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

Ladies and gentlemen, welcome to the Coor Service Management Q1 Report 2021. [Operator Instructions] Today, I'm pleased to present President and CEO, AnnaCarin Grandin; and CFO and IR Director, Klas Elmberg. Please go ahead with your meeting.

Thank you, and welcome to the presentation of Coor's report for Q1 2021. If you have been able to read the report we released earlier today, you might have recognized that we have updated the format, adding some new information, and we are also starting to report on sustainability KPIs. I will start with an introduction of Coor and our triple bottom line before we go into our performance in the first quarter. So Coor is the Nordic market leader in integrated facility management. We have a customer-centric business model with a decentralized organization. We deliver a broad range of services, both as IFM contracts as well as single service contracts. We have a clear ambition of becoming truly sustainable, and we are, from now on, increasing our focus on sustainability. We drive our organization in a triple bottom line perspective. We are striving for taking a business, social and environmental responsibility to future-proof Coor making us more attractive, both from a customer, employee and investor perspective. We have a well-balanced portfolio and to become more transparent, we have now included a revenue split by service line and by customer segment in our reporting. And I will start from the left and the split between our markets. Sweden is the largest country with 51% of total turnover; Norway and Denmark are both account for 21%; and Finland for 7%. The split by contract type has been stable over the years, with approximately 60% in IFM contracts and 40% in single service contracts. Cleaning is the largest service line with 39% of our total turnover. Property is the second with 31%. Workplace includes a number of services like reception, conference services and office supplies, and together, that adds up to 18%. And food and beverage is now up 7%. Our top 3 customer segments are public customers by 28%, manufacturing by 23% and oil and gas by 17%. So going into our financial figures. We are pleased to present a first quarter with improved earnings and a strong cash flow. We have a negative organic growth by minus 7% in Q1, driven by Sweden and Norway, while both Denmark and Finland shows a positive organic growth in the quarter. And acquired growth is more precisely 0.3%, and it's related to the acquisition of R&K Service in Norway that is included in the numbers from March. And the EBITA margin is 6% compared to 4.8% last year. Cash conversion is an LTM number, and it continues to be strong at 98%. Leverage is also an LTM number with 1.5, we are below Q1 last year and well below our target of staying below 3. And from an LTM perspective, organic growth is negative by minus 8%. The acquired growth in the LTM period is 1% and related to the acquisition of Norrlands Miljövård that we made in November 2019. LTM EBITA margin is strong at 6.1%. As I mentioned in the beginning, we are now adding nonfinancial KPIs in our quarterly reporting, and we will keep developing this over time. Customer satisfaction is measured on a yearly basis. The score of 70 is from the latest survey in 2020 and up by 2 units versus the year before and now in line with our long-term targets. The employee motivation index improved for the sixth year in a row, and we are now at a very strong level of 78%. And I'm also very pleased having a response rate at 85% among our 11,000 employees. And the total recorded injury frequency is an LTM number, and the level is 9.8 in first quarter. This is an improvement compared to a year ago and a significant improvement when looking back to 2016 when we started to measure and follow this in group level. Since 2016, we have reduced the injuries by half. But even if we have improved, we are not satisfied with our current level. We have a long-term 0 vision that no one should be injured at work. So there are still room for improvements. We have focused for several years on improving the balance between female and male managers. 5 years ago, we had 40% female managers and 60% male managers. Today, we are very proud of the fact that we have a 50-50 split. We will start reporting on environmental KPIs on a quarterly basis. We have currently defining robust measuring processes and KPIs. During Q1, Coor has decided to commit to the Science Based Target initiative to set climate targets in line with limiting global temperature rise to 1.5-degree Celsius. And prior to us coming to the Science Based Target initiative, we had established targets to reduce the level of greenhouse gases with 50% by 2025 within scope 1 and scope 2. We have also activities ongoing within the area of scope 3, for example, addressing purchase material. We will now start the process of aligning our targets to the Science Based Targets initiative, but the 50% reduction of scope 1 and 2 is the first step towards that. So looking at some of the highlights from Q1, we see that we have some important wins, especially the pan-Nordic IFM contract with PostNord, but also some cases in Denmark and in Finland. We also have a very important 4 years prolongation with Sandvik in Sweden. And in addition to the increased focus on sustainability, we are also gearing up in terms of innovation, digitalization and service development. Within the area of innovation, we are happy to see that our innovative solution, Coor SmartClimate, powered by LightAir, is now being sold as a service, including installation and maintenance to our customers. This innovation destroys viruses where they still are in the air and provides a cleaner and safer indoor environment. And our sales pipeline is still very strong, but is progressing somewhat slower than expected. And we continue to be active in our M&A dialogues. And we have showed this slide before, and it is still valid. We believe Coor is well positioned for the future. We are market leader in a geographical market, where there are good growth opportunities going forward. And 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 0.5 day per week pre-COVID-19 to 1 to 1.5 days per week. But there will, of course, be variations depending on industry, geography and type of sites. And before we'll see a more stable phase, we believe there would be a trial and error phase for 1 to 2 years in the period to come, where companies or organizations tests out ideas and solutions to find the right balance between remote working and working at the office. And in terms of service development, we also expect companies and organizations to develop their offices with our services and expertise we are supporting our customers in their ambition to create attractive offices where people can interact and be creative together in a safe way, and we're making the offices more attractive, the service levels tend to increase. And the demand for digital and technological solutions has increased previous years and will continue to increase. We then expect increased demand for professional cleaning also in the future. While property services is expected to be fairly stable compared to the situation pre-COVID-19. And with that, I will hand over to Klas to take you through the financial details for our first quarter.

