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

At this time, I would like to welcome everyone to this ISS Q1 2025 Trading Update. Today's call is being recorded. [Operator Instructions] Today's speaker is Group CEO, Kasper Fangel; and Group CFO, Mads Holm. But first, I would like to hand it over to Head of Investor Relations, Michael Vitfell-Rasmussen.

Thank you very much, and good morning, everybody, and welcome to our conference call. We appreciate you joining us this morning to discuss our Q1 2025 trading update, which was released earlier today. I'm Michael Vitfell-Rasmussen, heading up Investor Relations here at ISS. Joining me today in the room is our CEO, Kasper Fangel; our CFO, Mads Holm; and our IR colleague, Anne Sophie Riis. Before we begin, please take a quick view at the disclaimer, and then I will hand it over to Kasper to start the presentation. Please move on to Slide #4. Thank you.

Thank you, Michael, and good morning, everyone, and thank you all for prioritizing this call, especially in what continues to be a turbulent environment for the financial markets. While conditions remain uncertain more broadly, I'm pleased to see that our business model is holding up as expected. We are continuing to be a trusted partner to our customers during tougher times, helping them stay focused on their core business while we ensure their workplaces run safely, efficiently and without disruption. In times like these, workplace engagement becomes even more important. At ISS, we understand what it takes to create outstanding workplace experiences, and we remain committed to delivering exceptional service moments that help make our customers' workplaces more attractive and support stronger engagement among their employees. The first quarter of 2025 delivered as planned, both from a strategic and a financial point of view. Our Q1 organic growth ended at 4.3%, driven by solid above-base activity and continued price increases. We also saw positive volume growth for the quarter, but that was offset by an expected negative contribution from net new contract wins. I'm also pleased to see that once again this year, we continue to successfully manage price increases, a clear reflection of our strong operational capabilities and close relationships with our customers. Remember, price increases support our business as it's not margin dilutive and therefore, generate a higher nominal profit, contributing positively to the free cash flow generation. We maintained strong cost effectiveness through our OneISS initiatives and with continued pricing discipline, margins developed as planned in the quarter. Our customer retention rate remained strong at 94%, representing a slight improvement from Q4 2024. While underlying volumes remain a focus area, we are seeing encouraging signs in areas where we made strategic commercial priorities. For example, we are gaining momentum within our 4 key customer segments as reflected in the new contract wins announced earlier this year. It's also encouraging to see that our strategic changes introduced last year, particularly the leaner EGM structure already enabling faster decision-making and sharper execution across the business. The arbitration process with Deutsche Telekom is progressing as planned, and we'll share further updates when we can. And finally, our DKK 2.5 billion share buyback program initiated in connection with our full year report is progressing as expected. Let's turn to Slide 6, please. Let me share some key insights and a growing opportunity for our business. Last week, we launched a comprehensive ISS workplace study based on nearly 11,000 employee responses across 15 countries, all from companies with hybrid work possibilities. The research also includes customer interviews and expert perspectives. Just a week ago, we hosted a launch event with over 100 customers where we discussed the insights from the report with current and potential new customers. The outcome is that hybrid is no longer a trend. It's the default. Today, 81% of employees work in a hybrid setup with 1 to 2 days from home being the most common and most satisfying model. Yet, despite this demand for flexibility, 71% of employees still see the office as important, primarily because it fosters social connectivity and a sense of belonging. Notably, 88% of the responses highlight long-term risks from working remotely too much, especially when it comes to collaboration and culture. That brings us to the core insight. Employees have raised their expectations for what the office should offer. They no longer go to the office just to work. They go to be supported in their individual needs and well-being. 64% of responses highlight that facilities and office experiences would motivate them to be in the workplace more often. Most of all, they want excellent food options. They want gyms, activity zones and quiet areas. And that's exactly where ISS comes in. At ISS, we know how to create unique service moments. And that's where our true differentiator lies. It's our ability to consistently deliver exceptional customer experiences at site level. What enables this is our self-delivery model because we onboard, we train and we empower our own people. We ensure quality, consistency and gives them a license to act. That's not possible in operating models that rely on subcontractors. We help our customers transform their workplaces into destinations that is worth the commute, places people want to be. Whether it's curated food throughout the day, creative environments or high-performing sustainable facilities, we create spaces that drive productivity, engagement and ultimately, retention. It's more than a trend. It's a structural shift, and we are positioned right at the center of it. ISS is uniquely equipped to respond, and we know what it takes to create spaces people want to be in and more importantly, thrive in. And when people thrive, so does the business. Let's go to Slide 7 for a closer look at our pipeline. Let me share a few reflections on our commercial pipeline. We continue to see healthy and broad-based pipeline activity across our key markets. This reflects the strength of our commercial setup and the relevance of our value proposition. I'm also pleased to see that we are winning customers within our chosen segments, which reinforces the focus and strategic direction that we have set for our go-to-market efforts. We are furthermore also seeing some early results of our incentivized focus of growing with our existing customers, also reflected in the contracts announced this year. As mentioned earlier, we are seeing facility management becoming more important to customers as a key part of the overall workplace experience. This shift is leading to more complex and extended tender processes, especially on larger integrated contracts. As a result, decision-making cycles continue to be long. While this creates some short-term unpredictability on timing, it also signals stronger customer engagement and deeper strategic alignment. Despite these longer lead times, the momentum in our pipeline remains encouraging, and we continue to see opportunities across both global and local accounts. Some of the contracts up for renewal this year have already been extended, and we are working hard on extending all customers up for renewal in '25. As a result, just under 5% of our contract portfolio is now due for renewal this year. Looking ahead, we remain confident in the underlying strength of our pipeline and its ability to support our growth ambitions for 2025 and beyond. Let's go to Slide 8, please. Over the years, we've consistently demonstrated that the ISS business model is both resilient and proven also through changing and uncertain economic environments. In the top chart, you will see the organic growth has remained stable across cycles with a clear pattern of consistent momentum. In the bottom chart, our operating margin has proven to be both predictable and robust, reflecting our ability to manage inflation, wage increases and cost pressures through disciplined pricing and strong execution. Importantly, in more challenging environments, we've not been deselected in customer cost exercises. In fact, we've often become an even more trusted partner, enabling our customers to focus on their core business while we take care of ours, delivering reliable, high-quality facility management that supports their workplace experience and operational needs. Also, while we are well positioned to support customers in generating cost savings during uncertain times, we have not yet seen this develop into a broader trend. In addition, our business model is structurally stable. We neither import nor export significant volumes of goods across borders. And our revenue and cost base is largely in the same currencies. However, we closely monitor global developments as some of our customers may be impacted to varying degrees. The stability of our business reflects the strength of our customer relationship. The scalability of our model and the discipline embedded in our execution strengthened further through the recent strategy refresh. It's this consistency that gives us confidence. Our model is built for all cycles. Now I will hand it over to Mads to go through our financial results.

