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

Ladies and gentlemen, welcome to the Coor Service Management Q1 Report for 2023. [Operator Instructions] Today, I'm pleased to present President and CEO, AnnaCarin Grandin and CFO and IR Director, Andreas Engdahl. Please go ahead.

Thank you, and welcome, and thank you for listening to our Q1 report at Coor. I will start by giving you a summary of the first quarter, including the market update and then continue to present our triple bottom line results. I will hand over to Andreas to present some more details around financial performance before we sum up and have a Q&A. As I said, I will start with some highlights in the first quarter. And there has been high business activity in Q1. In Denmark, we continue to allocate resources to start up a large contract with the Danish Building and Property Agency and start-up activities have also been a focus in Norway with the new contracts with Technopolis, Drammen Municipality, Studentsamskipnaden i Oslo and IKEA that we won in the end of last year. In Sweden, we won a new IFM contract with Alstom that we with high-speed started up in the first quarter with service deliveries to 8 different geographies. We have also won a few smaller contracts in Finland, such as [indiscernible] and Supercell. And in the quarter, we prolonged several important contracts in Sweden, such as the property contract with Vasakronan, the IFM contract with Danish Building, and the switchboard contract with Uppsala County Council. And just after we closed Q1 we announced an acquisition of Skaraborgs städ, an activities related to let acquisition has also, of course, involved both resources and focus throughout the first quarter, and I will present Skaraborgs städ later on in my presentation. In the quarter, we see effects from indexation and mitigating activities that reduces the impact from inflation compared to previous quarters. Inflation management still remains high on our agenda. And in the environmental area, we are focusing on the target of achieving net zero. In this quarter, core committees to reach net zero by 2040, that's 10 years earlier than the requirement from the science-based target initiative. The shift represents a significant challenge, but it is necessary for securing an environmentally responsible growth. In parallel with realigning operations to achieve net zero, we have introduced official third-party validation through the science-based target initiative. This ensures that our efforts are in line with what the scientific evidence set is necessary to reach the target. And we continue to see growth opportunities ahead from a strong pipeline across the Nordics in all business segments. The market outlook in the Nordics region is favorable with new potential contracts that will provide us with the opportunity to win both new first-time outsourcing contracts and on the market already existing contracts in both IFM and single services. Well, I briefly mentioned our latest acquisition, Skaraborgs städ on the previous slide. And before going through that acquisition a bit more, I would like to mention a few words on our M&A approach. We are always looking for value-adding acquisitions, but with a clear approach. Strategic fit to our operation is key. We continue to focus on the Nordics. We also continue to focus on our 2 largest service areas, cleaning and property services, that accounts for 70% of our total revenue. And on top of that, we believe that acquisition must bring some new value to core besides just volume. That could be a variety of values such as the new geography or increased density in a service area. And examples of that from the past is the acquisition of Norrlands Miljövård in 2019 that gave us density and increased coverage of cleaning services in the Northern part of Sweden. Another example is the acquisition of Centrumstäd last year, that gave us increased density in the southern part of Sweden. A reason to acquire a company could also be to strengthen our competence. A good example of that is the acquisition of Veolia in 2021 that brought some 250 highly skilled property technicians to Coor, and those have been hard to find in the market. While solid financials is also important, and we are only looking for well-managed companies. And we believe the effort is meant to take on and turnover is better spent on developing our own business. At Coor, all acquisitions are fully integrated. By doing that, we can realize synergies and utilize competencies across the organization in a much more efficient way. We also create opportunities for cross-selling services between Coor and the acquired companies. And to do that, it becomes important to find target we believe can be managed independent of the existing owner. Now we see many values with our acquisitions. But having said that, it is also important to say that organic growth is our #1 priority. As I mentioned, I would like to give you some more details on Skaraborgs städ. Skaraborgs städ has been in the business for more than 50 years with a strong presence in the Midwest Sweden. The acquisition brings density to some areas we already cover but also new geographies in Sweden. And Skaraborgs städ is a well-managed company run by 3 brothers and 800 engaged and motivated employees, delivering services to many interesting customers. Now we expect the transaction to be completed in the second quarter following the customary review by the Swedish Competition Authority. Now moving on to triple bottom line results for Q1, and starting with business sustainability and some of the key financial metrics in Q1. Organic growth is more or less flat in the quarter, and we continue to see large swings on country levels. More on that later on. Acquired growth is limited in the quarter fully related to Sweden, and the acquisition of Centrumstäd. The EBITA margin for Q1 is 5.1%, a small improvement from the previous quarter. In the first quarter, indexation and executed mitigating activities continued to reduce negative inflation impact that we saw of the summer last year. And compared to the COVID period, we continue to see effects of normalized volume mix as well as expected effects of starting at large contracts. Cash conversion is an LTM number, and it continues to be strong at 95%, and that's well in line with our target to stay above 90%. Leverage is also an LTM number with 1.9X. We are in line with our previous quarter and well in line with our target of staying below 3X. Then moving on with our performance in social and environmental sustainability. We see that we continue to improve our TRIF levels. As of Q1, TRIF is down to 7.0 compared to 8.1 last year. I'm happy to see a steady improvement, but there are 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. On the environmental KPIs, we continue to see a steady positive development in Scope 3 emissions from our food and beverage operations. The CO2 emissions are down compared to last year, and the share of supplies aligned to science-based target has increased from 4% last quarter to 5% in Q1. And we also see a small positive development on Scope 1 CO2 emissions from our vehicle fleet. An example of that is the -- of the green transition is the 250 electric vehicles ordered for the Swedish operation with delivery during the year. Nevertheless, we are not on track compared to our target. And this is partly due to the strong growth in our company, delivery time of electric vehicles and some challenges in the infrastructure. But we recognize that we need to do even more from an internal perspective. So with that, I will hand over to Andreas to continue with some details on the financials.

