Coor Service Management Holding AB (COOR) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Coor Service Management Q2 Report 2024 Conference Call. [Operator Instructions] I would now like to turn the conference over to AnnaCarin Grandin, President and CEO. Please go ahead.

Thank you, and welcome all and thank you for listening to Coor's Q2 report. Before presenting the report, I will give a short introduction of Coor for those of you who not yet know Coor. We are the leading facility management provider in the Nordics and offer our customers a broad range of services. We future-proof our company by drive and steer Coor from a triple bottom line perspective, meaning that we are taking a business, social and environmental responsibility. And from a business perspective, we have a clear ambition to have a stable and solid financial development with high customer satisfaction. And from a social perspective, we have a clear ambition to attract the best talent in the market as well as support and develop our employees. And I'm very proud of leading a company where diversity and inclusion makes a difference, where we believe diversity creates an even more successful company. And we have a clear ambition to improve the environment. Our environmental targets are approved by the Science Based Targets initiative, and we are committed to reach net zero emissions by 2040. And with our knowledge and competence, we also support our customers to reduce their environmental footprint. And one way to get to know Coor is to view the company from different perspectives based on our turnover of SEK 12.6 billion. And 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%. And slicing the turnover by service line, we see only small variations compared to previous quarters, and cleaning continues to be our largest service line with 40% of net sales. And on our customer segment perspective, the split remains diversified. So let's move over to our Q2 report and starting with key highlights in the quarter. In the second quarter, we have successfully prolonged a number of key contracts. In Denmark, the large IFM contract with the Danish Police has been prolonged with 18 months, which starts in September 2025 with a total value of some SEK 900 million over the contract term. This means that Coor will continue to deliver IFM services such as restaurants, cleaning and property services to Danish Police. And with this prolongation, we're also addressing maturities in 2025. Coor has also secured prolongation of the property contracts with both Attendo and SSAB in Finland as well as with Vasakronan in Sweden. And in Norway, we have prolonged contracts, Ringnes and Storebrand. And in Denmark, we have prolonged the cleaning contract with Falck. And together with the prolongations we signed in last quarter, Coor has now secured prolongations on around SEK 1.4 billion in the first half of the year with a strong year-to-date retention rate of 94%. And we continue to see high business activity in the market, and I'm happy that we, after the prolonging the IFM contract with ICA last quarter, now also extended our partnership with deliveries of nationwide food and beverage, and that will start in the last quarter of this year. And we also continued to strengthen our position in the small- and medium-sized segment with several new wins in the quarter. In Denmark, we have won a new contract with Velliv and Hotel Odeon and in Sweden with [ Mitthem and Poseidon ] to mention a few of them. As part of our environmental ambitions, we have launched the tool, Carbon Insight, and this tool gives our customers climate data including a breakdown of emissions by each service in our delivery. The tool is helpful for the customers when they make their own climate impact assessment and also enable us to identify common focus areas that we can work on together. And you can read and see more about the Carbon Insight on our web page. And the integration of the acquired Swedish cleaning company, Skaraborgs Städ, has been successfully concluded during the second quarter and it continues to be -- have -- give us some added value as expected. In the Q3 report last year, we announced an action program to accelerate the company's progress towards its long-term margin target. Activities in the program is proceeding according to plan. I can conclude so far into the year that it takes somewhat longer to realize the financial effects, but I am still fully confident that towards the end of the year we will have achieved the expected effect. And on the market side, we see a solid pipeline of medium- and small-sized contracts in all segments and also achieved larger contracts in progress. So overall, we continue to see strong growth opportunities in the Nordic market. Before moving on with our second quarter, I would like to say a few words about our recently published third report in the Join the Workplace Revolution series. Our latest report describes trending technology in property and facility management and shows how progress brought by new technologies can help our customers to become more efficient and sustainable, and at the same time, enable an even better employee experience. It is evident that technologies will play a significant role in facility management where innovative methods such as BIM, digital twins, robots, drones have the power to streamline deliveries, producing high technical competence and tools to collect data. Customers receive a more data-driven way of working that helps them work more efficiently. And by sharing our insights, we aspire to play a key role in shaping Nordic workplaces for tomorrow. And Coor is well ahead of this development and already works together with several customers where innovative solutions create great value. And to read more about these exciting trends and technologies, you can find the report on our web page. Well, let's move to our triple bottom line results for Q2, starting with the business dimension. In the quarter, Coor delivers both sales and operating profit in line with previous year. Organic growth is negative by 1%, where growth from newly started contracts in Sweden and Norway compensate for ended contracts in Sweden and Denmark. Acquired growth is 1% in the quarter, and that's fully related to Sweden with the acquisition of Skaraborgs Städ in May last year. The EBITA margin for Q2 is 5.1%, and that's in line with previous year, but still below our margin target of around 5.5%. So our ambition to accelerate towards our margin target remains. Cash conversion is an LTM number and ended at 92%. Leverage is also an LTM number, and we delivered 2.7, in line with our target to stay below 3. And our ambition is to reduce our leverage somewhat