Coor Service Management Holding AB (COOR) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Coor Service Management Q2 Report 2020. Today, I am pleased to present President and CEO, Mikael Stöhr; and CFO and IR Director, Klas Elmberg. [Operator Instructions] I will now hand you over to Mikael Stöhr. Please begin.

Thank you very much and welcome, everyone, to this Q2 call, and thank you very much for listening in to us at Coor here this morning. So moving on in the slides. First slide, for those of you who are new to us at Coor, Coor is a Nordic market-leading company focused on integrated facility management, but working across a broader range of both integrated and single service management in the Nordic region. Over the last 12 months, we turned over some SEK 10 billion with a profit level of SEK 542 million on an EBITDA level. We employ a little over 11,000 people across the Nordic region, and that computes into just above 9,000 FTEs across the region. If you look at 2 different ways of splitting Coor, one by country, Sweden is just over half of Coor at 51%, again, over the last 12 months. Norway is the second largest country for us at 23%, and Denmark third at 19% and Finland at 7% of the total size of Coor. Another split of the company is by contract type. And you can see on the bottom pie chart there, 60% of our contracts are integrated contracts and some 40% are various types of single services. So that is Coor in a nutshell. Moving then over to Q2 and the next slide, starting out also this quarter with a summary of COVID-19 issues from Coor. Obviously, COVID-19 has been high on the priority list and handling COVID-19 for us during the second quarter as well. And our #1 priority is always the health and safety of our employees and also our customers' employees, and that is perhaps even more so in these challenging times as we've gone through in the second quarter. What we've done over the last couple of months is moving from a crisis organization that we set up at the end of Q1 over to normal day-to-day business in the line organization, handling also all of the various COVID-19 effects. So we moved in, in the quarter into more of a business as usual tempo and pace in the business. We're seeing in the quarter effects of COVID-19 on our variable volumes, significant effects on the variable volumes across all of the different service lines, main effects remain in the food and beverage area. So if you look then when we come to the figures, the top line is down compared to Q2 last year with some SEK 300 million, and that is all driven by variable volumes coming down due to COVID-19. Takes us then into the cost reductions that we've been hard at work with during the quarter to minimize the financial impact of the loss of variable volumes. It's been a broad range of cost reductions that we pushed through the Coor system, everything from furloughs that we have people furloughs on various levels in all of the countries. That level has gone down quite significantly though if you take end of Q2 compared to end of Q1. End of Q1, we had some 2,300 of our employees that were affected by various types of furlough schemes. That is down to some 1,500 or equivalent of 13% of all employees end of Q2. We've also made lay-offs. We've made reduction of subcontractors. We've minimized our purchased goods and really looked at every individual cost item throughout the whole group and made sure that we've stayed sane on all of our cost activity. So that's been a major push to handle the negative financial impacts of the variable volumes coming down. And finally, COVID-19, as you'll see when we move into the numbers, we've managed to maintain a strong cash flow throughout the period. And we've also strengthened the balance sheet, both with a strong development of our profit level and with a good level of cash flow. We'll see more about that when we come into the financial details. So that's on COVID-19 for the second quarter. Moving then over to the numbers. When you look at the numbers for Q2, our view is that our customer-centric business model once again has stood strong through turbulent times. And when we run through the numbers all the way from growth down on to leverage, I believe that is quite evident from the figures. So starting off then with organic growth, which was negative in the quarter at 11%. All countries in the group had negative growth in the quarter, most so in Norway and least so in Denmark, and we'll look at the details in a slide when we come to the individual countries. There was positive acquired growth for the group in the quarter, 2%, that comes from the acquisition of Norrlands Miljövård that was closed in November last year. So we carried that with us into the second quarter. EBITA margin comes in at 6.2% in the quarter. All countries in the group improved their EBITA margin, except Norway. We'll come to that when we walk through the country-by-country slide. But for the group, 6.2% margin. Cash conversion comes in at 107%. Now that's an LTM number and the leverage comes down to 2.2x, also an LTM number. So moving then over to the LTM numbers also for growth in EBITA. Over the last 12 months, the total group is roughly flat, slightly negative on organic and slightly positive on acquired growth for the total. That is a flattish nature on the top line. EBITA margin comes in at 5.4% LTM and then with the cash and the leverage. So even in times where we are hit quite significantly and in the quarter at minus 11% organic growth, the business model of Coor and our ability to move cost out the door, I think, affects the -- both the EBITA margin and the cash and then also the leverage, and that creates a strong basis for us going forward. Moving over then to business highlights for the quarter. COVID-19 obvious highlight, and we covered that already before. So I won't mention that again. Other things that have been in focus for us over the quarter is continued focus on large integrations, the cost reductions and the efficiencies that we pushed through the system. A couple of examples of large integrations that we've continued to work within the quarter is Norrlands Miljövård, the acquisition in Sweden. That company is now fully integrated and name changed to Coor's. That's now a strong part of Coor, covering the northern part of Sweden. Norrlands Miljövård came in with a very strong focus on cleaning services and are also seeing some positive signs in cleaning services now when people are moving back into the offices after lockdown in COVID-19. So focus on cleaning services has been a positive for us in the quarter. In Denmark, the Danish Police, Prison and Probation Service contract, the prolongation and significant expansion of that contract that was started to ramp up end of 2019, that is now fully ramped up. So covering not only the police, but also the probation -- Prison and Probation Service and the Public Prosecution Agency in Denmark. Large integrated contract fully ramped up in Denmark has gone very well. Of