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

Ladies and gentlemen, welcome to the Coor Service Management Q4 Report 2020. [Operator Instructions] Today, I'm pleased to present President and CEO, AnnaCarin Grandin. Please go ahead with your meeting.

Thank you, and good morning, and welcome to this presentation of Coor's report for the fourth quarter 2020. I hope you all are healthy and safe in these times. With the report released earlier this morning, in today's presentation, we conclude a 2020 that turn out to be something very different than all of us expected a year ago. And given the special circumstances, I'm proud to see that we, in 2020, have really shown the strength of the Coor business model and the Coor organization. Most of you probably know Coor quite well by now. But for those of you listening in to us for the first time, I will give you a very short overview of our company. 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 SEK 9.6 billion over the last 12 months, generating an EBITA level of SEK 556 million, taking us to an EBITA margin of 5.8% over the last 12 months. We have around 11,200 employees, which translates into approximately 9,000 FTEs. Sweden is, by far, our largest market, accounting for 51% of our turnover. Norway is second largest with 22%, followed very closely by Denmark with 20% and Finland with 7%. When splitting Coor by contract type, you can see that 58% of our turnover is generated from integrated facility management contracts and 42% is single service, mainly related to cleaning and property service. The IFM share of the total turnover has been over 60% when you look back. The main reason why that level is now below 60% is related to the drop in food and beverage volume that we have seen during the pandemic. Most of our food and beverage volumes are part of our IFM contract. And in the previous report, during 2020, we have provided a summary of how COVID-19 has impacted Coor and how we have handled the situation. I continue with a similar summary also for Q4. Our #1 priority is always the health and safety for our employees as well as for our customers' employees. We follow the recommendations from the authorities in the respective countries to support effort in reducing the spread of the virus. 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. COVID-19 has had a negative impact on variable volumes at Coor, mainly within food and beverage, but also 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 70%, 75% of our total turnover remains strong, which is creating stability for us. We have a close partnership with customers to find suitable solutions, both from a short-term as well as a long-term perspective. 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 2% of our employees by the end of Q4, compared to 20% by the end of Q1. So by the end of Q4, most of the people on furlough schemes are employed in our Norwegian operations. In Sweden, Coor left the furlough program and no furlough support has been received in Q4. Cash flow remains strong without negative changes in payment patterns from corporate customers. The deferred taxes and fees in Denmark and Norway that impacted Q2 and Q3 were paid in Q4. Our balance sheet is strong with a high level of unutilized credit lines. 2020 has been a challenging year in many aspects, but I'm very pleased with our performance. We have once again showed strength in our ability and capacity to rapidly adapt to the changing situations. Our customer-centric business model and a well-managed decentralized organization has really delivered during 2020. And this is evident when looking at both earnings and cash flow. Because of COVID-19, we have a negative organic growth, both in the fourth quarter as well as for the full year by minus 7%. We have negative organic growth in Sweden and Norway, while both Denmark and Finland shows organic growth in the quarter. The positive acquired growth of 1% in the quarter and 2% for the full year is fully related to the acquisition of Norrlands Miljövård in Sweden that we did in November 2019. Continuing with the EBITA margins, we see the results of the strong focus and adaptability across the entire organization on cost and efficiency. The group EBITA margin is 6.2% compared to 5.6% in Q4 last year. 3 out of 4 countries improved their EBITA margins in the quarter, while Norway is on par with last year. And Klas will take you through the individual countries in a couple of slides. The EBITA margin for the full year is 5.8% compared to 5.3% last year. Cash conversion is an LTM number and by the end of Q4, it was 108%, which is above our target of 90% and somewhat better than last year. 