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

Good morning, ladies and gentlemen, and welcome to the Coor Service Management Q3 Report 2024 Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. AnnaCarin Grandin. Please go ahead.

Thank you, and welcome listening to Coor's Q3 report. I will start by giving you the key highlights of the third quarter 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 summarize the key takeaways of the quarter and have a Q&A. So starting with the key highlights. During the quarter, we have successfully extended several important contracts. In exclusive dialogue, the IFM contract with Alleima in Sweden has been extended for another 6 years, including option years for an estimated total value of SEK 780 million. In Norway, the IFM contract with Aker Solutions has also been extended in exclusive dialogue, a contract worth SEK 150 million per year. And in competition, we have also been awarded a renewed 6-year contract for cleaning services to Southern Jutland Hospital with an annual turnover of approximately SEK 75 million in Denmark. We also continue to win new small and midsized contracts and in this quarter, thereby strengthening our position in those segments. Examples of such contracts is the new security contract with Gävle Municipality, at an annual value of SEK 17 million, and the cleaning contract with Degerfors municipality at an annual value of SEK 12 million, and both are municipalities in Sweden. In Norway, we have also won a new IFM contract with Semco Maritime at an annual value of SEK 15 million, which means that we also become even stronger within the Norwegian energy sector. And during the last 2 quarters, we have seen somewhat lower demand for variable volumes in Denmark, mainly among our public customers. As we do not see an immediate recovery in these volumes, we have decided to implement staff reductions in our Danish operations in order to adapt our costs to lower volume. And towards the end of the quarter and looking into coming quarters, we also see lower demand for variable volume in Sweden, primarily in property services, but also within conference services. We have proactively decided at the end of the quarter to initiate staff reductions also in the Swedish operations in order to adapt costs to lower demand. In total, the reduction in both countries affects approximately 70 employees. And a year ago, we presented an action program to accelerate development towards the company's long-term target of 5.5% adjusted EBITA margin. And during the last 12 months, the EBITA margin amounts to 4.8%, which means that we are still not on par with our target. And the action program consists of 3 parts. The first part related to staff reductions of 75 administrative resources was completed during the second quarter. And as communicated previous quarter, the second part of the action program, the harmonization of underlying processes requires more resources and time that we -- what we initially estimated. This is due to more extensive change work related to new ways of working, but we truly believe to invest in resources to continuously harmonize our processes and implement standardized ways of working. And I remain convinced that the harmonization that is carried out will contribute to us reaching our margin targets. And the third part activities linked to purchasing efficiencies are going according to plan, where the analysis work during the first half of the year has been completed, which will now generate continuous profitability improvement with first effects becoming visible towards the end of the year. And we are very proud that we, this year, take the first place in Allbright's annual gender equality report, and we are thus the most equal listed company in Sweden. And at Coor, our employees, their experiences and skills contribute to our success, and this position contributes to attracting the market's best talent and make us even more attractive as a partner to our customers. And for us, it's important that we make use of all the talent that exists in the society regardless of gender, age, ethnicity or other. And the market outlook for facility management in the Nordics remains good with a strong pipeline of new business. We see a pipeline with both first-time outsourcing and tenders of existing contracts within both integrated facility management and single services. And after summer, we see in our existing portfolio, a clearer trend that the proportion of employees who work from the office increased. We also have continued high demand in our consultancy business advisory, which helps our customers to optimize their workplaces. So let's move to our triple bottom line results for Q3 and starting with the business dimension. In this seasonally weaker quarter, Coor delivered both sales and adjusted EBITA in line with last year. Organic growth is flat with positive effects by newly started contracts in Sweden that compensates ended contracts in Sweden and Denmark and also somewhat lower variable volume. The EBITA margin for Q3 is 4.1%, slightly below last year, and the LTM margin of 4.8% is still below our target of around 5.5%. Cash conversion is an LTM number and ended at 77% and more details around that later in the presentation. Leverage also an LTM number at 2.7 and in line with our target to stay below 3. And our ambition to reduce our leverage somewhat during 2024 remains. And this year's customer survey was carried out during the second quarter, and the result was then at a continued high level of 70, which is in line with the company's goal. And the customer survey also measures the Net Promoter Score, which continues to be at a high level of plus 15 compared to last year, plus 11. Moving on with our performance in social and environmental responsibility. In the third quarter, our TRIF amounted to 6.5, which is an improvement compared with the third quarter previous