course, been a stretch to ramp up that type of contract during the difficult times of COVID-19, but something that the Danish organization has done very, very well. Moving on then to ICA, the Swedish retailer in Sweden. Large contract also starting to ramp up end of last year. That's now fully ramped up in the figures in Sweden for the quarter. In Finland, we started a new IFM contract for OP Group. That's a financial institution in Finland that was started in May. So that is now also ramping up in the quarter. And then again, focus on cost reduction, efficiency across the whole organization, not just the start-ups of the new contracts, but going -- really cutting across every individual contract in the whole organization. There's been continued market activity in the quarter as well, an important prolongation that we made with Telia. That is a contract worth some SEK 100 million, and we prolonged that for an additional 5 years, important to be able to continue to do normal business also in a challenging quarter, such as the second quarter was of this year. Good stream of SME contracts also coming in into the quarter. And we're moving into the second half of 2020 with, we believe, a solid pipeline ahead. There are several interesting IFM opportunities that are expected to reach the market in 2020. So we are excited about the second half from a new business perspective. Moving then over to a country-by-country run through, starting off with Sweden. In the second quarter, there was negative organic growth of 12%, a positive acquired growth of 5%, and that delivered with an EBITA margin of 10.2%. So we're seeing in Sweden, as we talked about before, the negative impact on variable volumes from COVID-19. Now that cuts across basically all of the different services for us, but with a strong focus on food and beverage. Of course, if people are not in the office, they will not go and eat in our restaurants and that significantly impacts the food and beverage service line. In Sweden, we're seeing counterbalancing effects from the downside of COVID-19 with new business. I mentioned the ICA contract ramping up, the acquisition of Norrlands Miljövård and also, which we're seeing across all countries, but most importantly in Sweden and Denmark, that's an increased demand for cleaning, especially in the public sector in hospitals and other types of public sector, but really cutting across an increased demand for cleaning. The margin -- and the margin improvement we're seeing in Sweden this quarter compared to the same quarter last year, that's a lot of moving parts that make up the margin improvement. There is the cost reductions that have gone through the system in Sweden; the integration of Norrlands Miljövård, which comes in with good, solid margins in Sweden. So a lot of things moving in the right direction from a margin perspective despite the negative volume impact then from COVID-19. Moving over to Norway. Norway is the country from a top line perspective that is most significantly hit in the second quarter. It's an organic decline of 17%. So as you can see, that's the most significant decline in the whole group and an EBITA margin of 5.5%. Now in Norway, there's, again, lots of moving parts. There are 2 main parts that are negative for us in the quarter. One is the COVID-19, which is roughly the same effect as in the other countries, hitting us on variable volumes mainly in the food and beverage segment. But what you're getting in Norway as well, that's a general restraint from oil and gas industry with the challenges in that industry that also impacts variable volumes. So you're getting sort of more of a perfect storm in Norway with 2 crises moving as one. And what we're doing then in Norway is, obviously, as in the other countries, we're cutting costs, we're looking through efficiencies. But with an organic decline of 17%, you can see that, that actually flows into a margin decrease from last year. So there's more for us to do in Norway, and we have more efficiency programs running, and we effect -- we expect to have effects from those efficiency programs in Norway in the second half of this year. Moving over to Denmark. Organic growth -- organic decline of just 1%. So that is actually the best performance in the group of just 1% down in the quarter with an EBITA margin from a Danish perspective of a whopping 6.2% in the quarter. Volume-wise, what we're seeing is, again, the same effects in Norway -- in Denmark with a negative effect on the variable volumes in COVID-19. We have a strong counter effect in Denmark and the ramp-up of the significantly expanded Danish Police contract that's really now come on stream with full volumes. And also, if you may remember, we acquired a company some time ago in Denmark, focused on cleaning services. So cleaning service is an important service for us in Denmark to really reaping the benefits of the added requests for cleaning services, especially in the public sector in Denmark. So 2 strong counters to the negative effect from COVID-19 from a volume perspective. Now in Denmark, the margin at 6.2%. That is a clear pickup from last year and also a clear pickup from what we delivered in the first quarter of this year. Again, many moving parts. Significant impact from the ramp-up of the Danish Police contract and all of the cost reductions and the good volumes we're getting for cleaning in the country. So lots of good moving parts in Denmark from a margin perspective. Finally, moving over to Finland. Organic growth, again, significantly hit at minus 15% in the quarter with an EBITA margin of 3%. So negative growth in Finland, that's, again, 2 moving parts. One is the negative impact from COVID-19 and the other is, as you've seen from the last couple of quarters, negative growth, where we have moved out of very low-margin contracts to focus on the types of contracts where we actually can make a difference and actually earn a healthy margin. So that flows through in the growth, which is negative, but it also flows through in the margin, which is significantly up compared to the second quarter in 2019 in Finland. So that's a quick run-through of the countries. Moving over to contract portfolio development. For those of you who have been following us for some time, you know that this is something that we talk about every 6 months to give you a sense of the net effect in the portfolio, what's happened, contracts terminated and new contracts signed for the first half of this year. And we're actually quite excited in the first half of 2020 with 4 months significantly impacted all of our customers and Coor from a COVID-19 perspective that we're continuing to build a contract portfolio also in this first half of 2020. We've signed 6 new contracts with a value -- annual value of some SEK 100 million. Contracts that we've moved out of delivery are 4 contracts with an annual value of some SEK 45 million per year. So the net positive change to our contract portfolio for the first 6 months at SEK 55 million per year.

