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

Ladies and gentlemen, welcome to the Coor Service Management Q4 Report 2023 Call. [Operator Instructions]. Today, I am pleased to present CEO and President, AnnaCarin Grandin; and CFO and IR Director, Andreas Engdahl. Please go ahead.

Welcome, and thank you for listening in to Coor's Q4 report. Before presenting the report, I will give a short introduction of Coor for those of you who not yet know Coor. We are the leading facility management provider in the Nordics and offer our customers a broad range of services. We future-proof our company by drive and steer Coor from a triple bottom line perspective, meaning that we are taking a business, a social and an environmental responsibility. And from a business perspective, we have a clear ambition to have a stable and solid financial development with high customer satisfaction. And from a social perspective, we have a clear ambition to attract the best talents in the market as well as support and develop our employees. And I'm very proud of leading a company where diversity and inclusion makes a difference, where we believe diversity creates an even more successful company. And we have a clear ambition to improve the environment. Our environmental targets are approved by the Science Based Targets initiative, and that means that our environmental targets are in line with the Paris Agreement to limit the global warming increase to 1.5 degrees Celsius. And with our knowledge and competence, we also support our customers to reach their environmental ambition. So moving over to our Q4 report. I will start by presenting key highlights in the quarter, followed by our triple bottom line results. I will then hand over to Andreas to present some more details around financial performance before we sum up and have a Q&A. So let's start with the highlights in the quarter. We continue to see high business activity in the last quarter of 2023. In Sweden, our new agreement was signed with OKG at a nuclear power plant in Oskarshamn for food and beverage services. New agreements were also signed with Locum for delivery of property service to several hospitals in the southern part of Stockholm and Södertälje. The contract extends for up to 8 years, including extension options. And in Denmark, we have prolonged the IFM contract with MAN. The cleaning contract with MCH has also been prolonged, a contract that we have had for 17 years. And the IFM contract with Topsoe has been extended with additional services, and a 2-year option has also been exercised. And after intense integration work during the fourth quarter, we started the new and large IFM contract with Swedbank in December. And I am proud to see all the commitment from my colleagues to start up that contract. And the integration of the acquired Swedish cleaning company Skaraborgs Städ is proceeding as planned and is adding value as expected. We expect the integration to be finalized during spring. And in the Q3 report, I announced an action program to accelerate the company's progress towards its long-term margin target. The implementation of the program is proceeding according to plan and is expected to generate an anticipated profitability improvement in 2024. And Coor is growing and developing with a strong Nordic platform. But to continue the development at a high pace and take advantage of business opportunities, changes are being made to the executive management team. Stine Solheim will take up the position as the President of the Norwegian operations during the second quarter. And in Sweden, an external interim solution will be appointed until a permanent new President is in place, as Magnus Wikström will leave his position in mid-February. And finally, a market update. We continue to see a solid pipeline of medium- and small-sized contracts in all segments. There are also a few larger contracts in the process. So overall, we continue to see a strong growth opportunities in the Nordic market. So we move over to our results in the business dimension and some of the key financial metrics in Q4. Organic growth is 3% in the quarter. The growth results from new, small and midsized contracts as well as high variable volumes. Acquired growth is 3% in the quarter, solely related to the Sweden with the recent acquisition of the Skaraborgs Städ. The EBITA margin for Q4 is 5.1%. Our full year margin ended at 4.9%, which is below our margin target of around 5.5%. And our intention is to accelerate towards margin targets. Cash conversion is an LTM number and ended at 86%, slightly below our target. Leverage is also an LTM number and 2.5x. That is in line with our target to stay below 3x. And our ambition is to reduce our leverage somewhat during 2024. And for 2023, the Board of Directors proposes a dividend of SEK 3 per share, of which SEK 2.4 per share as ordinary dividend paid out in May and SEK 0.6 per share comprises an extraordinary dividend paid out in October. So moving on with our performance in social and environmental responsibility. We continue to see a steady improvement in our injury frequency. TRIF for 2023 reached 5.5, and that is an all-time low for Coor, still away towards our target of 3.5, but with safety in focus, we continue to see improvements every quarter. On the environmental KPIs, we see a positive development. On Scope 1, CO2 emissions from our vehicle fleet, we still have an increase compared to baseline from 2018 in absolute numbers but a decrease compared to previous quarters as well as a significant decrease compared to the same quarter last year, even if we, in 2023, have added 180 vehicles from the acquisition of Skaraborgs Städ. All countries work actively with increasing their share of electric vehicles, a more effective fleet management and to use HVO fuel instead of diesel where it's possible, all together to turn the trend and to reduce CO2 emissions in absolute numbers. And for Scope 3 and Science Based Target-aligned suppliers, we continue to make great progress. Previous quarter, we presented 12%, and we are now at 18%. We continue to push our suppliers to align their targets with Science-Based Target and also actively steer our spend towards the brands that -- who are approved. So with that, I hand over to Andreas to continue with the details on the financials.