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 1.6x and well below the target of staying below 3x. We are happy to reinstate the dividend after withdrawing it last year. The dividend proposed by the Board is SEK 4.4 per share, where SEK 2 is ordinary dividend and SEK 2.4 is extraordinary dividend, and to be paid in 2 installments, the first in May and the second in October. So if we then looking at highlights from Q4 and significant events after the end of the period. In December, we launched an organizational change to increase focus and speed on service development, innovation, digitalization and sustainability. The overarching principle of highly decentralized organizational model remains, but given some of our group functions, a strengthening mandate and responsibility, each country also strengthened their center of excellence functions and will work in closer cooperation with the group functions. And during a challenging year, we are particularly proud of that we succeeded in increasing both our customer and employee satisfaction index. Customer satisfaction increased from 68 to 70 and is a good indicator of healthy customer relations. We are also delighted to achieve an increased in employee satisfaction index. For the sixth year in a row, up from 77 to 78, in the 2020 employee survey. The contract portfolio has developed in a positive way, both in H1 and in H2. And you will see the details around that shortly. Retention rate continued to be on high level also in 2020 at 92%, and 92% is also the average when looking at the last 3 years. Just like we mentioned in the Q3 report, the sales pipeline looks very strong, especially in Sweden and Denmark, but there are opportunities also in Norway and Finland. And there are several large processes ongoing as we speak. From an M&A perspective, the activity level is high within Coor, and we also see activity in the market in terms of incoming calls to us. I continue with major events for the beginning of 2021 and start with the loss of the Equinor office sites. Equinor has been and will still be a large and important customer to Coor. Equinor has decided to move into the final phase of the selection process with another service provider, not prolonging the office contract with Coor. The contract with Coor continues until the end of October 2021. It is disappointing that we did not win the new contract for the office sites, but it's also the name of the game in the FM industry, you will sometimes lose a contract. And over the years, Coor has been successful in winning new contracts and keeping large contracts for a long period of time. By learning from the process with Equinor and continue developing our offers and solutions to the market, we are confident that we will still stand strong going forward. And just before the release of this Q4 report, we signed the deal of acquiring R&K Service in Norway. R&K Service is a well-run family company that provides cleaning and food and beverage services in the Stavanger area. The company generate annual sales of approximately NOK 80 million and is an important acquisition that strengthened our position in Norway, both in single service as well as in geography. 2020 has been a very special year, and there is still uncertainty around development of COVID-19, but also positive development in terms of vaccine. We believe Coor is well positioned for the future. We are market leader in a geographical market, where there are growth opportunities going forward. Based on our experience, a crisis tend to lead to increased outsourcing. We saw this after the financial crisis as well as when the Norwegian oil and gas industry experienced a challenging time. Business and public sectors will look for efficiency, 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 FM market. The trend of remote working started well before COVID-19, but has been accelerated by the pandemic. We expect that the remote working will increase from approximately a half day per week pre-COVID-19 to 1, 1.5 days per week. But there will be variations depending on industry or sector. There will also be difference between manufacturing sites, including white collar work close to manufacturing site compared to a pure office sites. We also expect difference between urban areas and rural areas. If you have a long commute to the office, you are more likely to work from home compared to a situation where you only have a very short drive. We believe there will be likely a trial and error phase for 1 to 2 years where companies or organization test out IDs and solutions to find the right balance between remote working and working at office. We also expect companies and organizations to develop their offices. And with our service and expertise, we are supporting our customers in their ambitions to create attractive offices where people can interact and be creative together in a safe way. When making the office more attractive, the service level tends to increase. The demand for digital and technological solutions has increased previous years and will continue to increase. With our strong position and ecosystem of innovation partners, we are well positioned to engage with customers to make the workplace and service pandemic-safe through smart technology. Food and beverage that accounted for 15% of turnover prior to COVID-19 is expected to be negatively impacted also going forward when it comes to food and beverage deliveries in the urban areas or at pure office sites. Less or no negative impact is expected, for example, industrial sites and hospitals. Property services accounting for close to 30% of turnover is expected to remain relatively stable over time. We then expect increased demand for professional cleaning also in the future, and cleaning is Coor's largest service line with accounting for 30% of turnover. So with that, I will hand over to Klas to take you through each country on the financial details for our fourth quarter.