All right. Then looking at the Q2 P&L, we see, as Mikael said, that net sales are down by close to SEK 300 million to a level that is just below SEK 2.3 billion for the quarter. The decline comes from the negative growth of the 11%. And then you have the acquired growth of plus 2% and the FX effect of minus 2%, and that is fully related to the Norwegian NOK. EBITA is up from SEK 140 million in Q2 last year to SEK 141 million this year, and that gives us a margin of 6.2% compared to the 5.5% that we had in Q2 last year. And as you have heard, the improvement is mainly driven by the cost reductions and the efficiency that has been running across all the countries and also the group staff functions, but also the successful integrations of the Danish Police contract and Norrlands Miljövård, just to mention the 2. Amortization is slightly higher in Q2 than last year, but we also see a big decline in IAC items affecting comparabilities that is reduced by more than 50% compared to Q2 last year. And that takes EBIT to SEK 86 million compared to SEK 78 million last year. And with the financial net and taxes basically unchanged, we get to a net income of SEK 52 million, which is actually 18% higher compared to Q2 last year. And when adding back the amortization, you get an adjusted net income of SEK 100 million in the quarter. Looking at the LTM numbers, we see that net sales is still above SEK 10 billion; LTM EBITA at SEK 542 million, which translates into 5.4%; and the adjusted net income of SEK 357 million for the LTM. Continuing then with the sources and usage of cash for the last 12 months. You can see that we started off with an ingoing cash balance of SEK 391 million. Operations have contributed with approximately SEK 750 million, which is a very strong number. And then we see the financing flows, and that is reflecting interest, loans and leasing, that adds up to minus SEK 734 million, where the absolutely largest part is related to us reducing our debt by lowering the utilization of the RCF financing. Taxes paid in the 12-month period is SEK 36 million and cash out from M&A is 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 203 million. Moving on with some of the cash flow details for the LTM period. You see that the cash conversion is 107%, a strong number. CapEx of SEK 78 million, which keeps us just below 0.8% of our net sales. And working capital improvement during the last 12 months is SEK 130 million. And if we then look at some of the details from the balance sheet, you see that the net working capital is negative with minus SEK 703 million, and that equals minus 7% of net sales. Net debt is down from close to SEK 1.9 billion in Q2 last year to approximately SEK 1.6 billion in Q2 this year. And that gives us a leverage of 2.2x, which is well below the covenant levels in the RCF at 3.75x and is also well in line with our own target of staying well below 3x. And then just finally, some -- a few comments on the financing of Coor. We have 2 sources: one RCF of SEK 1.5 billion and bonds of SEK 1 billion, both this with the duration until 2024. And as we can see in the RCF, there is more than SEK 1 billion that is unutilized as of end of Q2.