Thank you, AnnaCarin. Coor's total turnover of SEK 12.4 billion can be viewed in different dimensions. From a contract-type perspective, we see that the split continues to be stable, with IFM contracts just under 60% and single service contracts just over 40%. Slicing the turnover by service line, we see only small variations compared to previous quarters, and cleaning continues to be our largest service line, with 40% of net sales. And on our customer segments, the split remains diversified. As you heard from AnnaCarin, we continue to grow. Organic growth for the quarter was 3%, and that is despite the ended contract with Ericsson having full impact in the quarter. Acquired growth adds another 3%. So net sales is up almost SEK 200 million versus Q4 last year, and that takes us to a quarterly net sales of close to SEK 3.3 billion. Adjusted EBITA amounted to SEK 166 million, which gives us an EBITA margin in the quarter of 5.1%. IACs in the quarter amounted to SEK 57 million. The quarter includes cost of around SEK 40 million related to the action program announced in the Q3 report. There has also been high activity for integration of acquisitions and start-up of new organic contracts, primarily the large IFM contract with Swedbank. Financial net increased in the quarter and that is driven by higher liabilities to credit institutions and a higher interest rate compared to last year. Net income is SEK 30 million, and adjusted net income when adding back amortization amounts to SEK 53 million. On the full year numbers, we see that net sales is slightly above SEK 12.4 billion. Full year organic growth is 2%; acquired, 2%; and FX, 1%. The full year EBITA level is SEK 606 million, which gives us an EBITA margin of 4.9%. Adjusted net income for the full year is SEK 285 million. Looking at Q4 country by country, starting with Sweden. Organic growth flat in the quarter, where new contracts and high variable volume in property, conference and food and beverage compensate for the lost contract with Ericsson. Adjusted EBITA are more or less in line with last year but with lower margins, 8.8% versus 9.4% in Q4 last year. EBITA was positively impacted by newly started contracts and the acquisition of Skaraborgs Städ and negatively impacted by the ended contract with Ericsson. This ladder effect is still somewhat amplified by lost synergies with other contracts, which the Swedish organization is gradually managing. Furthermore, margins in the quarter were negatively impacted by cost for high sick leaves. In Denmark, organic growth was 1%. We have high variable volume and indexations, partly offset by a few smaller ended contracts. Adjusted EBITA for the quarter increased compared to last year, and adjusted EBITA margin was 5.4% versus 4.1% last year. The strong EBITA margin was driven by positive effects of indexation with some retroactive effects as well as the effects from the adaptation of the organization that was implemented during the second quarter last year. In Norway, organic growth in the quarter was 15% from several new midsized contracts, such as Drammen Municipality, Studentsamskipnaden in Oslo and IKEA. Adjusted EBITA was in line with last year, and adjusted EBITA margin, 4% versus 4.5% last year. The decrease in margin was driven by newly started contracts with lower initial margins. Organic growth in Finland was 4% from increased variable volume and a few smaller new contracts. They were partly offset by a couple of smaller loss-making contracts in the northern part of Finland that was terminated earlier last year. Adjusted EBITA increased in the quarter, and adjusted EBITA margin was 1.2% versus 0.2% last year. The increase in margin comes from efficiency actions as well as the terminated loss-making contracts in Northern Finland that had a negative impact on profitability in Q4 last year. Looking at the contract portfolio development. We saw a positive net change in the first half year of 2023 of SEK 165 million presented in our Q2 report. In the second half, we have 30 new contracts awarded amounting to SEK 430 million, with Swedbank being the largest one. We have 3 contracts ended amounting to SEK 510 million, with Ericsson being the largest one. That takes the full year net change to a positive SEK 85 million. If we add the acquired portfolio of Skaraborgs Städ to that, we end up with a total net change for the year of SEK 485 million. Moving over to contract concentration and maturity. On customer concentration, we see 38% of total turnover coming from the 10 largest contracts, somewhat lower than the approximately 45% we had a couple of years back. We will, of course, always strive to win and retain the really large contracts, but we're also happy to -- when adding several new midsized contracts and, thereby, reducing customer concentration. With the acquisitions we have made in the past years, we have also added volume in the small contracts segment. That also reduces customer concentration. And on maturity for large contracts, that is, contracts with an annual turnover above SEK 100 million, we see that 9% of Coor's total turnover is up for renewal in 2024 and that small- and medium-sized contracts represent just below 60% of Coor. Moving on to cash flow. We see that our key metric, LTM cash conversion, ended at 86% for the full year, slightly below our target of staying above 90%. With Q4 ending on a Sunday, we had somewhat higher past due receivables compared to normal. They were, however, all paid early January, and we see no general change in payment patterns from our customers. On the LTM cash flow, the M&A item is related to finalizing the acquisition of Skaraborgs Städ in the second quarter last year. And on the balance sheet. Net working capital as a percent of net sales is stable compared to historical numbers and, for the full year, at negative 8.5%. Leverage is at 2.5x, a slight increase compared to previous quarter, driven by paying out the extraordinary dividend in October. And with that, I hand it back over to you AnnaCarin.

