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

Ladies and gentlemen, welcome to the Coor Service Management Q2 Report 2021. [Operator Instructions] Today, I am pleased to present President and CEO, AnnaCarin Grandin; and CFO and IR Director, Klas Elmberg. Please go ahead with your meeting.

Thank you, and good morning, and welcome to this presentation of Coor's report for Q2 2021. And I do hope that all of you are feeling healthy and safe. After a brief introduction of Coor and our triple bottom line, we will continue with the business and market update, followed by some details around the financial before I sum up and, of course, Q&A. So Coor is a 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 to our customers. We have a clear ambition of becoming truly sustainable, and we are 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. And looking at Coor, Sweden is our largest country with 50% of total turnover. Norway and Denmark are both slightly above 20% and Finland 7%. The split by contract type has been stable over the years, with approximately 60% IFM contracts and 40% single-service contracts. And looking at our turnover by service line, cleaning is the largest service line with 39%. Property is the second with 31%. Workplace includes several services like reception, conference service and office supplies. And together, that adds up to 18% and Food and Beverage is now at 7%. And our top 3 customer segments are public customers by 27%, manufacturing by 23% and oil and gas by 17%. So all in all, we have a well-balanced portfolio. And after a number of quarters with negative organic growth driven by negative impact of COVID-19, we are now very happy to see a strong organic growth in the second quarter, and all countries show positive organic growth. And in total, the organic growth in Q2 is 8%. So going into our financial figures. We are pleased to present a second quarter with strong organic growth of 8% and historical high earnings level and continued strong cash flow. Acquired growth is 1%, and that is fully related to the acquisition of R&K Service in Norway. The EBITA margin is at impressive 6.8% compared to 6.2% last year with all countries improving margins versus last Q2. Cash conversion is an LTM number, and it continues to be strong at 94%. And that is well in line with the target of being above 90%. Leverage is also an LTM number with 1.7. We are below Q2 last year and well in line with our target of staying below 3. And from an LTM perspective, organic growth is still negative by minus 4%, driven by COVID-19. The acquired growth in the LTM period is 1% and LTM EBITA margin is strong at 6.3%. And as you know from our Q1 reporting, 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, up by 2 units versus the year before and now in line with our 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 that is well in line with our targets. The total recorded injury frequency is an LTM number, and the level is 9.1 in the second 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 up this KPI. Since 2016, we have reduced the injuries by more than half. 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 improvement. And we have focused for several years on improving the balance between female and male managers. And today, we are very proud of the fact that we have a very good balance of 50-50. As of this report, we will start reporting on environmental KPIs on a quarterly basis, and we start with Scope 1 according to the greenhouse gas protocol. This refers to CO2 emission from our vehicle fleet in relation to our total net sales. In absolute numbers, the CO2 emission have been stable over the last years, but with lost volumes in food and beverage, a service line with low levels of vehicles. We see that the relative measurement has moved slightly in the wrong direction. And to secure that we start moving in the right direction, Coor is taking the decision in Q2 to start the electrification of our vehicle fleet. So we will keep developing our external KPIs from an environmental perspective and adding both Scope 2 and Scope 3 going forward. So over to our business and market update. Looking at some of the highlights from Q2, we see that we have some important wins, especially the IFM contract with DSB in Denmark, a security contract with Borealis in Sweden and a property contract with Pilke in Finland. We have also won a very important IFM prolongation with Equinor in Norway on the production site as well as the prolonged property contract with Attendo in Finland. So within the area of innovation, I would like to highlight the updated version of SmartDrone. With SmartDrone, we can provide advanced aerial scanning combined with demographic analyzers. The drone has been -- can be used to discover water damages, energy leakages and other types of maintenance needs in an early stage. The SmartDrone also allows for more efficient, accurate and safer inspections and planning for maintenance of roofs, surface and grounds. And the sales pipeline is still very strong across the Nordics, both in IFM and single services. And we continue to have a high activity in our M&A dialogue. In the quarter, we have decided to expand our consultancy business within strategic advisory services across the Nordics. We experienced a strong demand from all kind of customers, how to create the happiest, healthiest and most prosperous workplace environment. We have designed a 360 resonance assessment for the workplace, supporting the customers to create a safe and attractive way back to work, but also enable our customers to rethink and design their future workplaces. And we believe the workplace will still be central, but there will be a growing need for collaboration, innovation and social life at work with well-being and commitment in focus. And the demand for digital and technological solutions has increased previous years and will continue to increase. And when making the workplace more attractive, the service level also tends to increase. So with that, I will hand over to you, Klas.