Thank you, AnnaCarin. Starting with a look at organic growth. As AnnaCarin mentioned, organic growth for Q1 was more or less flat. The past few quarters, we had low organic growth, driven by ending a couple of large contracts late 2021 and in the beginning of 2022 combined with project volumes related to large maintenance but in the Norwegian oil and gas industry that was completed in Q2 last year. Most of these negative effects are phased out from our comparable numbers towards summer this year. Looking at organic growth over a longer period of time, organic growth has been around 4% since our IPO in 2015. Coor's total turnover of SEK 11.8 billion can be viewed in different dimensions. From a contract time perspective, we see that the split continues to be stable with IFM contracts just under 60% and single service contract just over 40%. Slicing the turnover by service line, we see that we continue to see a normalization of the volume mix more similar to pre-COVID. Before COVID, food and beverage accounted for 13% of Coor. That reduced the 7% during the pandemic. And now in Q1, we are back at double-digit churn in net sales. Cleaning continues to be our largest service line with 38%, somewhat lower volumes from extra cleaning compared to the COVID period that are compensated in new contracts and its continued focus on quality from our customers. On customer segments, the split remains diversified. The trend from the past year with increasing share of public contracts and declining share within the energy sector, reflecting recent changes in our contract portfolio has now stabilized. All in all, we see a well-balanced portfolio in all 3 dimensions. On EBITA and margin, Q1 ended at SEK 152 million and 5.1% in margin, a slight margin improvement versus previous quarter. Past few quarters, we have seen a normalization of volume mix and increased use of resources that normalizes margins compared to the pandemic period. Large changes in the contract portfolio were both ending and starting up large contracts, also affects profitability. Looking at Q1 country by country, starting with Sweden, growth is driven by the contract with Volvo Group that was ended in May last year to a large extent compensated by new midsized contracts and a recovery of variable volumes. The normalization of volume mix and increased fuel and resources normalized margins in Sweden to solid 9.9% in Q1. We continue to see strong organic growth with 18% in Denmark. This is driven by starting up the contract with Danish Building and Property Agency. Start-up activities are still the main focus for the Danish organization combined with strengthening central functions to handle larger volumes. Margins in Q1 is in line with the previous quarter. In Norway, as we have described in the past couple of quarters, we had high project volumes in the oil and gas industry that was completed in the second quarter last year. This negative effect is partly offset by a recovery in variable volumes as well as starting up a new contract that was won late last year. Margins are lower compared to last year. That is an effect of lower volumes and scalability as well as startup costs to new contracts. In Finland, new contract wins and return on variable volumes cannot fully offset the ended Finnish part of the contract with ABB that was ended in April last year. Margins are lower from ending this large contract and also from a winter with heavy snowfall. Moving on to cash flow. We see that our key metric cash conversion remained stable at 95% for Q1, well in line with our target of staying above 90%. As always, there is a strong focus on cash flow in our organization, and we continue to see stable payment patterns from our customers. On the balance sheet, net working capital as a percent of net sales is stable at around negative 8%. The normalization of our volume mix has also normalized the balance sheet compared to the pandemic period where lower variable volumes also resulted in somewhat less working capital tied in ongoing work. Leverage ended at 1.9X. That is in line with previous quarter and well in line with the target of staying below 3X. With dividends being paid in our May, as well as finalizing the acquisition of Skaraborgs städ, one should expect a somewhat higher leverage compared to Q1 in the next couple of quarters. And with that, I hand it back over to you, AnnaCarin.

Thank you, Andreas. And before we go into Q&A, I would like to sum up Q1. Organic growth is more or less flat in the quarter, and we continue to see large swings on the country level. On margin, we continue to see expected effect of normalized volume mix and start-up of large contracts. We have a solid cash flow at 95% and a leverage of 1.9X, well in line with our financial targets. In the quarter, we have taken another important step in our sustainability journey by committing to reach net zero by 2040. And we have continued to focus on value-adding acquisitions and are now waiting for the review by Swedish Competition Authority before we complete the acquisition of Skaraborgs städ. In the end, I would like to extend my warm thanks to our customers for the confidence you have in us. As equal, big thanks to my colleagues. Together, we are contributing by building and developing a sustainable and successful company. And with that, we open up for questions.

[Operator Instructions] It appears that there are no questions at this time.

Okay. Then I would like to thank all of you who listened in to this call, and I hope that you stay safe and have a good Wednesday. Thank you.

Thank you very much. That does conclude our conference for today. Thank you all for your participation. You may now disconnect.