Coor Service Management Holding AB (COOR) Earnings Call Transcript

Ladies and gentlemen, welcome to the Coor Service Management Q3 Report for 2022. For the first part of the call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. Today, I'm pleased to present President and CEO, AnnaCarin Grandin; and Acting CFO, Andreas Engdahl. Please go ahead with your meeting.

Thank you. And good morning and welcome to the presentation of the Q3 report for Coor. Today, I have Andreas Engdahl by my side. This Monday, we announced he will take up a permanent position as CFO and IR Director from the 1st of November. And I'm very happy with the solution. Andreas has broad experience within Coor and solid financial competence. He will make a significant contribution to our continued progress. So once again, we have showed the strength in Coor's leadership and appoint an internal candidate in an external recruitment process. I will start with a brief presentation of Coor and then continue to present our triple bottom line results, followed by a business and market update. I will then hand over to Andreas to present some more details around our financial performance in Q3 before we sum up and have a Q&A. Coor is the Nordic market leader in integrated facility management. We provide our customers with a broad range of services through our customer-centric business model and a decentralized organization. We are building a truly sustainable company, and we are constantly taking new positive steps in that direction. And as a company, we continue to drive and steer from a triple bottom line perspective, meaning that we are taking a business, social and environmental responsibility to future-proof our company in making a positive impact in the society and for the environment. Coor's total turnover of SEK 11.6 billion LTM can be viewed in different dimensions. And from a geographical perspective, Sweden is our largest country with 54% of total turnover. Denmark now being our second largest country with 22%, followed by Norway at 19% and Finland at 5%. And from a contract-type perspective, we see that the split continues to be stable with IFM contract just under 60% and single-service contract just over 40%. Analyzing the turnover by service line, we see that cleaning is the largest service line with 38%, property is the second with 31%, and workplace includes a number of different soft services with 18% and food and beverage accounting for 10%. And this means that we continue to see a normalization of the volume more similar to pre-COVID, especially when excluding the large acquisition. And our top 3 customer segments are public customers by 30%, manufacturing by 24% and energy by 16%. So all in all, we see this as a well-balanced portfolio. And going into our business sustainability and the financial figures, we see another strong quarter from a growth perspective. Organic growth is 1%, and acquired growth is 10%. And the organic growth is somewhat lower than previous quarters but with large swings on country level. Denmark had an organic growth by 24%. And our largest country, Sweden, has an organic growth by 6%. And in Denmark, it is mainly related to the new public contracts with DSB and the Danish Building and Property Agency. And in Sweden, it is driven by contracts with Micasa and the security contract with Borealis. In all countries, we see a positive effect of COVID-19 recovery. Then in Norway, we see a net negative organic growth mainly from the ended contract with Equinor Office but also from temporary high project volumes from maintenance stoppage in the oil and gas industry that ended in the last quarter. Acquired growth is fully related to Sweden and is driven by the acquisition of Veolia Technical Management, Inspira and Centrumstäd. The EBITA margin for Q3 is 4.4%, which is lower than the last quarters. This is driven by a continued normalization of the volume mix and the expected effects of starting up large contracts and integrate acquired companies. We also see effects of volume decrease in the Norway and Finland that requires additional adoption. Inflation has become more notable and have a negative impact in the third quarter. Cash conversion is an LTM number, and it continues to be strong at 91%, well in line with our targets to staying above 90%. Leverage is also an LTM number with 1.8%. We are slightly above Q3 last year, but well in line with our target of staying below 3%. And in this quarter, we also present the outcome from this year's annual customer satisfaction survey with a customer satisfaction index at 71. This is somewhat lower than the last record results of 74, but still above our target of staying above 70. And from an LTM perspective, organic growth is 7% and organic growth 10%. And the LTM EBITA margin is 5.6%, and well in line with our financial target at 5.5%. Moving on with our social and environmental sustainability. This quarter, Coor has once again been awarded the gold rating in EcoVadis annual international rankings. EcoVadis is an independent analyst that provides annual sustainability ratings for companies, and the gold means that we are within the top 5% from EcoVadis perspective. Starting with engaged and motivated employees, this year's survey shows a strong outcome of 76%, and well above our target of staying above 70. And we continue to improve our TRIF levels. As of Q3, that number is down to 7.9 compared to 9 last year, steady improvement, but still work to be done in order to reach this target being below 3.5. And gender balance continues to be stable at around 50-50. And we continue our efforts to reduce our CO2 footprint. We see stable development in Scope 2 and 3, while we still have challenges with the CO2 reductions related to our vehicle fleet. So over to our business and market updates. In Q3, we have made some important IFM contracts prolongations with Volvo Cars and CGI. We have also prolonged one of the largest public switchboard contract in Sweden with Region Stockholm. And from a new win perspective, we have several small and midsized contract wins, but no really large cases in the quarter. However, as you have seen from the growth figures, we have several large wins in the previous quarters that are now being integrated. And with strong organic and acquired growth, we obviously have a very strong focus on integration in both Denmark and Sweden. And as I mentioned earlier, inflation has become more notable in this quarter. A majority of contracts have an index clause, giving us a good possibility to transfer cost increases to customers. Having said that, indexation are typically made once a year, meaning that there is a time lag between contractual indexation and cost increase. And we pay high focus to find mitigation actions to balance that effect, such as procurement efficiencies, alternative menu planning in restaurants and, of course, price increases. The pipeline for new organic business continues to be solid, and we are actively looking at the new M&A opportunities. And we are in the middle of an energy crisis. High energy prices do not have a direct impact on Coor, but we have customers that are more impacted by this. A large share of energy consumption is related to buildings, and we see increased demand for our energy efficiency services within the property area. Coor has both the competence and several smart service solutions to support our customers, lowering their energy consumption. With smart drones, we can detect heat leakage in buildings. And we have concept for energy-efficient lighting with our smart lighting solutions and also technology to monitor and optimize the total energy consumption of building by using our concept for smart energy. And we have several reference cases where total energy consumption has been reduced by 10% to 15% with our smart energy concept. And with smart lightning, we have reduced energy consumptions for lighting by 90%. To summarize, in this area, Coor is well positioned to support our customers to create more energy-efficient buildings and lowering their costs. So with that, I hand over to Andreas to continue with the details on the financials.