Thank you, Kasper. Let me walk you through our financial performance for the first quarter of 2025. We delivered organic growth of 4.3%, driven primarily by the successful implementation of price increases, which contributed by around 4.5%. Turkey was slightly below half of that increase. This underlines the resilience of our business model as we continue to successfully pass on inflationary pressure to customers, particularly wage-related cost increases. Volume growth also had a positive contribution of around 0.5% due to increased activity levels at customer site and scope increases on retentions. As expected, net contract wins had a negative contribution of a little below 2% this quarter, largely reflecting the contract trimming and deliberate contract exits last year, particularly in the Americas. This headwind will end by midyear. Project and above-base activity contributes around 1%, supported by a high commercial focus on non-portfolio projects. Driving this kind of site-level engagement is a key part of our strategy, and I'm pleased to see it coming through in the numbers. Turning briefly to margins. Performance was in line with expectations. We maintained cost effectiveness through our OneISS initiatives and pricing actions supported margin stability. We still focus on the absolute earnings power of ISS, the nominal level of [ EBITA. ] Finally, on free cash flow, we still expect it to be negative in first half, but less so compared to last year. Let's go to Slide 11 for a regional breakdown. Q1 performance reflects a solid start to the year with organic growth supported by price increases and continued strong activity levels across the regions. In Northern Europe, the organic growth ended at 4%, primarily driven by pricing and supported by volume increases despite some annualizations from the start-up of large contracts last year. Growth was broad-based across the region with the U.K. as the largest contributor, supported by both increased activity levels and price increases. The mobilization of DWP is progressing as planned, and we're excited to go live in October. In Central and Southern Europe, we saw continued solid growth at 9% for the quarter, primarily driven by price increases in Turkey, along with positive organic growth across most countries in the region. In APAC, the organic growth rate at 4% was still impacted by our more selective bidding strategy as we continue to have a sharp focus on sustainable margins in line with our group strategy. The strongest growth contributors in APAC was Australia and Singapore, both growing high single digit organically in the first quarter. In the Americas, growth ended at minus 9% for the quarter. Americas was significantly impacted by the deliberate contract exits in the beginning of second half 2024, reflecting our conscious and disciplined portfolio approach. Overall, we keep encouraged by the momentum and remain confident in delivering on all 3 KPIs for the group for the full year. Slide 12, please. Finally, let me provide an update on our capital returns for the year. In April, we paid out the proposed dividend of DKK 575 million, corresponding to DKK 3.1 per share. Our share buyback program initiated in connection with the full year results, is also progressing as planned. As of yesterday, we have purchased shares worth DKK 575 million under the total DKK 2.5 billion authorization. In addition, we got the authorization to cancel 11.5 million shares at the AGM in April. This reduced the total share count to 175 million, corresponding to more than a 6% reduction in the total share count. Combining the dividend and the ongoing buyback, ISS is delivering a payout yield of 10% for 2025. This strong yield reflects our disciplined approach to capital allocation. Rather than sitting on excess cash, we consistently deploy it where we can create the most value for our shareholders. With that, I'll hand it back to Kasper. Please turn to Slide 14.

