Coor Service Management Holding AB (COOR) Earnings Call Transcript

Ladies and gentlemen, welcome to the Coor Service Management Q3 Report 2023. [Operator Instructions] Today, I'm pleased to present President and CEO, AnnaCarin Grandin, and CFO and IR Director, Andreas Engdahl. Please go ahead.

Thank you for listening into Coor's Q3 report. I will start by presenting key highlights in the quarter and present important business activities as well as our triple bottom line results for the quarter. Related to that, I will also announce our profitability program to accelerate our journey towards our financial margin target. I will then hand over to Andreas to present some more details around financial performance, before we sum up and have a Q&A. So let's start with key highlights in the quarter. I am happy to say that our strong pipeline materializes in the third quarter with a new first-time IFM outsourcing contract we signed with Swedbank. Coor will deliver a broad range of integrated services in Swedbank's all offices across Sweden. It is a 4-year contract with an annual value of some SEK 220 million. Activities to start up the contract in the middle of December are progressing well. We have also signed a new partnership agreement with ATP Ejendomme in Denmark. With this partnership, ATP Ejendomme will offer its tenants customized facility management services. And we have prolonged our contract with Aibel by 5 years during the third quarter. Aibel is a large oil and gas company in Norway, and the value of the contract is approximately SEK 200 million over the time of the contract, and that is excluding additional variable project volumes. At the end of August, we ended most of our delivery to Ericsson. We continue to deliver some advanced services to Ericsson until the new supplier can take over. And the integration of the Swedish cleaning company, Skaraborgs Städ is progressing as planned and is adding value added as expected. In the third quarter, we received the results from our annual customer satisfaction survey. And I am happy to see continued strong results of 71, and that is in line with both previous year and our target. Earlier this year, we took a decision with ambitions for Coor to reach net zero by 2040. We then started the process to have this validated by the science-based target initiative. And the validation is now completed, and our goal is approved, and I'm very happy with that. In the market, we continue to see a solid pipeline of medium and small-sized contracts, and there is also visibility of some large contracts. Closest in time of the large is the third and final wave with the Danish Building and Property Agency, where we expect the choice of the new supplier to be awarded in the end of this year. On M&A, we have adopted a more cautious view after the summer. We see costs for financing increasing and our focus being directed towards profitability, as I will come back to later on. So we move over to our results in the business dimension and some of the key financial metrics in Q3. Organic growth is 3% in the quarter. The growth results from new small and midsized contracts as well as higher variable volumes. Acquired growth is 4% in the quarter, and that is fully related to Sweden with the recent acquisition of Skaraborgs Städ. And the EBITA margin for Q3 is 4.2%. Q3 is a seasonal weaker quarter in Coor, but still a level I am not happy with. We also see our LTM margin at 4.8%, and that is below our margin target of around 5.5%. The cash conversion is an LTM number, and it continues to be stable at 93%, and that is in line with our target. Leverage is also an LTM number, 2.4, that is lower than previous quarters, driven by the continued stable cash flow. And this level is in line with our target to stay below 3. But in a business environment with increasing interest expenses, where dividends remain a priority, we are focusing on continued stable cash conversion, while taking a more cautious approach to acquisitions. So our ambition is to further reduce our leverage. So as I stated on the previous slide, we see a margin in Q3 below our financial targets as well as on an LTM basis. Our growth journey over the last years has been successful despite a few large contract losses. However, strong growth in combination with factors in the business environment, such as high inflation and rising interest rates has put pressure on the company's margin and cash flow. To accelerate progress towards our long-term margin targets, we are now implementing an action program to realize economies of scale and synergies to a greater degree and to retain the company's position as the market leader in facility management in the Nordic region. This action program includes expanded cost control, increased focus on procurement to better utilize Nordic economies of scale and synergies in starting through increased harmonization and industrialization of underlying processes. And the action program started in Denmark during the end of the second quarter and have been initiated in the remaining countries and staff functions. Once fully implemented, the entire program is expected to have an annual effect of approximately SEK 100 million. And the total estimated cost of the program is some SEK 40 million and the majority of which will be included in the fourth quarter when the staff reductions are put into effect. Now moving on with our performance in social and environmental responsibility. First of all, as we presented last quarter, we have a very strong result of 76 in this year's employee survey. And that is in line with previous year and above our target. Our TRIF continued to improve. And in Q3, we reached 6.6. There's still a way towards our target of 3.5, but with safety and focus, we now see improvements every quarter. And gender bag continues to be stable at around 50-50. And on the environmental KPIs, we see a positive development. On Scope 1, that is CO2 emissions from our vehicle fleet, we still have an increase compared to baseline from 2018 in absolute numbers, but a decrease compared to previous quarters as well as the same quarter last year, even if we in this quarter have added 180 vehicles from the acquisition of Skaraborgs Städ. All countries work actively with increasing their share of electric vehicles and more effective fleet management and use of HVO fuel instead of diesel where it's possible. Everything is to turn the trend and to reduce CO2 emissions in absolute numbers. Also in Scope 3 from food and beverage, we see a positive development where our reduction compared to baseline are well on track towards our 30% target. And for Scope 3 and science-based target aligned suppliers, we are making great progress. Previous quarter, we presented 5%, and we are now at 12%. We continue to push our suppliers to align their targets with science-based targets and also actively steer our spend towards the ones who are approved. So with that, I hand over to you, Andreas, to continue with the details on the financials.