Thank you, AnnaCarin. As you heard from AnnaCarin, growth continues to be strong also in Q3. Net sales is up over SEK 300 million versus Q3 last year, and that takes us to a quarterly net sales of close to SEK 2.8 billion. In addition to the 1% organic growth and 10% acquired growth, we also have some positive FX effects of 3%. Adjusted EBITA amounted to SEK 122 million, which gives us an EBITA margin in the quarter of 4.4%. Net income is SEK 39 million, and adjusted net income when adding back amortization amounts to SEK 71 million. On the LTM numbers, we see that net sales is SEK 11.6 billion, which is an all-time high level and about SEK 1.5 billion above last year. LTM organic growth is 7%, acquired growth 10% and FX 3%. The LTM adjusted EBITA level is SEK 655 million, which gives us an LTM EBITA margin of 5.6%. Adjusted net income for the LTM period is SEK 441 million. As AnnaCarin mentioned, we can see the very strong organic growth level in Denmark with 24% and also in Sweden with 6%. In Sweden, we also have the very high acquired growth impacting the Swedish numbers by 21%. This means that our 2 largest markets when looking at the Q3 figures are growing with approximately 25% each. This is, of course, something that requires both time and resources not only from the country organizations but also from a group perspective. In Norway, we see -- have seen high project volumes in the oil and gas industry for several quarters, more or less offsetting the ended Equinor Office contract. These temporary high project volumes ended in the second quarter, making the effects of Equinor Office more visible now in the third quarter, taking Norway to a negative organic growth of 27%. In Finland, new wins and return on variable volume cannot fully offset the ended Finnish part of the contract with ABB. From an EBITA and margin perspective, Sweden continues to deliver a solid margin in a seasonal weaker quarter but not at the extraordinary high levels of Q3 last year. In Sweden, as well as the other countries, we see the effects that we have talked about in previous calls that a normalized volume mix will put pressure on the margins compared to the COVID period. For example, we see higher share of F&B volumes and also higher resource requirements from increased activity at customer sites. We also see, as AnnaCarin mentioned earlier, negative effects from inflation in all countries. Margin in Denmark is down compared to last year driven by the large integrations but also from strengthening central functions to handle the growth. Looking at Norway, we have a negative impact on both EBITA and margin from the ended contract with Equinor Office and also a negative EBITA impact from the temporary high project volumes that ended in Q2. And Finland, a negative impact from the ended ABB contract and also in the beginning of the quarter some challenges around resources. Looking at cash flow. We had an ingoing cash balance of SEK 122 million. Operations have contributed with SEK 746 million. The financing flows reflecting interest, loans and leasing adds up to SEK 593 million. Taxes paid equals to SEK 90 million. Cash out from M&A is related to the acquisitions and adds up to SEK 411 million. And dividends equals the ordinary dividend payment made in May and the extraordinary dividends paid in October last year, and that adds up to SEK 455 million. And that gives us an outgoing cash balance of SEK 504 million. A look at some details from the balance sheet and our cash conversion. Cash conversion continues to be strong at 91% for the LTM period, with a continued low CapEx and improved working capital. In terms of working capital, we continue to see stable payment patterns from customers. Net working capital is negative by SEK 883 million or approximately 7% of LTM net sales, net debt at approximately SEK 1.6 billion and leverage at 1.8. And with that, I hand it back to you, AnnaCarin.

