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

Hello, and welcome to the Coor Service Management Q1 Report 2024. [Operator Instructions] Please note that this call is being recorded. Today, I'm pleased to present AnnaCarin Grandin and Andreas Engdahl. Please begin your meeting.

Welcome, and thank you for listening to Coor's Q1 Report. Before presenting the report, I will give a short introduction of 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 essential and environmental responsibility. And from a business perspective, we have a clear ambition to have a stable and solid financial development with high customer satisfaction. From a social perspective, we have a clear ambition to attract the best talent 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 target initiative, which 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 reduce their environmental footprint. And one way to get to know Coor is to view the company from different perspectives based on our total turnover of SEK 12.6 billion. And from a contract perspective, we see that the split continues to be stable with the IFM contracts just under 60% and single service contracts just over 40%. And slicing the turnover by service line, we see only small variations compared to previous quarters as cleaning continues to be our largest service line with 40% of net sales. And on our customer segment perspective, the split remains diversified. So let's move over to our Q1 report starting with some key highlights in the quarter. We continue to see high business activity in the first quarter of 2024. We see a solid pipeline of medium and small size contracts in all segments and also a few larger contracts in process. So overall, we see strong growth opportunities in the Nordic market. And we are proud to have extended a number of key contracts at the start of the year. The IFM contract with ICA has been extended with 5 years. Coor is continuing to deliver services to 20 facilities, both the warehouses and offices in a new contract focusing on partnerships. And the IFM contract with SAAB has also been extended by 5 years. The new contract period will include new services and facilities, while property management services will be conducted by another supplier. Coor also secured a 3-year extension with Heimstaden, comprising services for 120 properties in Stockholm and Malmo. In Denmark, the IFM contract with Topsoe has been prolonged and extended with additional services. And the contract with VTT in Finland has also been extended. And during the quarter, Coor secured several new contracts, including an IFM contract with Sweco for the delivery of workplace-related services to call all their offices in Sweden, and that contract is starting in May, a contract with high focus on service experience and sustainability. In Denmark, we secured a new contract with Clever for the joint development of sustainable cafe concept for the charging station and the first cafe will open up in August. And in Norway, we have signed a new IFM contract with Anvil in Stavanger. And after intense integration work during the fourth quarter, we started a new large IFM contract with Swedbank in mid-December. The start-up phase has progressed good, and we are well up and running with that contract during Q1. And the integration of the acquired Swedish cleaning company, Skaraborgs Städ, is proceeding as planned and is adding value as expected. And we expect the integration to be finalized now during spring. And in the Q3 report last year, we 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 the anticipated profitability improvement in 2024. And the successful example of harmonization of our processes is the implementation of group common HR processes with a common tool in all countries that will set foundation for enhanced and more efficient administration with high quality. So we move over to our triple bottom line results for Q1 and starting with the business dimension. Organic growth is 2% in the quarter, the growth results from the new contracts as well as higher variable volumes that more than offset ended contracts. Acquired growth is 3% in the quarter, fully related to Sweden with the recent acquisition of Skaraborgs Städ. And the EBITA margin for Q1 is 5.1%. That is in line with previous year, but still 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 90%. Leverage is also an LTM number, 2.4x, that is in line with our target to stay below 3x, but our ambition is to reduce our leverage somewhat during this year 2024. Moving on with our performance in social and environmental responsibility. In the third quarter, the group's TRIF amounted to 5.9, which is a significant improvement compared with the first quarter previous year, but somewhat weaker compared with full year 2023. And on the environmental KPIs, we see a positive development on Scope 1 CO2 emissions from our vehicle fleet that declined by 13% compared with the same period the previous year. We still have an increase compared to baseline from 2018 in absolute numbers, but all countries work actively with increasing their share of electric vehicles. They work with a more effective fleet management and use HVO fuel instead of diesel where it's possible, all to boost the trend and to continue to reduce CO2 emissions in absolute numbers. And for Scope 3 and science-based target aligned suppliers, we continue to make progress, and we are now at 19%. And we continue to push our suppliers to align their target -- their science-based target and also actively steer our spend towards the ones who are approved. So with that, I hand over to Andreas to continue with the details on the financials.