Well, thank you, Andreas. So before we go into Q&A, I would like to summarize our last quarter of 2023. We have high business activity in the quarter with both new contract wins and several prolongations. There has also been high activity with integration of acquired business as well as startup of new organic contracts. We see continued growth opportunities in the Nordic market from a solid pipeline of midsized and small contracts and a visibility of some large contracts. And we continue to stay committed to deliver on our financial targets. So with full year profitability below our ambitions, we have initiated our action program to accelerate progress towards our margin target of 5.5%. And we see that program proceeding according to plan in the fourth quarter. And dividend is our capital allocation priority. And for 2023, the Board of Directors proposed a total dividend of SEK 3 per share. And finally, I would like to extend my warm thanks to my colleagues. With joint forces, we are building a truly sustainable and successful company. So with that, we open up for questions.

[Operator Instructions] Our first question comes from the line of Mads Andersen at DNB Markets.

It's Mads Andersen from DNB Markets, so just standing in for Karl-Johan this morning. So AnnaCarin, you mentioned the RFPs, I guess, the pipeline looking healthy and strong. I was wondering if you could add some detail maybe on sort of the -- maybe not the small and medium ones, but the larger ones that you talked about? I mean, first of all, is it sort of first-time outsourcing contracts or is it essentially sort of existing contracts coming up for grabs from competitors? But also maybe if you can give an idea of the potential size of these, I mean, is it sort of Ericsson-style size or is it small or slightly larger? And then I guess maybe on that, if you, I guess, in these RFPs, if you have an idea of the time line of when these contracts could potentially be awarded or you would have a conclusion? That will be my first question.

Thank you, Mads. I will try to help out. As I mentioned, we do see quite high business activity in the Nordic market. And when we look into the pipeline, we can see actually several cases quite large. And there is a mixture about -- of them. Some of them are first-time outsourcing contracts, and some of them are contracts that some of our colleagues in the industry is delivering today. So it's a mixture of that, I would like to say. And when it comes to size, I would like to say that there is no contract in the same size as Ericsson, but quite close actually. And the time line of those kind of contracts that, I would like to say -- if I take Swedbank as an example, I would like to say that we worked with that case in the process for about a year. So those kind of large contracts, often quite complex contracts, they take some while to materialize as well. So -- but we have several of them going on all the time. So we are -- we see quite positive for the future.

Okay. Got it. The reason why I'm asking is just that, I guess, both you and some of your peers have mentioned that the pipeline looks healthy but also that it's taking longer than it maybe has in the past. But I think, yes, that was good with some additional color. Maybe if I could just ask you on variable volumes, they look quite strong in Q4. And I guess maybe just a question is on the cyclicality of these volumes. I guess in the past, they tend to be relatively volatile. And obviously, there was the COVID volumes as well, which is, I guess, if it's not completely out then close at least. If we look at sort of the expectations for variable volumes in 2024, any sort of color that you can add on this, please?

I can try to give you some color on that. I think we have seen quite a high volume of the variable projects for quite in 2023. And we do see that the -- we see that they will continue at least in the beginning of Q1, absolutely. So I think we are also quite positive in that area as well. We see that the variable volume comes from property-related projects, and there is a lot of activities going on towards our customers. I think that is an effect from -- well, trying to find a good balance after COVID, I think some of them are, well, doing changes in their offices, for example, but we also have a lot of customers in the industry, and we know that in -- with some of our customers, there is a very high activity in their business. So quite a lot of property-related volumes. We also can see that after COVID, we can see that the volume in the restaurants is increasing as well. And of course, Q4, and that is also a quarter when you -- when we serve a lot of Christmas tables, you onboard as well.

Yes. Sorry, if I may just follow up on that. I mean if you just look at the Christmas period in itself, I mean, how is that year-on-year? I mean, if you have the numbers, do you have an idea if it was up like [indiscernible] in the quarter year-over-year? Or was it more muted? Because I guess the fear was that a lot of the companies or your customers would save on Christmas parties and that sort of thing.

