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

Ladies and gentlemen, welcome to the Coor Service Management Q2 Report for 2022. [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 good morning, and welcome to this presentation of the Q2 report for Coor. I will start with a brief presentation of Coor and then continue to present our triple bottom line results, followed by a business and market update. I will then hand over to Klas to present some more details around our financial performance in Q2 before we sum up and have a Q&A. . Coor is the Nordic market leader in integrated facility management. We provide our customers with a broad range of services through our customer-centric business model and a decentralized organization. We are building a truly sustainable company, and we are constantly taking new positive steps in that direction. To ensure this, we drive and steer Coor from a triple bottom line perspective, meaning that we are taking a business, social and environmental responsibility to future proof our company and making a positive impact in the society and for the environment. The last proof of this is that our environmental targets are now approved by the science-based target initiative. Coor's total turnover of SEK 11.3 billion LTM can be viewed in different dimensions. In the geographical perspective, Sweden is our largest country with 52% of total turnover. Norway and Denmark account for 21% each, and Finland at 6%. And from a contract type perspective, we see that the split continues to be stable around 60% IFM contracts and 40% single service contracts. And slicing the turnover by service line, we see that cleaning is the largest service line with 37%, property is the second with 31%, workplace includes several services like reception, conference services and office supplies and together that adds up to 18%. Food and beverage is now back to double digits, accounting for 10%. This means that we have started to see a normalization of the volume, meaning that it is more similar to pre-COVID, especially when excluding the large acquisitions. And our top 3 customer segments are public customers by 29%, manufacturing by 24%, and energy by 17%. So all in all, we see this as a well-balanced portfolio. And going into our business sustainability and the financial figures, we see another strong quarter from a growth perspective. Organic growth is 9% and acquired growth is 11%. The organic growth comes from Denmark and Sweden. And in Denmark, it is mainly related to the new contracts with DSP and the Danish Building and Property Agency. In Sweden, it is mainly related to the IFM contract with PostNord and the security contract with Borealis. In all countries, we see a recovery of variable volumes within property-related projects and a decline of variable volumes with COVID-related cleaning. In the quarter, we see, as I mentioned earlier, a recovery of food and beverage. Acquired growth is fully related to Sweden, and is driven by the acquisitions of Veolia Technical Management, Inspira and Centrumstäd. The EBITA margin for Q2 is 5.8%, which is somewhat lower than the last quarter's. This is driven by a normalization of the volume mix and the expected effects of starting up large contracts and integrate acquired companies. We pay high attention monitoring effects of inflation. In Q2, the negative effect of inflation is still limited. Cash conversion is an LTM number, and it continues to be strong at 97%, well in line with our target of staying above 90%. Leverage is also an LTM number. With 2.0, we are slightly above Q2 last year, but well in line with our target of staying below 3. And from an LTM perspective, both organic growth and acquired growth adds up to 8% each and the LTM EBITA margin is at 6.1%. Moving on with our social and environmental sustainability. We see that we continue to improve our TRIF levels. As of Q2, the number is down to 8.0 compared to 9.1 last year. Steady improvement, but still work to be done in order to reach the target being below 3.5. Gender balance continues to be stable at around 50-50. And we continue our efforts to reduce our CO2 footprint. We see positive development in Scope 2 and 3. While we are struggling a bit with the CO2 reductions related to our vehicle fleet. This is partly due to the strong growth and some challenges in infrastructure, but we also recognize that we need to do more from an internal perspective. However, with our environmental targets now approved by the science-based target initiative. We know that we, with high ambitions, are on the right track. So over to our business and market update. In Q2, we have made some important IFM contract prolongations with Stockholm Exergi, Olav Thon Gruppen and a large Danish technology company. We have also prolonged the Nordic IFM contract with ABB, excluding the Finnish part. From a new win perspective, we have several small and midsized contract wins, but no really large cases in the quarter. However, as you have seen from the growth figures, we have several large wins in the previous quarters that are now being integrated. With strong organic and acquired growth, we obviously have a very strong focus on integrations in both Denmark and Sweden. And its pipeline for new organic business continues to be solid, and we are actively looking at new M&A opportunities. An area we study closely is post-COVID development of workplaces. We have performed a survey among 800 decision-makers and 500 employees in the Nordics, and I would like to share some findings. A vast majority of companies still see that the physical office will play an instrumental role in the future. For instance, in order to sustain and build company culture. We also see strong employee expectation on the rise being put on employers, both regarding office improvements, services, but also work location flexibility. And looking ahead, we see 3 big themes that many companies now go after where Coor will be an important partner in terms of rethinking the offices. Building office attractiveness is becoming important as office presence will be dependent on employees volunteering heading to the office. Offices need to be bringing an individual value and experience out of the ordinary. Secondly, a focus on culture and community. We will see more community space and social features where employees come together around company values. Lastly, creating a new level of work experience that the homes cannot offer where we see an increased demand for workplace services. To summarize, Coor is well-positioned for the future and our combined service offering is a key ingredient for many of our customers to create an attractive and future proof of this. So with that, I'll let Klas continue with the details of the financials.