Thank you very much, AnnaCarin. And if we then continue by looking at our P&L statement, we see that the net sales for the quarter is somewhat above SEK 2.4 billion. That means that we are up approximately SEK 200 million versus Q2 last year, and that equals the total growth of 8%. And as AnnaCarin mentioned, the organic part is also 8%. Acquired growth is 1%, and then we have a small negative FX effect of minus 1%, mainly related to the Danish krona. EBITA is at SEK 167 million compared to the SEK 141 million in Q2 last year. And the EBITA level of SEK 167 million is an all-time high level for an individual quarter at Coor, and that translates to an EBITA improvement of around 19%. And that gives us this very, very strong EBITA margin of 6.8% in the quarter. Net income in the quarter was SEK 81 million. And the adjusted net income when adding back the amortization, that amounts to SEK 125 million. On the LTM numbers, we see that net sales is approximately SEK 9.6 billion. And as AnnaCarin mentioned, the organic growth in the LTM period is minus 4%; acquired growth, plus 1%; and the FX effect for the LTM period is minus 2%. And the LTM EBITA margin is 6.3%. And in absolute numbers, we're very close to SEK 600 million with the SEK 599 million in EBITA. And as you've heard, we have a very strong quarter, both from the growth perspective and the profitability perspective. We're very happy to see that all countries show positive organic growth, with the highest levels being delivered from Norway with 19% and then Denmark with 10%. In Norway, we see a very strong contribution from variable volumes, and those are mainly related to ongoing maintenance stoppages at the Equinor production plans, but there is also continued high demand for cleaning in Norway. In Denmark, we do see positive effects from the new contract with PostNord. That started already in Q1 for Denmark while the deliveries in Sweden, Norway and Finland started on July 1. And in addition, we continue to see high demand for cleaning also in Denmark, and we have also started to see some positive effects in Denmark around food and beverage. As the Danish society has now opened up more and more during Q2, people have started to return to the office. And they've also started to return to our canteens, which is very nice to see. From a profitability perspective, all countries have improved their margins in the quarter, most notable in Sweden and Norway. The solid cost control and efficiency work is evident across all the countries. And like in the previous quarters, we still have a positive volume mix effect. And we have also been able to perform a large share of the additional variable volumes with our own personnel, and that has also improved the margin levels. So there are many things across the organization that contributes to this very strong quarter. And that's what you get when you have many, many contracts that are all doing a little bit better than the year before. So that adds up to quite large numbers. So we're very pleased with that performance. Looking then at the contract portfolio changes for the first half of 2021. We see that we have a positive net effect of close to SEK 220 million. Three contracts have been finalized during this period with a total value of around SEK 80 million, but we have added new contract wins to a value of close to SEK 300 million, where PostNord, DSB and Borealis security are the largest ones. And on the right-hand side, you can find a new graph illustrating the customer concentration. This information has been included on a yearly basis in the annual report, but we will, from now on, start sharing that together with the portfolio development twice a year. And here, you can see that the top 10 customers accounts for approximately 45% of the total net sales, customer number 11 to 25 for an additional 17% while the remaining parts then accounts for around 38%. Moving on with the cash flow. We started off with an ingoing cash balance of SEK 203 million. Operations have contributed with SEK 722 million, strong performance. The financing flows that reflects interest loans and leasing, that adds up to minus SEK 551 million. And then the largest part of that is related to us reducing our debt level by lowering the utilization of the RCF financing. Taxes paid, minus SEK 64 million and cash out from M&A is also minus SEK 64 million, and that's fully related to the acquisition of R&K in Norway that we did in Q1. Dividend paid in May was SEK 190 million, and that relates to the ordinary dividend of SEK 2 per share. In October, there will be a second dividend payment as the extraordinary dividend of SEK 2.4 per share will be distributed to the shareholders. And this takes us to an outgoing cash balance of SEK 57 million. Finally, just a few words related to the balance sheet and our cash conversion. Cash conversion, well in line with the targeted level of being above 90%. We end up with 94% for the LTM period, with a continued low CapEx and a slight improvement on working capital. We don't see any negative indication around customer payments either. So that looks good as well. On the total level, the net working capital is negative by SEK 708 million or minus 7.4% of net sales. Net debt at SEK 1.4 billion and leverage at 1.7%. So with that, I'll hand it over to you AnnaCarin again.