Thank you, AnnaCarin. As you heard from AnnaCarin, we continue to grow. Organic growth for the quarter was 2%, and that is despite the ended contract with Ericsson having full impact in the quarter. The acquired growth adds another 3%. The net sales is up almost SEK 150 million versus Q1 last year, and that takes us to quarterly net sales of close to SEK 3.1 billion. Adjusted EBITDA amounted to SEK 160 million, which gives us an EBITDA margin in the quarter of 5.1%. Financial net increased in the quarter, and that is driven by a higher interest rate compared to last year. Net income is SEK 62 million and adjusted net income when adding back amortization amounts to SEK 82 million. On the full year numbers, we see that net sales is close to SEK 12.6 billion. LTM organic growth is 3%, acquired 3% and FX 1%. The full year adjusted EBITDA level is SEK 613 million, which gives us an EBITDA margin of 4.9%. And adjusted net income for the full year is SEK 282 million. Looking at Q1 country by country, starting with Sweden. Organic growth of 3% in the quarter from new contracts and continued high variable volume in properties that more than compensate for the lost contract with Ericsson. Adjusted EBITA is above last year and margin 9.4% for the quarter. EBITA was positively impacted by newly started contracts, the acquisition of Skaraborgs Städ and effect from the action program. The ended contract with Ericsson has a negative effect in comparison with previous years and effect still somewhat amplified by lost synergies with other contracts, which the Swedish organization is gradually managing. In Denmark, organic growth was negative 4% from a couple of ended midsized public contracts. Adjusted EBITA for the quarter increased compared to last year, and adjusted EBITA margin was 4.9% versus 4.1% last year. The stronger EBITA margin was driven by the adaptation of the organization that was implemented during the second quarter last year. The quarter was also positively impacted by retroactive volume adjustments in one larger contract. In Norway, organic growth in the quarter was 8% from new midsize contracts such as Studentsamskipnaden in Oslo and IKEA. Adjusted EBITA slightly lower than last year and adjusted EBITA margin is 3.5%. EBITA and margin were negatively impacted by high costs in the offshore operations where bad weather conditions led to delay in the transportation of personnel. The negative development on margin was also impacted by newly started contracts with a start-up phase that requires more resources than normally expected. Organic growth in Finland was 4% from high variable volumes and a number of small and new contracts that were partly offset by a couple of smaller terminated loss-making contracts in Northern Finland. Adjusted EBITA and margin largely unchanged year-on-year. Implemented efficiency actions in the operations had a positive impact, while high costs for winter work had a negative impact during the quarter. Moving on to cash flow. We see that our key metric, LTM cash conversion ended at 90% for the Q1 LTM period, in line with our target of staying above 90%. Past due receivables more or less at normal level despite the quarter ending in the middle of Easter holiday. On the LTM cash flow, the M&A item is related to finalizing the acquisition of Skaraborgs Städ in the second quarter last year. On the balance sheet, net working capital as a percent of net sales is stable compared to historical numbers, and at the end of Q1 at a negative 8.6%. Leverage ended at 2.4x, a slight decrease compared to previous quarters. During the quarter, Coor placed 2 new senior unsecured bonds in the amount of SEK 500 million each, with maturities of 3 and 5 years to refinance the outstanding SEK 1 billion bond that matured at the end of the quarter. The split in maturities provides a more diversified maturity structure of outstanding financing. And with that, I hand it back over to you, AnnaCarin.

Thank you, Andreas. And as usual, before we go into Q&A, I would like to sum up our first quarter of 2024. We have high business activity at the start of the year, both new contract wins and several important prolongation. There has also been high activity with integration of acquired business in Sweden 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 the visibility of some large contracts. And we continue to stay committed to deliver on our financial targets. We have initiated an action program to accelerate progress towards our margin target of 5.5% and the program proceeds according to plan in the first quarter. And we see continued solid cash flow. In the quarter, we had, as Andreas mentioned, placed new senior unsecured bonds with 3 and 5 years maturity to refinance our outstanding bond as split in maturities provides a more diversified maturity structure of our financing. 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] And our first question comes from the line of Simon Jönsson from ABG Sundal Collier.