Thank you very much, AnnaCarin. And as you heard from AnnaCarin, the growth rate continues to be strong also in Q2. Net sales, if we look at the top line, is increasing by more than SEK 0.5 billion in the quarter compared to Q2 last year, and that takes the total net sales very close to the SEK 3 billion mark. In addition to the 9% organic growth and the 11% acquired growth that we just heard about, we have a small positive FX effect of around 2%. The adjusted EBITA amounted to SEK 172 million in the quarter, and that gives us an EBITA margin in the quarter of 5.8%. Net income, SEK 79 million and adjusted net income when you add back the amortization amounts to SEK 123 million. On the LTM numbers, we see that the net sales is close to SEK 11.3 billion. That is an all-time high level for Coor on an LTM period, and that's approximately SEK 1 billion above the pre-COVID level of SEK 10.3 billion in 2019. And organic growth from an LTM perspective is 8%, acquired growth also 8%, and the FX effects 1%. The adjusted EBITDA level for the LTM period is SEK 683 million, and that gives us the LTM margin of 6.1%. Adjusted net income for the LTM period is SEK 483 million. On the country-by-country view, we can see the strong organic growth that AnnaCarin mentioned in Denmark. Denmark is growing by 28% organically and Sweden, 11% organically. And in Sweden, we also see the high acquired growth. So in total, that impacts the Swedish numbers by 21%. That means that the 2 largest countries in Q2 is both growing with approximately 30% each. And this is, of course, something that requires a lot of focus, it requires time and resources, not only in the country organization, but also from a group perspective to secure this integration period. Norway continues to keep up fairly good in terms of top line, offsetting the end of this contract with Equinor through high project volumes in the oil and gas industry. This is something that we have seen for a number of quarters, but as I think we have mentioned before, we don't expect this to continue going forward, and we actually started to see a decrease in these project volumes during the second half of Q2. In Finland, the new wins and the return on variable volume cannot fully offset the ended Finnish part of the ABB contract. From an EBITA and margin perspective, Sweden continues to deliver a strong margin, but not at the very high level that we saw in Q2 last year. In Sweden, as well as the other countries, we now see the effects of what we have talked about in the previous calls, the normalization of the volume mix. And that normalization will put some pressure on the margins compared to the COVID period. For example, we see a higher share of F&B volumes now than we did during the pandemic, and we also see that the extra COVID cleaning that gave us quite positive effects during COVID are now more or less gone in all the countries. Looking into Norway, we, of course, have the negative impact of the lost Equinor office contract, also impacting Q2. Margins in Norway in Q2 is more or less in line with the Q1 figures from 2022 as well. Denmark is also down in terms of margins compared to last year. That is driven by the large integrations and the extra COVID cleaning that we had last year in the same period. But from a margin perspective, Denmark is actually up compared to Q1 this year. Finland continues to be challenging for us in terms of both resources and also the negative impact from the lost ABB contract. Looking then at the contract portfolio, we see that there is a negative net change in the first half year of 2022. This is mainly driven by the end of contract with AB Volvo and that accounts for approximately half of the SEK 561 million that you see in the graph. So excluding the AB Volvo part, the net change is more or less 0. Customer concentration looks very similar to what you have seen in the past. And if we look at the top 10 contracts, I think we got a question in the last call if there were any contracts that needed to be prolonged in the near future. We said then that we were very actively working with Volvo Cars, and we're still working with that one, but we are now in the final exclusive stage of that process. So we are very optimistic that, that can be finalized quite soon. Going into the cash flow. And from an LTM perspective, we see that we had an ingoing cash balance of SEK 57 million. Operations have continued to contribute in a very strong way with SEK 835 million. Financing flows that reflects the interest loans and leasing, adds up to SEK 732 million. Taxes paid is minus SEK 88 million and cash out from M&A is SEK 620 million. The dividend you see here is the ordinary dividend that we paid out in May this year, but also the extraordinary dividend from October last year, and that amounts to SEK 455 million in total. And that gives us an outgoing cash balance that equals SEK 462 million. Some details then from the balance sheet and the cash conversion. Cash conversion, as AnnaCarin mentioned, continues to be very strong at 97%. We don't see any changes in payment patterns from customers, so it's very stable. Net working capital is negative by SEK 783 million or minus 7% of net sales. And that means that we are also now seeing a more normal level of the negative net working capital. It has been even more negative throughout the pandemic, but the minus 7% is more normal and something that we expect to keep going forward. Net debt, approximately SEK 1.8 billion and leverage, as you have heard, at SEK 2.0 billion. So with that, AnnaCarin, I'll let you summarize Q2.