Thanks, Andreas. Before we go into Q&A, I would like to sum up our third quarter. Q3 has been characterized by continued strong growth with an LTM growth by 20%. We see a pressure on the margin in the quarter due to the high growth in combination with a normalized volume mix, but we also have negative impact of inflation in this quarter. And this situation is something we have talked about and expected and is now materializing. We have a strong cash flow at 91% and a leverage of 1.8, well in line with our financial targets. And given our strong financial position, we see continued opportunities to carry out value-adding acquisitions in the Nordic region. So with that, we open up for questions.

[Operator Instructions] And our first question comes from the line of Karl-Johan Bonnevier from DNB Markets.

I think we all need slightly more help to understand all these moving parts in Q3 that I also remember from historical patterns was your seasonally weaker quarter, so to say, to understand what is impacting, say, from seasonal perspective here, what is impacting from start-up perspectives and so on. Is there any chance you could, say, shed some more light on maybe the absolute quantities, what you see coming from large start-ups, inflation and then all these kind of components that you are mentioning that is hitting you in the quarter, and maybe also then referring to what you see of that is probably better balanced in sort of seasonally stronger Q4 or which will take longer for you to balance?

Yes. Let's start with Q3 then. You're correct that we see a negative impact from inflation. The net effect of that, meaning the cost increases with some mitigations that we have implemented, is around SEK 10 million. Then you're also correct that this is a seasonally weaker quarter for us typically. That has been somewhat distorted during the pandemic with some extraordinary profit levels. But looking at historical numbers, a normal Q3 has been more in line around 5% for us. And then I think for this quarter, it's relevant to take a look at 2018, where we had a similar situation with very high growth number, both organically and acquired, and also some large renewals that was implemented. And back in 2018, we had a margin of 4.3%.

So if we continue to compare with 2018, is that -- should we say, from a seasonal perspective, then expect the same kind of normalization of margins upwards in Q4? Or is that something that is really holding you back this year compared to, say, the 2018 pattern?

No, I think it's -- I mean, we are running integrations, large ones in Denmark. And obviously, we have an ambition to increase margins in Denmark as that contract matures. Then as we had said in the past, it typically takes 6 to 18 months to integrate such a large contract. And this is in -- large in size and complexity more towards the 18 than 6 months, I would say. So it will take some time, but the ambition is to increase margins in Denmark. Looking at Norway, where we did some adoptions to handle the ended Equinor Office contract last year, now we see a lower volume base here after the summer, and we are implementing additional adoptions to that lower volume. So there are mitigating actions that we will expect to see come here in Q4.

And the comment for Norway, is that a similar kind of thing for Finland? Obviously, I guess you have slightly higher absolute volumes in Norway, so it might be easier for you to mitigate that kind of thing in Norway than it might be in Finland if you lose volumes.

Yes, I think that's correct. I mean, Finland is smaller. And I think it's hard to fully compensate for that effect that the lost contract with ABB came with.

And I -- obviously, I see that you continue to generate very, very good cash conversion, even on these kind of slightly more depressed margin levels and so on. When you -- I see your last slide still talk about the leverage capacity and keeping dividend. Is that -- would you assume, given the current kind of environment, that there would be any risk for you not paying a similar kind of dividend for this fiscal year as the last one?

I think that's a question for the Board, of course, but we still have our financial target and that they remain.