Thank you very much, AnnaCarin. If we then look into the country-by-country details, we see, as mentioned by AnnaCarin, that we have a negative organic growth in Sweden and Norway. While on the positive side, we see that both Denmark and Finland is showing a positive organic growth in the fourth quarter. From a margin perspective, Q4 is very strong, and we're very happy to see that Sweden, Denmark and Finland are all improving their margins compared to Q4 2019. Norway is on par with last year at 6.2%. In Sweden, we see a similar pattern as we did in Q3 and also in Q2, that we are dropping the variable volumes in terms of food and beverage and also some of the property-related projects. The demand for cleaning continues to be high, and we still have a positive impact of the large IFM deal we did with IKEA and started in November 2019. The same goes for Norrlands Miljövård that also came in our books in November 2019. From a margin perspective, we continue to see the positive effects from the strong organization, focusing on cost control, efficiency. And we also have a positive impact from a more favorable volume mix in the quarter compared to Q4 2019. In Norway, situation is also similar to Q3 with a drop in food and beverage volume. Cleaning continues to be strong. And in Norway, we actually had a quite good quarter when it comes to property-related projects despite the general restraint that we have experienced in the oil and gas industry. Denmark, the positive organic growth is related to the extended and expanded contract with the Danish Police, the PKA contract, and also the increased demand for cleaning across Denmark. And that actually makes up for the losses in food and beverage volumes and also some drop in property volumes in Q4. As in the other countries, the Danish organization has continued the strong cost focus and efficiencies, and we see an improvement both in terms of margin, but also profit in absolute numbers in Q4. Finland made another strong quarter with positive organic growth, mainly related to the new OP contract started in May and additional cleaning volumes. Both profit and margin improves compared to Q4 2019. If we then move on and look at the contract portfolio development in 2020, we had a positive effect in H1 that we presented in the Q2 report, that we had a positive net effect of around SEK 60 million. In H2, we won new contracts to a value of approximately SEK 150 million, and that gave us a net impact in H2 of around SEK 100 million. So that takes us to a full year net of roughly SEK 160 million. If we then continue with the P&L and look at some numbers in more detail, we see that net sales is down by approximately SEK 250 million, and that takes us to a total level at just below SEK 2.5 billion for the quarter. The organic growth, as AnnaCarin mentioned, is minus 7%; acquired growth, plus 1%; and then we have some small negative FX effects of approximately 3%, mainly related to the Norwegian NOK. EBITA is SEK 153 million compared to SEK 152 million in Q4 2019, and that takes us to a very strong EBITA margin for the quarter of 6.2%. With a lower level of IAC and more or less unchanged levels when it comes to the financial net, taxes and amortization, the adjusted net income for the quarter ends up at SEK 97 million compared to SEK 90 million in Q4 2019. Looking then at the full year numbers, you see that net sales totals up at SEK 9.6 billion. Organic growth also for the full year was minus 7%, while the acquired growth is plus 2%, and FX effect was minus 2%. EBITA improved by SEK 7 million to SEK 556 million for the full year, and that gives us an EBITA margin of 5.8%. And the adjusted net income for the full year improved from SEK 355 million to SEK 384 million. Next, we'll take a look at the cash flow and the sources and usage of cash in 2020. We started off with an ingoing cash balance of SEK 497 million. Operations have then contributed with plus SEK 781 million, very strong contribution. And then if we look at the financing flows, that is reflecting interest, loans and leasing, that adds up to minus SEK 821 million. And the largest part of that is actually related to us reducing our debt level by lowering the utilization of the RCF financing. Taxes paid is SEK 46 million, and cash out from M&A is SEK 12 million, and that reflects the last part of the cash payment related to the acquisition of Norrlands Miljövård. And that takes us to an outgoing cash balance for 2020 at SEK 396 million. Looking then very quickly at some of the details from the cash flow. You see that cash conversion is 108%, slightly better than the level that we had in last year. That's driven by the strong result, CapEx discipline and continued focus on working capital across the organization. There are also some positive impact on working capital from a somewhat more favorable calendar in the last year of -- last week of 2020 with more continuous working days compared to the year before. A lower level of property project also reduces the levels of capital tied up. Continuing then with some of the details from the balance sheet. We see that net working capital is negative with 1 -- with SEK 881 million, and that equals minus 9.2% of net sales. Net debt is SEK 1.2 billion. Leverage is down to 1.6x, well below our own target and also the covenant level of 3.75x. And as you can see, we still have a very large part of unutilized credits in the RCF financing, now totaling slightly over SEK 1.2 billion. So with that, I'll just hand over to AnnaCarin to sum up before Q&A.