during 2024. Moving on with our performance in social and environmental responsibility. In the second quarter, of course, our TRIF amounted to 6.0, which is an improvement compared with the second quarter previous year, but somewhat weaker compared with full year 2023. In equal opportunities, our gender balance remained stable and I am proud to see that Coor is ranked in Sweden as the most equal company in the SHE Index. The SHE Index is a tool for mapping and helping companies in their gender equality work. A third place in this year's Swedish survey means that we secured a top position for the fourth year in a row, and I'm very happy with that. On the environmental KPIs, we see a positive development on Scope 1 and 2 and that is CO2 emissions from our vehicle fleet and premises. We see for the first time since we started measuring a decline in emissions in absolute numbers, 14% compared with our base year 2018 even though Coor has grown as a company by 33% in the same period. We have a positive trend, but not sufficient towards the interim growth in 2025 and recognize that we need to do even more. And for Scope 3 and Science Based Targets-aligned suppliers, we continue to make progress and we are now at 21%. 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. As you heard from AnnaCarin, net sales is more or less in line with last year. Organic growth for the quarter was negative 1%. The newly started contracts such as Swedbank and Sweco in Sweden as well as IKEA in Norway compensate for ended contracts in Sweden and Denmark. Variable volumes are at a continued high level and well in line compared to the same period last year. Acquired growth was 1%, FX effects 0% and that takes us to a quarterly net sales of close to SEK 3.2 billion. Adjusted EBITA amounted to SEK 161 million, which gives us an EBITA margin in the quarter of 5.1%. Financial net increased in the quarter, and that is driven by a slightly higher debt and higher interest rates compared to previous year. Net income is SEK 60 million. And adjusted net income, when adding back amortization, amounts to SEK 77 million. In the full year numbers, we see that net sales is SEK 12.6 billion. Full year organic growth is 3%; acquired growth, 3%; and FX, 1%. The full year adjusted EBITA level is SEK 613 million, which gives us an EBITA margin of 4.9%. Adjusted net income for the full year is SEK 271 million. Looking at Q2 country by country. Starting with Sweden, organic growth of negative 3% in the quarter with strong underlying growth from new contracts partly offset the negative effects of the ended contract with Ericsson. Variable volumes are at a continued high level and well in line compared to the same period last year. Adjusted EBITA, in line with last year with slightly higher margins, 9.5% versus 9.3% in Q2 last year. EBITA positively impacted by newly started contracts, the acquisition of Skaraborgs Städ and effects from the action program. The ended contract with Ericsson has a negative effect in comparison with previous year. In effect, still somewhat amplified by loss synergies with other contracts, which the Swedish organization is gradually managing. In Denmark, organic growth was negative 4% from a couple of ended midsized public contracts as well as somewhat lower variable volumes in the public sector. Adjusted EBITA for the quarter is slightly below last year that gives margins in line with last year at 4.5%. EBITA margin was positively affected by the adaptation of the organization that was implemented during the second quarter last year while the ended contracts and somewhat lower variable volumes affect negatively. In Norway, organic growth in the quarter was 11% from new contracts and variable volumes in the oil and gas industry where maintenance activities have started earlier in the year this year compared to last year. For new contracts, the midsized contracts won late 2022 are as of now fully reflected in last year's numbers. Adjusted EBITA improved by over 40% compared to previous year, and EBITA margin ended at 4.6% versus 3.7% last year. We see positive effects from higher variable volume and also from more favorable occupancy numbers in the offshore delivery compared to previous year. Organic growth in Finland was flat year-on-year, where smaller new contract balances a couple of smaller terminated loss-making contracts in Northern Finland. Adjusted EBITA margin slightly improved where implemented efficiency actions in the operation had a positive impact. And the smaller terminated loss-making contracts in Northern Finland had a negative impact on profitability in the same period last year. Moving over to contract concentration and maturity. For contract changes for the first 6 months of the year, we have SEK 300 million new contracts, above SEK 5 million in annual volume awarded while SEK 108 million ended and that takes us to a net positive of SEK 192 million. As AnnaCarin described, we continued to strengthen our position in the small and midsized contract segment. And in the right-hand chart, we see small and medium-sized contracts representing 61% of total volume compared to 59% last year. With the successful first 6 months of extension, large contract maturities for 2024 and 2025 have significantly been reduced compared to the numbers presented at year-end 2023. At the beginning of this year, we had large contracts representing 24% of total volume maturing in 2024 and 2025. That has now been reduced to 14%. More than half of the volume maturing in 2024 has been extended and we see limited retention risk for the remainder of the year. For next year, around 1/3 of the volume that was up for renewal has now been extended and the remaining volume represents a more normal retention year for us. And on retention rate, we have secured prolongations on around SEK 1.4 billion in the first 6 months of the year, and that gives us a strong year-to-date retention rate of 94%. Moving on to cash flow. We see that our key metrics, LTM cash conversion, ended at 92% for the Q2 LTM period, in line with our target of staying above 90%. We continue to see stable payment patterns from our customers. On the balance sheet, net working capital as a percent of net sales is stable compared to historical numbers, and at the end of Q2 at negative 7.4%. Leverage ended at 2.7, a slight increase compared to previous quarter, driven by the majority of this year's dividend, SEK 2.4 per share was paid out in the quarter. The extraordinary dividend of SEK 0.6 per share will be paid out early October. During the quarter, Coor placed a subsequent senior unsecured bond in the amount of SEK 250 million with a 5-year maturity. And with that, I hand it back over to you, AnnaCarin.