year, but somewhat weaker compared with the full year 2023. And on the environmental KPIs, we see a positive development. On Scope 1 and 2, CO2 emissions from our vehicle fleet and premises, we continue to see a decline in emissions in absolute numbers by 22% compared with our base year 2018, even though Coor has grown as a company by over 30% in the same period. We have a positive trend but not sufficient towards the interim goals in 2025 and we recognize that we need to do even more. For Scope 3 and science-based target aligned suppliers, we continue to make progress, and we are now at 23%. We continue to push our suppliers to align their targets with science-based targets 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. Net sales is 2% down compared to last year. Organic growth for the quarter was flat, where newly started contracts such as Swedbank and Sweco in Sweden compensates for ended contracts in Sweden and Denmark. Variable volumes are at a continued high level, but compared to the same period last year, we see somewhat weaker demand in Denmark, mainly related to public customers. And looking ahead, we see lower demand in Sweden for variable volumes in property service and content services, as AnnaCarin mentioned earlier. With flat organic growth and negative 2% from FX, that takes us to a quarterly net sales of around SEK 2.9 billion. Adjusted EBITA amounted to SEK 120 million, which gives us an EBITA margin in the quarter of 4.1%. As AnnaCarin described earlier, we have decided to make some downsizing of both the Swedish and Danish operations to adapt our cost base for reduced demand for variable volume. The downsizing affects approximately 70 employees in the delivery organization. Costs for the restructuring amounting to SEK 27 million have been included in the third quarter as item affecting comparability. Financial net increased in the quarter, and that is driven by a slightly higher debt compared to previous year. Net income is SEK 17 million and adjusted net income when adding back amortization amounts to SEK 32 million. On the full year numbers, we see that net sales is SEK 12.5 billion. Full year organic growth is 1%, acquired 2% and FX negative 1%. The full year adjusted EBITA level is SEK 607 million, which gives us an EBITA margin of 4.8%. Adjusted net income for the full year is SEK 244 million. Looking at Q3 country by country and starting with Sweden, organic growth of 1% in the quarter with strong underlying growth from new contracts offset the negative effect of the ended contract with Ericsson. This is the last quarter with volumes from Ericsson in the comparable numbers. And for the third quarter, organic growth was 6%, excluding the effects of Ericsson. Variable volumes are at a continued high level, but as I mentioned earlier, we see lower demand for variable volumes looking ahead, especially in property service, but also related to content services. Adjusted EBITA of SEK 126 million and margins at 8% flat is largely in line with last year. EBITA was positively impacted by newly started contracts and effects from the action program. The end of contract with Ericsson has a negative effect in comparison with previous year. Also affecting negatively, we see lower profitability in parts of the Swedish cleaning operations. That is explained by excessive resource utilization and an action plan has been initiated to gradually return to previous level of profitability during the fourth quarter. Moving over to Denmark. Organic growth of negative 5% in the quarter, primarily explained by a couple of ended midsized public contracts. We also continue to see lower demand for variable volumes, for mostly in the public sector. Adjusted EBITA margin are lower compared to last year, where both ended contracts and lower variable volumes affect profitability negative. And after 2 quarters with lower volumes, adjustments are made to the Danish operations to adjust our cost base for lower demand. Moving over to Norway. We see lower organic growth compared to previous 4 quarters, where several newly started contracts won late 2022 now are fully reflected in comparable numbers. Variable volumes are at a continued high level from periodic maintenance stops in the energy sector. During the year, both the second and third quarters have had high variable volumes related to the energy sector, volumes which mainly occurred in the third and fourth quarter in the previous year. This is also something we have seen historically that maintenance stops vary in size and quarterly timing between years. Adjusted EBITA are in line with last year, but with slightly higher margins, where a more mature contract portfolio affects positively. And last among the countries, Finland, organic growth of negative 3% in the quarter from a couple of discontinued small loss-making contracts in the northern part of Finland. Adjusted EBITA and margins are in line with last year. Moving on to cash flow and balance sheet. We see in the top left-hand chart, our key metric, LTM cash conversion ended at 77% for the Q3 LTM period, and that is below our target of staying above 90%. You see a buildup in working capital during the quarter related to increased accrued revenue for ongoing work that takes net working capital as a percent of net sales to negative 7% compared to negative 8% Q3 last year. This is a development we are not satisfied with, and we have full focus to complete and invoice ongoing work to secure reductions during the fourth quarter to get back to our cash conversion target. Leverage, and that is on the bottom right of the slide, remains at 2.7, the same as in Q2 after a weaker third quarter from an operating cash flow perspective. With full focus on the net working capital buildup and a seasonal stronger fourth quarter, the ambition to reduce leverage towards the end of the year remains. And with that, I hand it back over to you, AnnaCarin.