Thank you, AnnaCarin. Coors total turnover of some SEK 12 billion can be viewed in different dimensions. From a contract type perspective, we see that the split continues to be stable with IFM contracts just under 60% and single service contracts just over 40%. Splicing the turnover by service line, we see only small variations compared to previous quarters, and cleaning continues to be our largest service line with 39% of net sales. And on our customer segment, the split remains diversified. As you heard from AnnaCarin, the growth rates for Q3 are strong. Net sales is up by SEK 0.25 billion versus Q3 last year, and that takes us more or less to a quarterly net sales of SEK 3 billion. In addition to the 3% organic growth and 4% acquired growth, we also have positive FX effects of 3%. Adjusted EBITA amounted to SEK 126 million, which gives us an EBITA margin in the quarter of 4.2%. IACs in the quarter amounted to SEK 80 million, that is related to start-up costs for both new organic contracts and the newly acquired Skaraborgs Städ as well as some additional cost for the adoptions we made in the Danish organization in the second quarter. Financial net increased in the quarter, and that is driven by higher liabilities to credit institutions and a higher interest rate compared to last year. Net income is SEK 28 million, and adjusted net income, when adding back amortization, amounts to SEK 59 million. On the LTM numbers, we see that net sales is close to SEK 12.2 billion. LTM organic growth is 1%, acquired growth of 3% and FX 2%. The LTM adjusted EBITA level is SEK 592 million, which gives us an LTM margin of 4.8%. Adjusted net income for the LTM period is SEK 318 million. Looking at Q3 country by country and starting with Sweden, a small negative organic growth in the quarter from the delivery to Ericsson that was ended in August, partly offset by new midsized contracts. In the quarter, adjusted EBITA decreased by 3% to SEK 120 million, and adjusted EBITA margin was 7.7% versus 8.4% in Q3 last year. EBITA was positively impacted by newly started contracts and the acquisition of Skaraborgs Städ and negatively impacted by the ended contract with Ericsson. This ladder effect was somewhat amplified in the quarter by lost synergies with other operations, which the Swedish organization is gradually managing. Furthermore, operating profit and the margin were negatively impacted by a union agreed low-wage initiative and a discontinued state subsidy for social security fees for young employees. These effects have not yet been reflected in the labor cost indexes and thus not yet transferred to customers in indexations. In Denmark, organic growth was close to zero. Lower variable volumes in property compared with high levels last year as well as a few smaller ended contracts impacted growth negatively while higher indexations had a positive impact. Adjusted EBITA for the quarter increased compared to last year, and adjusted EBITA margin was 3.8% versus 2.8% last year. The stronger EBITA and margin was primarily driven by positive effects of indexation as well as some effects from the adoptions of the organization that was implemented during the second quarter this year. In Norway, organic growth in the quarter was 18% from several new midsized contracts, subsets with German municipalities to Studentsamskipnaden i Oslo and IKEA. Adjusted EBITA was in line with last year and adjusted EBITA margin of 3.3% versus 3.9% last year. The decrease in margin was driven by high staffing costs in newly started contracts as well as increased raw material costs for food and beverages during the quarter. Organic growth in Finland was 4% from increased variable volume and a few smaller new contracts that were partly offset by a couple of smaller terminated loss-making contracts in the northern part of Finland. Adjusted EBITA increased in the quarter, and adjusted EBITA margin was 5.8% versus 5% last year. The increased margin is primarily explained by the terminated loss-making contracts in Northern Finland that had a negative impact on profitability in Q3 last year as well as implemented efficiency actions. Moving on to cash flow. We see that our key metric, LTM cash conversion, remained stable at 93% in Q3, well in line with our target of staying above 90%. As always, there is a strong focus on cash flow in our organization, and we also continue to see stable payment patterns from our customers. On the LTM cash flow, the M&A item is related to finalizing the acquisition of Skaraborgs Städ in the second quarter this year. On the balance sheet, net working capital, as a percent of net sales, is stable compared to historical numbers and for Q3 at around negative 8%. Leverage ended at 2.4, a decrease compared to previous quarter, driven by the stable cash generation. As AnnaCarin mentioned, this is well in line with our financial target of staying below 3. But in a business environment with increasing interest expenses, our ambition is to further reduce our leverage. Dividend remains a priority. We are focusing on continued stable cash conversion, while taking a more cautious approach to acquisitions. And with that, I hand it back over to you, AnnaCarin.