Thank you very much, AnnaCarin. And if we then start looking at our P&L, just to see if the slides show will work. Bear with us for a second. Do you have some technical issues in terms of changing the slides? All right. I'll just keep talking, and then we'll see if we get the slides to work. If we look at our P&L, we see that the net sales in total adds up to just over SEK 2.3 billion. And that means that we're down approximately SEK 200 million compared to Q1 last year. That equals minus 9%. And as AnnaCarin mentioned, the organic growth in the quarter is minus 7%, and the FX effect was minus 2%. EBITA for the quarter is SEK 139 million, and that should be compared to the SEK 122 million that we showed in Q1 last year. And that equals an EBITA improvement of 14% in the quarter. And that gives us a very strong EBITA margin of 6%, and we compare that to the 4.8% that we had in Q1 last year. If we look at the net income, that adds up to SEK 53 million, and the adjusted net income, when adding back the amortization, that amounts to SEK 104 million. Looking at the LTM numbers, we see that net sales for the last 12 months is SEK 9.4 billion, and the organic growth in the LTM period was minus 8%, acquired growth plus 1% and FX effects of minus 3%. The EBITA in millions of SEK is SEK 573 million. And that gives us an LTM EBITA margin of 6.1%. So compared to the period prior to COVID-19, the top line is more or less SEK 1 billion lower. But at the same time, we managed to improve our EBITA in millions of SEK with some SEK 25 million to SEK 30 million. So very strong EBITA performance from the organization. On a country-by-country perspective, there are many similarities in Q1 compare -- when you look back to the prior quarters, we see the same types of patterns. We see that food and beverage volumes continues to be down compared to Q1 last year. And we also see lower levels of property-related volumes. But at the same time, we see a high demand for the professional cleaning. And we also see some positive effects from some of the new business. Even if we're down in terms of organic growth in both Sweden and Norway, we're very happy to see that both Denmark and Finland shows organic growth of approximately 3% in the quarter. All countries are improving EBITA margins compared to Q1 last year, and all countries, except Sweden, is also improving EBITA in absolute numbers, while Sweden is on par with last year. The drivers behind the strong profitability are, as you have heard before, a strong focus on cost reductions, efficiencies but also a positive volume mix effect that we have seen in several of the countries. And if you look at specifically Denmark and comparing the Q1 figures in 2021, with last year, you should remember that we did have a negative one-off in Denmark in Q1 2020 of approximately SEK 5 million. So that partly explains the big positive change there. If we then take a look at the cash flow and the sources and usage of cash in the last 12 months, you see that we started off with an ingoing cash balance of SEK 578 million. Operations contributed with SEK 724 million. The financing flows, and that reflects interest loans and leasing, that adds up to minus SEK 817 million. And the vast majority of that is actually us reducing our utilization of the RCF financing, as you can see in the bullet below, minus SEK 600 million. Taxes paid is SEK 52 million, and cash out from M&A is SEK 60 million, and that's fully related to the acquisition of R&K in Norway. And that takes us to an outgoing cash balance of SEK 373 million. Then I think we run into some technical issues again. Talking a little bit about the cash conversion. We do have a strong cash conversion of 98% in the quarter as an LTM number. We see a relatively low level of CapEx, and we see an improvement in working capital. If we look at customer payments, we continue to see the same positive signs as we have seen in the past, that big customers continue to pay according to the invoices and according to the agreements. So solid customer payments. If we look at net working capital, that is negative by SEK 891 million, and that equals minus 9.5% of net sales. Net debt is at SEK 1.1 billion and leverage, as AnnaCarin mentioned, 1.5. So I think that concludes the more detailed financial part, and I'll hand over to you, AnnaCarin, for the last summary.

