ISS A/S (QJQ.F) Earnings Call Transcript & Summary

Welcome to the ISS Company Update Conference Call. [Operator Instructions] I will now hand it over to CEO, Jeff Gravenhorst. Please begin.

Thank you very much and good morning, everyone, and welcome to this update from ISS. As you know, we've had a malware attack at ISS that came in on the 17th of February, and we're been working very hard on that. Today, this is an update on it, on the status of that. It's also an update on the -- what we can see as an implication of COVID-19. That is definitely unprecedented times. Obviously, we, at ISS, were hit by 2 viruses, and this is an update on both and what it means for the business as we stand today. So I'd like to take you through a few highlights. We have obviously come out with the company announcements, which I hope that you all have with you or in front of you. The organic growth as we saw when we began the year was good, strong actually. So the January numbers showed an organic growth of 7%, and we were in line for a good first quarter on organic growth perspective. The business has continued to perform and we delivered uninterrupted services to the vast majority of the clients despite the malware attack. The negative impact on organic growth from that and also on our operating profit is estimated to be minimal or immaterial. We have now regained control of the vast majority of our IT infrastructure, albeit that all of our systems were down on the first day as we also said when we came out last time. We have gradually relaunched our business-critical systems. We're not done yet, but they will be opened during the next 3 months. So by half year, all of our critical systems are up and running. Some of them will still lack some integration, and that means that we will continue to work on it during the entire year. But for all intents and purposes, business will be carried out as expected. We have not had any indication so far on customer data or sensitive personal employee data have been compromised as a result of the malware attack. But we do have some damages of IT assets because the -- it's hard to isolate and actually get rid of this virus. So there will be some write-downs and rebuilds of the IT infrastructure already happening now and will happen during 2020. With this, there will be -- we expect to have a cash impact, including incremental cost and system rebuilds in the estimated levels around DKK 450 million to DKK 800 million. Most of this will hit at the end of -- or the second half of this year, and actually some of the cash impacts spilling over into 2021. It is important that the P&L impact sits at around DKK 300 to DKK 500, which will be reported as an other expense and not in the operating margin part in order for you to be able to see what the specific amount will be. While the organic growth in January was strong, we are obviously now impacted by COVID-19. And it's extremely difficult to give a clear picture on what that would actually entail. Right now, we see countries closing down, government rules and regulations kicking in. And depending on what country, what measures they're taking, it has different impact on us. Clearly, the most important impact for us is within the Food Services business, that is about 15% of our revenue. A good part of that is within hospitals, so that's not affected. But still, there is an impact on the Food Services, on the normal Business Services & IT segment, and that's where we see one of the most notable impacts as we speak. As well as on the above base work, of course, as the sites have been closed down across the world, there was also a lot less above base work carried out. So depending on how long this period will last and where it actually kicks in and in what measure, they're going to be kicked in by the government of sending people to work from home, then there will be a varying impact on our outlook for 2020. So as we speak, it is impossible to tell you exactly where we're going to end up or even through estimate where we're going to end up on the revenue side, and then, of course, also on the bottom line from 2020. And with this, as the situation is very uncertain, we are withdrawing the estimate as it sits today. We will, of course, keep you abreast of the situation as we go forward as soon as we could see a little bit of stabilization as we've seen in Asia, where the impact has been minimum. I think on the European business, it's much, much more difficult to foresee right now, but we'll keep you abreast on an ongoing basis. Our liquidity, though, that remains very solid. As a precautionary measure, we have secured further credit lines in 2020. Currently, we sit with a credit -- current liquidity of around DKK 8 billion. And I want to just reiterate, as we've done many times, we have no financial covenants in our capital structure. And we have no debt maturity in 2020, and the vast majority of our debt, around 90% of our debt, does not mature until 2024 and onwards. But in light of the extraordinary circumstances that we have now and as a precautionary measure, the Board has chosen to be very prudent and then postpone the dividend of the DKK 7.70, and thereby, not suggesting the dividend for the upcoming AGM. But we will assess the situation as we come through the crisis of COVID-19, and then, of course, revert to what would be an appropriate amount to return shareholders within 2020. Where we stand today, in these times of crisis is, we do have to be prudent. We do need to make sure that we have enough liquidity and focus on liquidity to get through the crisis. We don't know how far it's going to be. We don't yet know how deep it's going to be. We do know that it's taken unprecedented measures from all countries across the world. There are government grants being put in place. There are government support being put in. That means that compared to our normal ways of reacting within ISS of having months to react on scaling down on contracts, now the governments are putting in redundancy programs. It means you can actually take people out on day one, which, of course, is very difficult to predict on how that will pan out on the revenue and on the -- and of course, on the cash side. Because it really does depend on how does the cash come in from where we get the subsidies on the -- from the salaries or whether they just go on to unemployment payroll. That is not easy to see through for you. I know that. But it's certainly not easy to run the companies as we stand today. And of course, it goes for everyone in the entire world. But it does mean that the cash flow from the government grant is not quite clear yet. And as that's not quite clear, and with the crisis length and depth not clear, we and the Board have, of course, taken the right measures of securing liquidity to be able to go through this crisis in a prudent way and ensure that we get strengthened coming out on the other side. I will say that the focus on key accounts and the strategy that we had over the last many years is actually benefiting us in this situation. Because it does mean there are a lot fewer clients we need to deal with, it's fewer sites, larger sites, and also these are at -- for the most part, blue-chip customers with very strong balance sheets. We are exposed to some aviation business. It's less than -- around 4% of our business. Most of that is airports, some of it is airlines. But again, it's prudent, good customer segments. And around 2% of our business is within hotel and leisure area. But it is, of course, the areas that we see the biggest impact right now as it is with food, as it is with the above base work. But as I said, the key account strategy, of course, means this is much more manageable. And also the credit lines and the credit of our clients is at a reasonable level because of the blue chip approach that we've had. So obviously, this is not great times for anybody. It's very difficult to get overview of exactly what this means. We believe that this is the right approach in the middle of the crisis, is to focus on being able to make the right cost adjustments, follow the clients and then get through this with enough liquidity and then get strengthened out on the other side of this. And then take the decision on the other side of COVID of -- when we have more clarity on what is the appropriate amount to return to the shareholders. With this, I would like to open up for questions. I will, though, again, say, it is obviously not easy to answer all questions at this stage. And because of that, we will commit to regular updates. So you'll see much more updates from us on calls that comes out, so -- as we get more and more clarity of the situation. So with this, I would like to open up for Q&A.