Thank you, Klas. And before we go into Q&A, I would like to sum up our second quarter. Q2 has been characterized by strong growth and strong cash flow in combination with normalized profitability. This is something we have talked about and expected and it's now materializing. Given our strong financial position, we see continued opportunities to carry out value-adding acquisitions in the Nordic region. And I would like to extend my warm thanks to my colleagues at Coor who together have contributed to the strong performance. And with that, we open up for questions.

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

Congratulations to a solid performance, given all the moving things for you out there for the moment. One thing that's striking when I look at the slide you showed on the contract portfolio changes is that it seems like there is an increasing number of contracts that has both coming in and going out. Do you see a trend in the market for the moment that the customer retention is becoming more difficult after COVID or any changes to it that could explain that the gross number, so to say, are quite high?

No, not that we see a change in the market, KJ. I think what we see here is, as AnnaCarin commented, we have won several small and midsized contracts in the end of period, and we have also ended a few small contracts as well. But nothing that really changes the market dynamics and so on. Looking at the pipeline going forward, it's still solid. I mean, there are also large contracts to compete for going forward.

And I understand your comments on COVID-19 related volumes. When you look at, say, Q2 as a standalone quarter, do you see that basically is totally gone now in these numbers? .

Yes. I would say it's basically totally gone in terms of the extraordinary cleaning that we have talked about for a number of quarters that has provided us with the very positive effects and things like that. That is gone in all the countries, I would say.

And when you look at the variable volumes to take-up of that and how that is coming back, how close are we to say the normal pattern before COVID-19 with variable volumes and the impact of that in Q2?

I would say quite close, and we're not fully back in terms of a full return of variable volumes. But I think we have seen quite a big impact already now, meaning that we don't expect dramatic extra return on variable volumes going forward.

And finally, when you look at the ramping of these big contracts you are doing in Denmark, looking at profitability, seems to be going quite well. Is that the general feeling that you have had a good start up? .

I think that we're still at a very early stage, especially when you think about the Danish Building and Property Agencies. I think it's a bit too early to conclude that everything is perfect. I think we will see challenges, as we always do in integration periods and things like that. But I guess the jury is still out, but we're working very hard in the integrations.

Excellent. And Klas, good luck with your new challenges.

Thank you very much, Karl-Johan.

[Operator Instructions] There are currently no further questions. I'll hand the conference back to you, speakers.

Thank you. With us today, we have Andreas Engdahl. And as you may have read, Andreas is appointed as acting CFO from the 1st of August. There will be a solid handover between Klas and Andreas. And until Klas will leave during autumn for new assignments outside the company. And I just would like to let Andreas present himself shortly.

Thank you. Hello, everyone. I'm actually a long time at Coor, has been with the company for 18 years, recently as Vice President of Group Finance. I'm very happy for the opportunity. I'm looking forward to get back after summer to take on this role and to secure a good handover from Klas.

Thank you, Andreas. I'm very happy to have you by my side. And thank you all for listening in to this call, and we wish you a wonderful summer.