Yes. Thank you, Klas. And we will shortly go into a Q&A session. But before that, I would like to sum up our second quarter. It's great to see that we are showing a strong organic growth in the quarter and historically high earnings levels. All countries are contributing both to the positive organic growth and margin improvement. And I really would like to thank all my colleagues at Coor for an amazing work during the second quarter. So with that, we will open up for questions.

[Operator Instructions] Our first question is from Erik Paulsson of Nordea.

Yes. AnnaCarin and Klas, I have 3 questions. So I'll start with the first one regarding your very good margin in the quarter. And obviously, you alluded to here that you have a target over time to be at 5.5%. But at the same time, we're seeing a gradual volume upticks in variable volumes, et cetera. And I guess, also that maybe cleaning service will come down a bit given also that we see a good mix in this. And how will this play out now in terms of your margin for the coming quarters and for like '21 in total?

Well, you're absolutely right, Erik, that we do have many things that are very positive in the quarter. And margin level of 6.8% is not something that we see as something that we will keep over time. We still think that the targeted level of being around 5.5% is valid over time. As we get more and more variable volumes back and also some volumes where we use subcontractors, that will push the margin down a little bit. We also know that the margins on food and beverage as a whole is slightly lower than other margins. For example, the high margins that we have had on cleaning. So when those volumes return, that would also put some pressure on the margin level. And you're also right around the high profitability in cleaning. That's probably not going to last forever at least. How long? It's very difficult to say. We'll see. I mean, we definitely hope that we will see a return to a more normal situation during the fall, but it's very difficult to say how long this will continue.

All right. And the second question is regarding what you presented here on the customer offering regarding advisory services, et cetera, when societies and companies now start opening up for more office work, et cetera. What's the underlying, so to say, business model for this? And how will you actually gain money from it, so to say? How will it work?

The advisory part of our offering is not something that will make a huge dent when it comes to top line and things like that. We do charge the services to the customers, but it's fairly small numbers in comparison. But it's a very important service in order to both be attractive to win new contracts, but also to retain existing customers. So it's both about stickiness and attractiveness rather than bringing in a large share of new volumes.

Okay. And then finally, on M&A. And as you, AnnaCarin, alluded to in the forward in your CEO comment in the report, you seem to be -- you want to push more for M&A going forward and you have been saying that before, but we haven't really seen that much excluding the R&K acquisition here recently. What can we expect from you from the coming quarters?

Yes. As we have said before, organic growth is our #1 priority at Coor, of course, but we do have ambitions for our M&A as well. And there are a lot of high activity in that area for the moment. We can see that from incoming call as well as our more proactive things that we are doing within Coor. So yes, it is an important part for us, and we are working with that a lot. But also, we have had 2020 behind us with low activities in M&As. But now I think we can see that it's starting to be more active, and we did 1 acquisition during winter of R&K Service in Norway.

And as we have also said in the past, I mean, we're very picky when it comes to M&A. We only want to buy well-managed companies. So I mean, there are, of course, companies out there that you could buy, but we are picky when it comes to potential acquisitions.

Our next question is from Robin Nyberg of Carnegie.

AnnaCarin and Klas, Robin here from Carnegie. Two questions. First, going back to the profitability you partly answered already. But of course, margins were very good now in Q2, and now it seems that sales is growing organically again, and you are likely to start investing more than in the previous quarters. So should we expect margins to come down to a more normal level already in the second half of this year?

Well, Robin, that we will not give any guidance around the coming quarters or the in-years effect. But historically, when we have had higher growth level that has also been something that has pushed margins down a little bit, we still think that we can keep developing the EBITA in absolute numbers, but the margins can go up and down a little between the quarters.

Okay. Fair enough. Then you mentioned that the pipeline for new contracts is good. Could you say something about the total volume potential for new contracts that could come to the market still during this year?