[Operator Instructions] And we have the first question.

It's Bilal Aziz from UBS. Firstly, I wish everyone very well. Secondly, 3 questions from my side, please. Firstly, what sort of cost action can easily be exercised? How much do you subcontract currently? Secondly, within your current credit line of DKK 7.5 billion, is that all undrawn? Or were some used up to cover working capital swings already? And lastly, Jeff, I appreciate you've talked us about Food Service and your above base business already. Can you perhaps talk us through a very basic example, perhaps with Deutsche Telekom of how contracted revenue is likely to behave through 2Q right now? Do you have any clauses within your contract or anything else?

Thank you very much. If we take on the cost actions -- actually, let's take the contract first because that actually is related. So you can argue, of course, on the revenue -- or the cost actions on the food side, of course, it's all the food stuff, all the food that we use for to prepare the meat [Audio Gap] I really do apologize. The point here is that on the back of COVID-19, everybody is in remote places. Pierre and I are sitting together here, but we don't have the usual providers, so it is not the usual setup. Sorry for this call. So I hope that we'll get through. So now we are trough on another type of solution. So I was just about to answer a question on what can we do for cost actions? And obviously, when we look at the food side, we have a lot of food that we buy in that, of course, we stopped doing. So from this perspective, we had a drop-down on the bottom line of losing revenue, it's around 10% to 15% on own portfolio work; and on nonbase, it has dropped down about 20%. So the rest of it, we can adjust typically. But it does depend, as you alluded to the question on what are the clauses in the contract. Now typically, we will have change clauses that says that we have an amount of weeks, months to adjust our baseline of people. And that means, of course, that if you go through a covered period, then larger clients will ask us to reduce staff, but then they still need to continue to pay us for a while. But the difference this time, which we've never seen before, is that governments across the world are going in with new programs, which means that we can actually lay people off immediately, send them home either on with the reduced pay, where the government takes most, or where they go into unemployment programs. Now this doesn't come over very clear to you because -- and I have to admit, it is not that clear because it depends on the country, it depends on the union agreement. And when there are programs like this, we can immediately reduce our staff cost, but that also means that, that would hurt revenue, but it does not hurt the bottom line. That's where the cash flow is actually very hard to see, when do we get the money from the state, depending on whether the state gives us the subsidy; or whether we actually offload the burden of the labor immediately. Again, that's depending on the contract, on the country and depending on the unions. So there are good levers here to reduce our costs. What we're going to look at is what's the drop-down impact on the margin side. And as I said, I'll reiterate it, on above base work, it's higher. So it's typically about 20%. And on the nonportfolio business, it could be 10%, maybe 15% depending on the country and the contract. So those are the actions. So we have very good actions. We also do have a lot of subcontractors, which is around DKK 10 billion out of our annual revenue. So again, a reaction where we can save, of course, cost. But at the end of the day, it's the same impact on the drop-down ratios. Pierre, if you would take on the credit lines?

Yes. Sure. Thanks for an opportunity to elaborate a bit on this liquidity. So we are stating that, currently, we are over DKK 8 billion. You may remember that in the financial statement and general reports, we had a liquidity at the end of last year of DKK 11 billion. For those who have been following up ISS for many years, you know that we have significant swings in the working cap, with a low point of the working cap at year-end and then we have an increase of the working cap in the first months of the year, this has been the usual pattern that you have seen. The current liquidity that we show is also reflecting that we are in mid months. And as you can imagine, mid months, it's not the best time of our liquidity which is usually and that's a common pattern for all months, higher at month end, where we collect actually a significant amount of receivables. And last but not least, in 2020, we had also in the beginning of the year, the impact of our new payment terms, which is the quarterly payment terms that were implemented throughout 2019. All in all, to say that there is a drag on the working cap in the beginning of 2020, which is as usual and a bit higher due to the mid months versus the month end, and a bit here due to QPT. Therefore, you should be surprised to see that the liquidity is actually above DKK 8 billion, which is quite a significant number. The reason behind that is that compared to the RCF of EUR 1 billion that we had a year, we have added extra liquidity and we have signed a committed line for another EUR 400 million. Why is it that we did that? Actually, it has little to do with COVID-19. But you remember that we had a malware issue mid-February. At that point in time, we were unable to invoice. So we found that what would happen if we were taking too much time to restore our capability to invoice, and that's the reason why we secured these extra lines which are now available for us. I can't immediately reassure you that our capability to invoice is fully restored. So not only we can invoice what needs to be invoiced today but we have also, in terms of backlog, today we have completed the invoicing of the backlog for more than 90%. So we are really back on track on invoicing. And therefore, we -- there is no use for -- related to the IT malware of these facilities, which as you can imagine are fully undrawn. So there is this EUR 400 million, which are fully undrawn, and there is also a significant amount of the RCF which is not drawn, despite that we are indeed at a low -- at a higher point of the working cap. I hope that it gives you some color on the nature of our liquidity.