Thank you, Klas. And I'm -- as I mentioned before, we are very proud of what we have done during 2020 and show the strength of the Coor business model and the Coor organization. We have a negative organic growth in the quarter by minus 7% as well as for the full year, driven by lower variable volumes, even though our subscription volumes remained strong. The successful acquisition of Norrlands Miljövård contributes positive with 1% acquired growth in the quarter. We delivered an EBITA margin of 6.2% in Q4 and a full year margin of 5.8%. Cash conversion and leverage are both on strong levels. The LTM value for cash conversion is 108%, and leverage is at 1.6x. We are very happy to reinstate the dividend after withdrawing it last year. The dividend proposed by the Board of Directors is SEK 4.4 per share, where SEK 2 is ordinary dividend and SEK 2.4 is extraordinary dividend. So we remain positive for the future. And there are interesting opportunities in the Nordic region and a strong pipeline ahead. And with that, we will open up for questions.

[Operator Instructions] Our first question comes from the line of Erik Paulsson from Nordea.

It's Erik. So first of all, can you please outline the contract opportunities that are coming up here during 2021, that you bid on, et cetera, the larger ones?

Yes. Thank you, Erik. As we mentioned, we have a very strong pipeline, and we can see a mix of both large cases as well as medium and small cases in the pipeline. We can also see a mix between private companies as well as public companies.

Okay. And is it possible to give some more granularity around that and timing, et cetera?

Well, what we saw during 2020, there was quite a large pipeline as well. But some of the large cases were postponed or delayed. And I think we see that coming now during 2021.

Okay. And then talking about contract endings, you had that Equinor contracts or parts of that. How does it look like -- regarding that in the coming quarters, so contract endings and risk relating to that in overall?

I mean the largest contracts that were up for renegotiation is the Equinor contract, and there we communicated the part on the office sites. And as we also mentioned, the production site is being handled in a separate process, which we are taking part in right now. And it's a different team from the Equinor side. It's a different type of process and so on. So we remain positive in terms of keeping the production sites. But the process is ongoing. Apart from that, there are no major prolongations in the near future.

Okay. Great. And then a final one. You touched upon it here regarding office spaces, et cetera. Potentially if we're seeing in the underlying market, decreasing the amount of square meters, et cetera. And you mentioned here going from potentially 0.5 days working from home up to, I think, you said 1.5 days. But what do you see the time horizon here going forward? And what's the risk for you in this? And can you actually utilize it in a better way for you as a business opportunity going forward?

Well, as we mentioned, we think we will, during the coming years, 1, 2 years ahead, we will see a trial and error phase. I think we will see that different kind of customers in different kind of industry, they will go back to their office in different kind of phases. I think that -- but what we can see is that we need to stay very close to our customers and make sure that we can provide them with actually new kind of services when we are in that kind of trial and error phase. But actually, we -- what we have seen so far is that also the level of services increases during that phase as well.

And just maybe a follow-up finally there. Can you just tell us what the share of white collar and the blue collar is respectively for you in total?

We haven't disclosed that split because we don't think that, that is a super -- first of all, it's quite difficult because you do have a lot of white collar people working at manufacturing sites and so on. So it's not completely relevant to do a split in white collar versus blue collar. It's more interesting to look at how the different industries and so on develop over time.

All right. If I rephrase it then, if you could give a breakdown regarding types of works where you can actually work from home and like workplaces where you cannot really do that?

I mean if you look at our customer base and where we do see that a lot of people have been working from home during the pandemic, it's very much concentrated to business services in the main cities in the Nordic region. And that's not our largest customer base, so to say, if you think about banks, insurance companies, and so on.

Our next question comes from the line of [indiscernible] from [ Holt Capital ].

The first one goes to the top line. Given that the office contract with Equinor rolls off pretty late in the year, and your comments on the pipeline, it seems to me that you're very confident in organic growth in 2021. Is that correct?

I mean the loss of the office sites for Equinor will have a limited impact in 2021. And then, of course, it all depends on the win rate and so on. But given the history and our sort to say, normal win rate, we do think that we have a good possibility of reaching organic growth in 2021.