As we have mentioned before, we have a very strong pipeline with a lot of potentials in the pipeline. And we saw from the beginning of this year that the pipeline was a bit more active than it was before and last year in 2020. So there are a lot of movements in the pipeline for the moment. And we can see cases both in public cases as well as from the private sector. And we can also see IFM contracts in the pipeline as well as single service in the pipeline and also a mix between Virgin contract as well, the first time outsourcing contracts for IFM.

There are some sizable contracts in the pipeline right now. And I think what you already know since its public information is, for example, in Denmark, a large potential contract with -- beginning to Olson. That hopefully will be decided on late in 2021. And there are also some other very large cases.

Our next question is from Karl-Johan Bonnevier of DNB Markets.

First of all, congratulations to a very solid quarterly report. Just to come back to Erik's question a little again on how you currently stand in the different service areas when -- if you compare it to maybe normal market pre-pandemic or something. If you could just give us, say, some sort of indication how you see, say, where is food and beverage now compared to what it was in a normal market before, where is property services, cleaning services and so on?

Sure. I mean if we start with the food and beverage, that, today, only accounts for 7% of the total turnover. And pre-COVID, which means full year 2019, that was around 13% of the total turnover. Property today is just over 30%, 31% to be very precise and that's approximately the same share of the total volumes as we had in 2019. But then you know that the absolute number has been decreased. Cleaning is the service line that has really increased its share from 31% prior to COVID up to the 39% that we see now as of Q2 LTM. So it's an improvement both in relative terms, but also in absolute numbers. And in absolute numbers, that's SEK 0.5 billion approximately in cleaning volumes increase.

And would you say that then turning that reasoning around that there is still a doubling potential, so to say, in volumes for you in food and beverage compared to where you stand now and how it used to be, say, in a normal environment?

I mean there is definitely potential to regain volumes within food and beverage. I'm happy to see that we saw some signs of that in Denmark already in Q2. I haven't seen it yet in Sweden and Norway, at least not to that extent. So we do think that there is a potential. Whether that will return to the exact same level as before, hard to say, but there is definitely a potential.

And similarly, when you look at the normalization between base and variable volumes, good to hear that you are getting variable volumes back in there again. But I guess, compared to normal market, you must be still quite low to where you used to be?

Yes, it is lower than it used to be. You're right.

And if you could put a number to it or some index indication or?

I mean, prior to COVID, we said that around 25% to 30% of our total sales were variable and the remaining part fixed in terms of subscriptions. The subscription levels have been very stable during the pandemic. So basically, the volumes that we have lost are within variable volumes.

And compared to normal markets, there should then be, say, 15% to 20% upside or how should we see it?

There is an upside. How big and how fast, difficult to say. So we'll see during the fall and how quickly things returns.

Excellent. Excellent. On that pie chart you showed us, the customer concentration. Is there a big number of contracts up for renewal in the -- among your top 25 customers, so to say, for the rest of this year and 2022?

Not a big number. I mean the 2 largest -- the largest parts of that renegotiation was related to Equinor, and that we got the prolongation when it comes to the Equinor production sites. Then, of course, there is always a number of contracts that will be up for renegotiation. We should, on average, renegotiate some SEK 2 billion per year, almost. There are a few, but nothing of the size of the Equinor production side.

So when you look at -- you can argue that your own renewal pipeline is basically derisked now as it looks for the, say, the next 12 months or so?

Yes. I mean the Equinor production side wasn't a very important prolongation that derisk the portfolio.

Excellent. And when you look at the part of the Equinor contract that you now lost in Norway, how do you see yourself handling and, say, neutralizing the effect of getting out of that, so to say, on the profit and loss? Is there big closing down costs to come? Or how should we see that?

We mentioned that during even our first -- the first quarter's report, and we have a lot of activity within our Norwegian organization to try to adapt to a new situation in Norway. So I would like to say that we have high speed in that area. And we also have still very good dialogue with Equinor, of course, and we still have received a lot of project volumes from them for the office side things that we will be doing before we will hand over the contract.

In terms of closing down costs, we don't expect that to be a huge number. We do expect quite a few of the people currently employed by us will be employed by the new service provider as of November 1. So that shouldn't drive any major closing down cost at least.

[Operator Instructions] There are no further questions at this time, so I'll hand back over to our speakers.

Thank you. And thank you for listening to our presentation, and we hope that you will have a warm and wonderful summer.