Thank you, Andreas. And before we go into Q&A, I would like to sum up the second quarter. We have high business activity with several new wins in the small and midsized segment, and we have also expanded our partnership with ICA with food and beverage service. We see continued growth opportunities in the Nordic market from a solid pipeline of midsized and small contracts and visibility of some large contracts. We have had a successful first 6 months of the year with several important customer prolongations. In total, we have secured prolongation of around SEK 1.4 billion, which also gives us strong year-to-date retention of 94%. And large contract maturities for this and the next year have significantly been reduced compared to where we started the year, and we see limited retention risk for the remainder of 2024. For the next year, around 1/3 of the volume after renewals has now been extended and the remaining volume represents a more normal retention year for us. We also see continued solid cash flow. And finally, I would like to extend my warm thanks to my colleagues. With joint forces, we build and develop the leading and most sustainable facility management company in the Nordics. So with that, we open up for questions.

[Operator Instructions] And your first question comes from the line of Raymond Ke with Nordea.

Three questions for me, starting with one to AnnaCarin regarding the restructuring program. You said it will take slightly longer to realize the financial effects, but maintain the time line by the end of the year. I take it that we should not expect a linear improvement from here on until Q4. But could you maybe flesh out what is behind this delay in visible improvement?

Absolutely. As we mentioned already in our Q3 report, this is a change in the company where we harmonize our underlying processes, but also our -- that we choose common tools that will build less complexity in our organization, but it will also, for the future, make sure that our improvement can be even stronger. So we can make a fix in one way and then we can have an effect of all things, and I think we have started to actually try to give examples of what we are doing. I think in last quarter we said that we are a people business and we have had different kinds of processes in the HR process in each and every country. We have also used different kind of tools. And today, we have implemented a common HR process with a unified tool, and that brings some efficiency and brings more quality in our data as well. But of course, those kind of examples that we are doing, in this report we also mentioned that we are doing the same in our largest service line, which is cleaning. And I think we underestimated the time of doing this, but we are -- really have a focus on harmonizing processes, the underlying processes, within cleaning as well as using a common tool. I'm totally sure this will really bring some more efficiencies in our organization even though it will take a bit more time than we expected. But as I've said, I am confident that we will capture the potential in the end of this year.

Got it. And then regarding the contracts that have ended this year, do you sort of see a common denominator among these contracts in terms of maybe geography, reason for ending or the customer segment that is represented here?

No, not really. I think it's more or less the same pattern as we have seen before. So I think we are quite confident that we have a diversified customer portfolio actually that is spread all over the world, different kind of industrial segments or geography.

Okay. Great. And then just final one. On the sort of work-from-home trend. Have you noticed a trend in more customers wanting to reduce their IFM spend as a result of reduced office space?

No, Raymond, actually, I would like to say that in all of my dialogues with customers, I would like to say that most of our customers, they really would like to attract back their employees. And I think they are taking some stronger positions even and say that you should go back to your workplace in the office for the moment. But of course, you need to attract back your employees. So you need to actually spend a bit more facility management in your premises actually. So we do not see a decline in that.

[Operator Instructions] Your next question comes from the line of Karl-Johan Bonnevier with DNB Markets.

First, on variable volumes that you highlight, still remains solid and high except maybe for public contracts in Denmark. Given that this, I guess, is your best kind of cyclical indicator and that it's remained so solid, do you think we are past the worst of risk on the downside, so to say, from your contract portfolio at this stage or -- given that something very strange doesn't happen at this stage?

Yes, I think Karl, that is fair to assume. I mean, we are keeping track on that, but we don't see any signs of sort of a significant decline in that. So it's a fair assumption, I would say.