I would like to say it's more or less actually the same. It was high activity in 2022 as well, but slightly higher in 2023.

Got it. I'm sorry, I'll -- 2 questions more, if that's okay. Just maybe on -- I'll try and be quick. On the country management changes that you're doing in Sweden. Maybe just, first of all, why and what are you sort of trying to achieve? Any color on that would be great. I'll just throw in the second question. Forgive me if I've missed this, but can you sort of give us an idea of what the sort of wage increase you're expecting? I think you said previously around 4% wage increase in '24. If you could help on that, but also if you could be a bit specific on the pricing impact on the top line in '24, please?

Absolutely. I start with the changes we are doing in executive management team. And well, Magnus Wikström, I know him very well. We have been working together for more than 20 years, and I am really impressed by his competence in this industry, and he has really been working with Sweden in a good way, taking Sweden through a COVID situation and doing that in a very good way. At the moment, we are continuing to grow. We are continuing to develop ourselves, and we work quite a lot to harmonize our underlying processes and using other kind of tools. And I know it's quite a challenging position in the company, of course. And me and Magnus, we have had a dialogue, and he has always had the best for Coor in his mind, and he has decided to resign and leave the company, and I have decided to switch with an external interim solution quite immediately and then looking for a permanent solution. So there's no drama in that one. Magnus will also support this process all the way. So this is no drama at all. And then I can go over to Andreas and, yes, hand over the wage.

Sure. The wage increases in '24, I mean, we don't have visibility on all of the union agreements yet, but the majority of them we have, and they will be set lower than last year. Last year were 4.5%. So we're looking at lower numbers in '24. What we also see on the indexations currently that the labor cost index are sort of reflecting last year's increases and are on that level as wage increases were last year. Then of course, gradually in '24 that they will decrease when '24 increases sort of affect indexes. But right now, they are around last year's wage increase.

[Operator Instructions] Our next question comes from the line of Oliver Uusitalo of Aktiespararna.

Congratulations on a good quarter. I have a couple of questions from my end. You reached 4.9% in margin for '23, and you said that -- and it's a bit below the target of 5.5%. With the action program in place, do you expect to reach the profitability target already in 2024? Or should we rather expect an increase towards the target? And also, how much remains to be done in terms of cost savings? And will the action program burden the P&L in the upcoming quarters?

Let's start with margins. I think you should expect margins to increase throughout the year. So we are aiming at delivering towards the target that -- I would say more the second half of the year than looking at the full year numbers. And the action program is progressing well. We have -- on the cost side, taking around SEK 40 million in Q4, and we don't expect any sort of material more cost to come here in the coming quarters.

I see, loud and clear. And also, the net debt came in at 2.5x EBITDA. That's up from last quarter. You said that dividend is high prioritized, which I, of course, understand. How do you view your financial position right now? And is reducing debt still a high-prioritized target?

I mean we would like to balance our debt, of course, but looking at the full year numbers, we -- the Board of Directors proposes a dividend of SEK 3 a share. That corresponds to our both adjusted net profit and free cash flow. We do have a stable capacity to generate cash flow. So we believe that is a level that we can support but, on the same time, actually, the leverage here in '24 with the profitability improvements that we are aiming for.

[Operator Instructions] We've had one further question come through. That's from the line of Raymond Ke at Nordea.

Okay. Great. And I apologize if I know these questions have already been asked. But I was wondering about the lower margins in Norway due to the 3 initial contracts there. It's been almost a year since you won them. When do you expect them to sort of reach normal levels of profitability?

We believe we will have them up and running here in the first half of '24.

Great. And regarding the Saab contract, I understand that it is a contract that's being renegotiated this year. Is that going to be sort of a full-on renegotiation where they invite all new parties or any news on that one?

I can comment on that. And that is actually an ongoing process, and it's an open RFP process as well. So we do not have an exclusive negotiation, but we are doing, what we always do, our absolute best to prolong that contract, and still in the process.

Got it. And regarding Sweden then, if the sick leave rate was sort of unchanged year-over-year, would that have moved the needle for the margin in Sweden? And if so, how much?

Sorry, can you state that question again?

Yes. So I understand that the sick leave rate was higher in Sweden, which sort of negatively impacted the margins there. If it was -- had it been unchanged, flat year-over-year, would that have moved the needle for the margin in Sweden, would the profitability have been at a higher rate? Or yes, if so, how much?

Yes, slightly. I mean their full year number is 8.9%. They would have been slightly above 9% with the enormous sick leave level.

And there are currently no further questions in the queue at this time. So I'll hand the floor back to our speakers for the closing comments.

Thank you for listening in, and I wish you all a continued good day.

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.