Congratulations to a solid quarter. A few questions from me. With the new contracts signed as well as the full effect of the Swedbank contract now in the numbers. Do you feel that, that is enough to see slightly higher organic growth coming quarters from what we delivered here in Q1 that we saw?

Simon, I mean, still, we need to consider that both Q2 and partly Q3 will be burdened by the effects of Ericsson. But obviously, we are very happy that we are signing new contracts with coming back to growth, but we should still expect some slightly lower rates here in the coming 2 quarters.

All right. And on the action program, could you quantify a bit how much impact you have seen so far? And what do you expect -- or when do you expect to see the full effect?

Absolutely. I mean this is a program that we are gradually implemented, and we expect it to be fully up and running from Q4. So there are some effects in Q1, but still on a smaller level or -- fairly small level. But as of Q4, we expect it to be fully ramped up.

All right. And one last from me. If we look at the segments, I think Denmark stood out, at least on the EBITA margin, a bit higher than what we expect at least. What do you see for Denmark in terms of EBITA margin over time as it has been scaling sales quite good in recent years. Do you think it can reach the same kind of level that Norway did at its peak?

I think so. I think we have -- when we view Denmark, we have seen a growth in Denmark, and we all know that in our business, it takes a while to ramp up new business. And we also have both the size and density in Denmark. So we do expect margins in Denmark higher than previous years actually.

All right. So nothing on like a potential over time here, given the volume we see where it can be.

I mean, without sort of guiding exact numbers, but with a larger volume, we expect margins to gradually increase. And we have seen sort of where Norway, as you mentioned, has been in the past. So I mean that's one reference to look at.

And our next question comes from the line of Karl-Johan Bonnevier from DNB Markets.

I'll continue on the same line of question as the earlier guy. Looking at the efficiency program, it seems like that you had some nice contributions from it coming through already in Q1. Could you just detail what has already been executed and what is still to be done to reach the full potential of the program?

Absolutely. I mean, first of all, what we do see effects from it is staff reductions that we started to implement towards the year-end here last year, and we see some of that taking effect in Q1 and expect it to be sort of fully ramped up here in the second quarter. But then sort of to get to fully ramp up the program, then we are also looking into procurement, where we are making stand analysis to identify different categories that we believe will be beneficial to procure across Nordic, that obviously takes a bit longer time, and we expect that to be more visible here in the second half of the year.

But do you still feel confident about the total amounts that you sought to get out of the program?

Yes, absolutely, we do. That is running along according to plan. So we still are confident around that.

And when you look at the integration and restructuring cost that you singled out, how much of that is related to the program? How much is still to come? And how much is related to the integration of Skaraborgs Städ?

If you look at the IACs, you have the integration costs, those are fully related to new contracts and the acquisition. And the restructuring part is more or less related to the changes in staff that we did in Sweden here in Q1, but none of it is related to the action program, that cost was fully taken in Q4.

And how do you see those costs, say, continuing into the second half of this year?

I mean, what we expect to continue is some costs related to contract start-ups. Besides that, we have no other visibility of sort of IAC costs yet in the near term future.

And when you look at the impacts you saw in Norway and the challenges you saw there, is that something that you already managed to, say, balance out now in Q2? Or is that something that will hang over?

I expect some of that to continue also in the second quarter, but the Norwegian operations is on that issue and sort of gradually managing that, but some effect is still to be expected in Q2, I believe.

Excellent. And looking at the good negotiation -- renegotiation you had with ICA and then SAAB, is that is a good proxy now to say that your renewal needs for 2024 is already now settled when you look at the big contracts?

There are a few contracts still to prolong in Q4, but they are not as large as the ICA and SAAB. But I think you all know that working with renegotiation, that's a long-term process that we have continuously dialogued with our customers all the time and also looking into 2025 as well, trying to prolong contracts.