Thank you, Andreas. So before we go into Q&A, I would like to summarize the third quarter. We see a strong pipeline materialize with a new and large first-time IFM outsourcing contract with Swedbank. We see continued growth opportunities in the Nordic market from a solid pipeline of midsized and small contracts and the visibility of some large contracts. We continue to stay committed to deliver on our financial targets. So with LTM profitability below our ambitions, we have initiated an action program to accelerate progress towards our margin target of 5.5%. We had a solid cash conversion at 93% and leverage decreased in the quarter, but our ambition is to further deleverage over time with a strong cash generation and a more cautious view on M&A. Dividend is still our capital allocation priority. And finally, I would like to extend my warm thanks to my colleagues. With joint forces, we are building a truly sustainable and successful company. So with that, we open up for questions.

[Operator Instructions] Our first question comes from Oliver Uusitalo from Aktiespararna.

Hello, AnnaCarin and Andreas. Looking ahead over 2024, how do you assess the current market temperature, both in terms of new contracts and how existing customers are scaling in their variable parts?

Oliver, when we view the market for 2024, we see a strong market with a lot of possibilities. As I mentioned in my presentation, we can see quite a wide broader list of small, midsized contracts coming into the pipeline during 2024 as well as some large contracts as well. In terms of retention processes, we have a focus on that. And I would like to say that 2024 is quite a normal retention year.

Great. And moving forward to the efficiency action program, I see Coor business as a people business and by cutting heads, how do you ensure high-quality delivery towards customers?

Well, I think, first of all, when we go into this program, we try to also improve the quality of our services by industrialize and harmonizes our underlying processes. So I am totally convinced that we will actually improve the quality at the same time that we can do some cost reductions. But also be aware of that, we also put some focus in the procurement processes as well. And of course, we have some cost restrictions in terms of external costs, for example, travel, conferences and so on. We are quite convinced it's possible to still have conferences, but do that in own premises or do it by Teams, for example.

I understand. The margin in the Swedish market fell a bit short. This is explained by the union agreed low wage initiative and the abolished subsidy for young employees as well as the loss of synergies. How are we to view the margin going forward? It's a double-digit margin on loss cost. Can we expect a pickup in the near future? If so, when?

I think definitely both of these two items is something that the Swedish operations are working on and managing over time. On the wages and state subsidy, that's more a time lag effect before that moves into our indexations. Hard to predict the exact timing of that. But over time, that will come back to us. On the synergies, I think we have talked about that. I think Sweden is -- it's a large, stable organization. Obviously, it takes some time to sort of reestablish these synergies, but it's a large country and they have the capacity to do that. So I wouldn't call double-digit loss cost, but they need time to work through to get the synergies back on track.

[Operator Instructions] Our next question comes from Karl-Johan Bonnevier from DNB Markets.

AnnaCarin and Andreas, I want to come back to this action program for strength and profitability to understand a little better how quickly you are looking to implement these kind of things and to realize that SEK 100 million cost saving. Is it something that will be put in place already in the first half of next year? So this should be, say, rolling into the number in the second half? Or is it more of a question of getting things rolling into the number maybe in '25, '26?