Thank you, Andreas. Before we go into Q&A, I would like to highlight the key takeaways from our third quarter. We continue to successfully extend important contracts and strengthen our position in the small and midsized segments. We see somewhat lower demand for variable volumes in Denmark. And since we do not see an immediate recovery in these volumes, we have decided to implement staff reductions in our Danish operations to adapt our cost base. And towards the end of the quarter and looking into coming quarters, we also see tendencies of lower demand for variable volumes in Sweden, primarily in property service, but also within conference services. So we have, therefore, proactively decided to also initiate reductions in the Swedish operations to adapt cost base here as well. And in the ongoing action program, downsizing of administrative resources was completed during the second quarter, harmonization of processes and procurement efficiency are ongoing, and we expect effects to be implemented gradually in the coming quarters. And in parts of the Swedish cleaning operations, we saw lower profitability in the quarter, which is explained by excessive resource utilization. An action plan has been initiated to gradually return to the previous level of profitability during the fourth quarter. And cash conversion, LTM, amounted to 77%, below target of 90%, and this is driven by an increase in working capital, primarily from an increase in accrued net revenue. We have full focus to complete and invoice ongoing work to secure reductions during the last quarter of the year. So with that, we open up for questions.

[Operator Instructions] Your first question comes from the line of Oliver Uusitalo from Aktiespararna.

As currency effects turnover negatively this quarter, does this affect -- how does this affect operating margins? Does this affect operating margins negatively as well? Or do you have any expenses in foreign currencies that kind of balances this negative turnover?

Oliver, I'm sorry, I didn't fully hear your full question. Can you repeat that please?

Yes. Well, my question is basically if you have any expenses in foreign currencies as well that balances the negative impact from the turnover?

Absolutely. I mean, most of our businesses are in local currency on the expense side as well. So the negative effects we see on turnover sort of has a corresponding side of expenses in each country.

Yes. Okay. I see. And as you are reducing the workforce as well on the back of the lower variable volumes in -- specifically in Sweden and Denmark, I know this might be quite early to have a say about it, but do you view this as a structural or rather a cyclical change?

Oliver, I can start, and I think that Andreas will fill in a bit because when we look into variable volumes, they have -- the recent quarters has actually been on quite a high level. And what we are seeing at the moment is that more of a normalized volume of variable volumes.

So basically, it's a cyclical change that we see here.

Okay. I understand. Thank you for the clarification. And my last question as well. Q4 is quite an important quarter in terms of variable volumes with all the Christmas parties and so on. What can you say about the booking situation in Q4 so far?

I mean looking into Q4, and that's basically the reason why we are doing some downsizing in Sweden. Bookings are at a lower level today comparing to where we were a year ago. So looking into Q4, we expect bookings to be somewhat lower compared to the previous year.

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

Just want to understand if anything underlying has really changed in the operation because historically, you used to be very good at, say, doing these kind of personnel adjustments within contracts without having to do big programs. But is there any fundamental change out there in the market that now requires these kind of annual programs that you had one you kicked in last year with a slightly different kind of focus and now you have this one coming up here in Q3.

Karl-Johan, I think it's important to, first of all, sort of keep those 2 programs apart. I mean the previous one was very much related to organization and administrative resources and what we're looking at right now is in operations due to some overcapacity in both Denmark and Sweden. And agree, we have historically been very good at handling changes in demand and doing that in sort of ongoing business. I think what we are seeing right now is -- I mean, we are seeing bookings and small volumes being ordered here at the summer. We have been running on fairly high volumes for a couple of years now. And that also sort of [indiscernible] the organization according to that. We are right now making between [indiscernible] employees, some adjustments to make the organization and the cost base a bit more flexible here, seeing that demand is somewhat weaker here looking into the coming quarters. But agree changes from that perspective is something we should be able to handle in existing ongoing work.

But you would agree that, that seems to be an increasing complexity in your business model that might not have been the same a couple of years back or...?

No, not really.