All right. Summing up Q2 then. From a growth perspective, negative organic growth of 11%, 2% acquired growth flowing as a positive takes us to a flat profile from a growth perspective over the last 12 months. But from an EBITA margin, a significant improvement compared to Q2 last year at 6.2% in the quarter. It takes us up to 5.4% over the last 12 months. Cash continues to be strong, 107% cash conversion over the last 12 months. And we continue to be excited about the opportunities and the structural opportunities in the facility management market in the Nordics in a longer perspective. So with that, I think we will open up for Q&A.

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

Congratulation for managing the tough market environment in a very, very successful way. And I really would like to start to get your take on, given that you have been able to limit the, say, negative earnings leverage coming from the growth challenge you have seen in the quarter, could you describe maybe a little more how you've been able to -- what was really related to all the programs you already had initiated prior to this, what is something that are particular for this period and what are things that you think are exceptional in helping you during this quarter?

KJ, just to give you some flavor, I think what has actually helped us at Coor in a way is that the whole machine of Coor is built around finding efficiencies. The machine of Coor, when we move into a new agreement, we will typically -- what we sell, as you know, is efficiency to our customers. So what we've done in end of Q1 and then throughout Q2 is really flexing our normal muscles, that is using the decentralized structure of Coor, the decentralized P&L structure that we have, where every individual quarter and down to individual group have their own P&L and their own cash flow. So what you're seeing coming through in the figures is a massive effort throughout the whole organization, but really structurally no different than what a lot of the people at Coor do in a day-to-day basis. So I'd say that is the -- I think that's been key for us to make sure, and that's also why we've moved over as rapidly as possible from the crisis organization that we put up in end of February when we didn't really know where things were moving. And we rapidly moved back into normal way of working, the normal lines of managing Coor because we saw that what had to be done was structurally the same thing that we do on a day-to-day basis, find efficiencies, more efficiencies than we normally had to. So that's key for us. Now of course, we're also taking part of various furlough plans throughout the Nordic region, which is standard for us in all of the countries. Sweden is the only country that has put in new types of furlough. These are schemes that were in place in the other countries before and that we used from time to time in those countries before as well. I think what's important to look at there is the level of decrease of the use of furlough plans that we've done in the quarter. So going down from some 2,300 people that have been affected at -- to some point down to 1,500 people at the end of the quarter.

Excellent. And maybe if it would be possible, could you give us some sort of feel for the intra-quarter movement in -- if you compare the challenge you saw in April, what you now see towards the end of the quarter and maybe going into July?

No. I think there is a big difference of the momentum end of Q1, which was really, I think, for everyone in business life, not just for Coor, you were in the dark. You didn't really know what you were up against. I think the feeling closing Q2, what we've seen in June is that the companies across the Nordic regions, the lockups in the countries with a harder lockup has been released to some extent. People have been starting to move back to the offices to some extent across the region. We're seeing a significant increase of variable volumes in cleaning, for example. Now we're also seeing the same low levels of food and beverage, but we're seeing lights at the end of the tunnel. And again, I think that creates some excitement for the second half of this year, but again, comes down to what happens on the COVID situation. If people will continue to move back into the offices for the second half, I think there's a good chance that the general momentum in the business can continue. If there's a second wave, of course, that could affect us as well.

And when you look at the use of furlough programs, as you say, the -- outside Sweden, there is normal -- that's normal structure for these kind of things. Is there an extra challenge for you now coming into the second half when maybe a couple of these programs are, then -- and back track then coming up towards their end?