And when you look at the debundling that SAAB decided to do here, not renewing the technical facility part of the contract with you, is that a trend that you believe you can see from more players in the market going forward? I think we had one similar kind of situation in Sweden last year, didn't we?

Would not say that we can view a trend in this dimension. I think more or less, I would like to more compare SAAB with maybe Equinor actually, from a security perspective or safety perspective, I think they have decided to go for 2 suppliers instead of one.

And when you look at your offering, so to say, in energy efficiency that I know Caverion has really tried to push towards their end clients. Do you feel that your offering in that segment is as strong as maybe the technical service installers?

The way we view it, I think we have quite a good offer to our customers as well, so I do not think that's the reason why they do not choose to up for the scope actually. And actually, we will try to deliver this is an IFM contract anyway to SAAB and to get with Caverion.

And when you're talking about new opportunities, I heard you said that there was good opportunities in the SME segment across the Nordics. There are no big new opportunities, so to say.

I think we -- as I mentioned, there is a strong pipeline of new possibilities coming into the pipeline all the time. So I view the future in a positive way.

Excellent. So this should be a year for where you can possibly get back to net portfolio growth then?

Yes, hopefully.

[Operator Instructions] And our next question comes from the line of Raymond Ke from Nordea.

A couple of questions from me. First one, sort of if you could describe the strength of different geographies there a bit, Denmark against Norway and Sweden? Where do you see the most opportunities right now? And where do you see sort of fewer IFM opportunities, both midsized and large-sized contracts, in general?

I mean, I think we have a sort of solid, steady inflow of small, midsize contracts in all those geographies, so sort of a stable situation around that. Then we have talked for a couple of quarters that we see it, most of the larger cases coming from Denmark and Sweden. That is still the case. But we also actually see an active sort of small, midsized market in Norway. So right now, a positive view on all of them.

Got it. And then regarding sort of Swedbank and Sweco contract, I think we're sort of touching on them before. But in terms of ramp-up periods, when do you sort of expect these contracts to start to contribute positively or be more in line with the overall Swedish geography in terms of profitability?

I think Swedbank is quite a large and complex contract. It's spread all over Sweden delivering to all their offices. So I would like to say that -- we say actually that it will take something between 6 to 18 months to ramp up a new contract and the more complex contracts the longer time it takes. So I expect to be around a year or something like that. In this case is Swedbank.

Got it. And for Sweco, is that a first-time IFM contractor?

No. Actually, they had another IFM supplier before we're going to take all this.

Got it. And then just curious about the midsized contract in Denmark that you stopped here in Q1. What was the reason behind that, if you could provide some more color?

Do you mean the lost contract in Denmark, the public contract?

Yes, that contributed to the negative growth here, the midsized public contract?

Yes. And that is some midsized public contract in Denmark. And we were, of course, in the process, but we lost that contract due to sizing.

Our next question comes from the line of Oliver Uusitalo from Aktiespararna.

AnnaCarin and Andreas, hopefully, you can hear me all right. I have a question regarding the renegotiated contract with ICA and SAAB. I know that you are a bit restricted in giving details regarding the contract with SAAB, but could you tell us anything about the margin of these contracts? Are they any close to the margins in the previous contract with Ericsson, for example?

I mean we typically don't comment on margins in individual contracts. But I mean, we don't expect any major changes in sort of profile on either one of them.

Okay. I understand. And then I just had one last question about the Danish market. What I'm curious about the future growth perspective, has it turned negative in this quarter? And I get that the comparables are tough and now that you've closed a few public contracts as well, will the extension with Topsoe and Clever bringing back high growth alone? Or should we expect low single-digit growth going forward? Or where are we?

We're close to sort of normal low-single digits with the contracts we have right now, and that could obviously change depending on what we are winning. But right now, what we see in terms of winning, that's low-single digits.

[Operator Instructions] As we have no more questions registered, I hand back to our speakers.

Okay. Thank you all for listening in to this call, and we wish you all a continued good day.

This now concludes our presentation. Thank you all for attending. You may now disconnect.