Yes. Thank you, Klas, and we do apologize for the technical issues. Before going into questions, I will just briefly summarize our first quarter. Even if the organic growth is down by minus 7%, we are happy to see that the stability of our subscription volumes is strong. From a growth perspective, our main priority is winning new contracts, but as always, we need to win it on the right terms. We have now been affected by COVID-19 for more than a year. During that time, we have been extremely clear in our prioritizations. #1 priority have been the health and safety for our employees and our customers' employees followed by focus at cash and EBITA, and EBITA margin is 6% in Q1 and 6.1% for the LTM period. Cash conversion is 98% well above the target of 90%, and leverage is at 1.5. We have succeeded through our ability to adapt and stay close to our customers. And I would like to take the opportunity and send a great thank you to all Coor employees for another strong quarter for Coor. And with that, we will open up for questions.

[Operator Instructions] Our first question comes from the line of Karl-Johan Bonnevier from DNB Market.

Well, first of all, a reflection, just looking at the performance you have done over the last year, considering the strong strength of the -- and all the volatility we have seen in the markets, very impressive, keeping the whole financial model together like you have done, I must say so. And looking at the new business breakup, I thought that was very interesting on Page 3, and I noticed in the annual report as well. AnnaCarin, could you maybe elaborate a little on the successes you have had in the different customer segments? Because if I look back, obviously, the public segment, particularly in the customer segment, has been something that has moved up a lot, I guess, it is the Karolinska Hospital, a big part of it. But maybe talk a little about the business momentum you see in the different segments here, particularly when you look at opportunities maybe for the second half of this year as well.

Sure. Karl-Johan, and thanks for the question. Yes, you're absolutely right that the public segment has increased in share of the revenue. And as mentioned, it's now at 28%. It was slightly over 20%, if you look back a year ago, and it's related to Karolinska sjukhuset in Stockholm, but you also have the Danish Police, for example, as one of the larger public contracts that we have that has also increased during the last 12 months. And if you look into that segment, it's also quite a lot related to cleaning because you also see that cleaning has increased its share of the total turnover as well in the last 12 months.

And when you look at that from a business mix perspective, I guess you imply with the comments you have done in the report that, that is something that is also driving your overall margins.

Yes. That's correct.

And when you look at the financial targets, you're obviously meeting them in a good way, except for 1 of them, the organic growth. And as you see the COVID-19 pandemic situation normalizing, clients getting back to offices, do you see yourself being back in that range? And then obviously, adding to that, the Equinor challenge you see in it for the moment?

Yes. I think that is, of course, a challenge for us that we will lose some volumes by the end of this year related to Equinor. And then it's, of course, very much related to when will people start returning to the office. And as AnnaCarin mentioned before, I mean, the importance of us winning our share of that very strong pipeline that we see out there. So very difficult to say when we will be back in our targeted level, but we're very confident that we will get back there.

And I noticed the commentary AnnaCarin did on the very strong pipeline across the Nordics, but maybe a slower conversion of that. Is that -- what do you see playing in there?

We still can see some delays in the processes. So it's taking a bit longer time than we actually expected. But the pipeline, the strong pipeline is still there.

And do you see, say, normal kind of delays compared to, say, a weaker business climate, if you put it like that, also playing into an acceleration and you're being able to convert these orders or RFPs?

Yes. I think more normal. We can see a 3 -- third wave of COVID-19, and I think that has been delaying some of the processes we have with our customers.

Good. Good. And the final 1 for me at this stage. Looking at paid tax in the cash flow statement, I saw it was up. Have you done any reevaluations of your loss carryforwards? Or is that just the early start of the year impact of paying taxes?

No. No changes there or so.

[Operator Instructions] We have no more questions from the line. I will hand it back to our speakers for their closing comments.

Yes. Thank you for listening to this presentation. I hope you enjoy our new format to be more transparent. We feel a bit more modern as well. And stay safe out there. Thank you.