And the second question relates to the gross margin and pardon my ignorance here. But if it's 10% or 10.5% or 11%, it matters a lot on the EBITA level. Could you just provide some color on to what factors are going to affect the gross margin and to which extent you can control those factors from quarter-to-quarter?

I'm not sure I fully understood your question up there. You mentioned the gross margin and how that develops from quarter-to-quarter or...

Yes, yes. And it kind of -- it has a pretty big impact on the bottom line, whether it's 10% or 10.5% or 10.8%, right? So what factors do affect the gross margin? And to which extent can you control those factors? Is it just arbitrary, so to speak, from quarter-to-quarter?

I mean looking at the gross margin and looking back at that, that has been around 12%, 12.5% for Coor. And I mean what really impacts the gross margin is the work that is being done out in the organization, in all the different contracts. And as AnnaCarin mentioned before, I mean our ability to adjust to changing needs and every day looking for the small efficiency or cost control and so on, that's really what drives the gross margin. In combination with, of course, being clever and utilizing your resources when you have some extra demand for certain services and so on. So basically, it comes down to hard work in the organization.

Okay. And the final question from me. On the working capital, it's a pretty good ratio, you announced this time. What should we consider a reasonable ratio? I think it was 9.2% if I heard correctly. What's the reason to lever there over time for the business?

I think it's better to look back at history and see that we have been more consistent at around minus 7% or something like that. I think minus 9% is a very low number. And as we say, I mean, with the lower level of property-related progress, we tie up less capital as well. So you shouldn't expect minus 9% going forward.

We have 1 more question on the line. [Operator Instructions] Our next question comes from the line of Karl-Johan Bonnevier from DNB.

Congratulations to good development in a challenge year with a lot of moving parts. A couple of questions, if I may. First of all, coming back to the Erik's questions around the on-site service opportunity that you show on the -- on Slide 6 in your material. AnnaCarin, when you look at this, it sounds like, say, you are in waiting something that you've now seen in 2020 as variable volumes going deep cleaning into offices and so on, maybe becoming more of a regular service. And that potentially then balancing, I guess, the work from home utilization or smaller office spaces. Is that a way to describe it?

Yes, I think you described that in a very good way. I think we have seen increased cleaning during the pandemic, and we see that -- yes, we think that increased volume will stay even after the pandemic. And we actually expect a return of volumes, for example, food and beverage. When we can see the effects of the vaccine and people start to go back at work, we can see that our food and beverage volumes will increase, as well as for the property-related projects. Many of our customers, they have postponed a lot of projects, and they will most probably be back in a couple of months.

Excellent. And if I split that up then. If you're looking at food and beverage, I think you mentioned that when you look at rural sites and hospitals and so on, you wouldn't expect a lot of change now when volumes come back on compared to what you saw historically and maybe more of a challenge in urban areas. How is your split looking at food and beverage in those 2 parts in a normal year?

We have a larger part of our food and beverage service related to larger IFM contracts actually outside of the pure white collar offices. There are, of course, some food and beverage deliveries also to the pure white collar offices, but the majority is actually outside of that area.

The majority would be, say, what you could say they're unaffected at the end of the day when you get back to some sort of normality?

A little less affected, at least.

Less affected, that's probably a good way of putting it. And then looking at the on-site service part of this, if you then try to play this out, say, over a 2- to 3-year perspective with, say, extra cleaning services becoming the normality, so to say, and then maybe a slightly smaller office basis, how do you think the net-net of that would affect your business? Is it a positive or negative?

I think that's very difficult to have a firm view on that. But given the fact that cleaning is our largest service line, so to say, increased in importance during 2020, I think that is a big positive part of it. But then there are so many other things that could impact that going forward, so hard to have a really firm view on that. But it's good for us that cleaning becomes more than a commodity.

I noticed you mentioned volume mix as being a margin contributor in the quarter. What's the underlying impact there?

I mean the volume mix is related to us losing the volumes, primarily in food and beverage, where we have had a lower margin. And then we've been able to sell additional cleaning projects at a higher margin. It has a -- it has, of course, a positive impact, but we haven't quantified it and we'll not quantify it either.