margins improved and we were at 4.4% in the quarter, a bit better than Q3 last year. In Finland, we see a very strong quarter in terms of EBITA margin at 8.9%. There, one should remember that from a seasonality perspective, when it comes to EBITA margins, Q3 is always the strongest quarter and that is related to how vacation salaries is actually handled in Finland. So you shouldn't look at 8.9% and see that as a new level for Finland. It's more accurate to look at the LTM level of 3.3% to get a grasp on where the Finnish margins are. But again, a strong quarter from a Finnish perspective with a lot of focus also here on cost reduction and efficiency. Also happy to see that the new contract with OP Group that started in May is progressing in a very good way contributing both to the top line, but also to the margin improvement. Going on then and looking at the P&L. We see that net sales is down by almost SEK 200 million compared to Q3 last year. Organic growth, as AnnaCarin mentioned, is minus 7%; acquired growth, plus 2%; and then we have a negative currency effect of approximately 3% and that is mainly related to the Norwegian NOK. EBITA is at SEK 140 million and that can be compared to SEK 127 million in Q3 last year, and that equals an EBITA growth of 10%. That, then, gives us the EBITA margin of 6.1% compared to the 5.1% in Q3 last year. If we then move further down, we see that EBIT is at SEK 89 million and that is improvement compared to last year with close to SEK 20 million. Amortization is slightly higher. But on the other hand, the level of IACs, the nonrecurring items, is approximately SEK 9 million lower than Q3 last year. Financial net and the taxes are basically on par with last year. So when adding back the amortization, you see that the adjusted net income ends up at SEK 106 million versus the SEK 86 million in Q3 2019. Looking then at the LTM numbers, you see that net sales is now at just above SEK 9.8 billion. Organic growth for the 12-month period, minus 4%; acquired growth, plus 2%; and the FX effect is minus 1%. The LTM EBITA is at SEK 555 million and the LTM EBITA margin is at 5.6%. And the adjusted net income for the LTM period is down at SEK 377 million. Moving on to the cash flow and the sources and usage of cash over the last 12 months. You see that we started off with an ingoing cash balance of SEK 483 million. Operations have contributed in a very strong way with almost SEK 900 million. The financing flows, that's reflecting interest, loans, leasing, adds up to SEK 807 million -- minus SEK 807 million (sic) [ minus SEK 817 million ]. And the largest part of that is related to us reducing our debt level by lowering the utilization of our RCF financing, and I'll get back to that in a short while. Taxes paid is at minus SEK 50 million. And cash out from M&A is at minus SEK 164 million. And that is, again, fully related to the acquisition of Norrlands Miljövård. And that takes us to an outgoing cash balance of SEK 345 million. Moving on with some of the cash flow details for the LTM period. You see that the cash conversion is at 123%. And as we said before, that is mainly related to the strong result of the structured work on working capital, the CapEx discipline, and as AnnaCarin mentioned, also the positive effect of actually being able to defer some payment of taxes and fees in Denmark and Norway. And that amounts to approximately SEK 140 million, that positive effect. So if you exclude that one, we are at around 105% in cash conversion. So still a very strong number. Some details from the balance sheet. You see that net working capital is at minus SEK 828 million and that equals minus 8.4% of net sales. Net debt is down to SEK 1.4 billion, and that gives us a leverage of SEK 1.8 billion and that is well below the covenant level in the RCF financing at 3.75. And looking then at Coor's financing. We have 2 sources: one is the RCF of SEK 1.5 billion and then we have the bonds of SEK 1 billion, both with the duration until 2024. And in the RCF, there is more than SEK 1.1 billion that is currently unutilized as of Q3 2020. So with that, back to you, AnnaCarin, to sum up.

Thank you, Klas. Q3 is the quarter impacted by COVID-19. Nevertheless, we delivered Q3 with strong earnings and strong cash flow. We, though, have a negative organic growth by minus 7% in the quarter impacted by the variable volumes, mainly from the food and beverage and property-related projects, but with an increase in cleaning. Our subscription volumes remain strong. So we see some very interesting opportunities in the Nordics and a strong pipeline ahead. So with that, we open up for questions.

[Operator Instructions] And our first question comes from Robin Nyberg from Carnegie.

It's Robin from Carnegie here. A couple of questions from me. Have you seen any trends in October that would be different from the development seen in the third quarter?

I mean we do not comment on individual months at this point. We're only looking at the quarters. But I mean, I guess, everyone is seeing some effect of the increased spread of COVID-19 and an increased uncertainty right now. And of course, we are experiencing that as well. But a little bit too early to assess whether that is a trend or not. But I think we're all a little bit nervous about what can happen with the second wave and so on.

Okay. Fair enough. Then could you give us some indication of how large the office end market is for you? And if possible, break this down to the pure white collar office segment?

I missed part of that question, Robin. Can you please repeat that one?

Yes. I mean it would be nice if you could give us any indication of how large the office end market is for you? And also how large the pure white collar office end market is for you?

Yes. I mean we haven't splitted the business and communicated that split. For us, it's a little bit difficult because you see, at certain manufacturing sites, I mean, you have the manufacturing facility and then you also have the offices connected to it. So it is rather difficult to give an exact number. But I mean a large part of our customer base is actually manufacturing industries and so on, not -- have not so affected as the downtown areas in the major capital cities.

Okay. And then one final question. Your profitability has been very strong. It would be quite helpful if you could give us some indication of how much these kind of government support measures have supported profits. Can you say anything about that?

I mean, as AnnaCarin mentioned, we have utilized furlough schemes across the different countries. But you can also see that, that level of furlough utilization has really gone down from some 20% of our employees affected in one way or the other by the end of Q1, we're now down to 6% by the end of the third quarter. We haven't disclosed a number in millions of SEK and we will not do that this quarter either, but it has gone down significantly. And then one should remember that we might receive some support from governmental support packages and so on. Some of that is actually shared with our customers as well. So it's not everything that ends up at Coor. But it's going down. And our ambition is, of course, to move out of the furlough schemes, as AnnaCarin mentioned before, to move from the temporary cost reductions to the more permanent cost reduction by resizing the organization.

Our next question comes from Karl-Johan Bonnevier from DNB Markets.

Just to continue on the last thing going from, say, the temporary furlough scheme to permanent resizing. I saw in the report that you mentioned you did that in Denmark during this quarter. What kind of [ rethink ] do you normally put into this process when you decide to do that? Or -- and what kind of impact did it have on Danish operation?