Thank you, Mads. With the first quarter behind us, I can confidently reconfirm our guidance for 2025. The first quarter delivered as planned, supporting continued sustainable growth. In all of ISS markets, there are plenty of opportunity to grow our business. And with our investments and strengthening of our commercial function, we are reconfirming our organic growth guidance range of 4% to 6%. Once more, I want to highlight that 2025 will be back-end loaded, predominantly driven by the contract exits from mid-2024, combined with the start-up of the DWP contract in October 2025. In 2025, we still expect price increases to remain the main contributor to organic growth, primarily driven by Turkey, but also reflecting the price increases already implemented in other markets in the beginning of the year. Furthermore, as explained previously, one of our commercial initiatives going forward is to grow with our existing customers, and we do expect to see a contribution in 2025 from this. Lastly, we expect a positive contribution from net contract wins. And as you might recall, we've already announced a number of new contract wins this year, and we still see positive health in our pipeline. For the margin, we are also on track, and we reconfirm our guidance of above 5%. Let's turn to Slide 15. We are also reconfirming our cash flow guidance for the year. We still expect the strong underlying cash flow generation to be maintained in 2025. The guidance of above DKK 2.4 billion is in line with the above 60% cash conversion after adjusted for the DKK 200 million negative impact from 2024 prepayments. We still expect payment from DTAG and providing it's received in 2025, that will bring our expectations to the free cash flow, including DTAG at above DKK 3 billion. Please turn to the next and final Slide 16. I want to finish by saying that ISS has a solid foundation, proven to be resilient through all financial cycles. The underlying business has improved significantly over the past years as a direct result of an increased focus on the things that really matters to our customers and people, fewer initiatives, better alignment, all of which is creating an improved spirit and enthusiasm around the future of the company. The first quarter of 2025 represents another positive chapter in ISS' journey towards becoming a company that is growth-orientated, people-centric and performance-driven. As we close the quarter, I want to take a moment to acknowledge what truly drives our progress. To our more than 325,000 placemakers, thank you. You are the foundation of our success. Your commitment to excellence and the care you show in every service moment is what defines ISS and earns us the trust of our customers. And to our customers, thank you for choosing us. We don't take that trust for granted. We are committed to continuing our shared journey, creating spaces for people and businesses to thrive. With that, we've concluded our presentation, and we will now open the floor for the Q&A, where we'll be joined by our Investor Relations team to address your questions.

[Operator Instructions] Our first question comes from Remi Grenu from Morgan Stanley.

I've got 3 on my side. So on the commercial pipeline, I think you are referring to demand being driven by local opportunities. So should we read into that comment that we are more likely to continue to see a series of small and midsized contract wins coming through as we've seen over the last 2 quarters now rather than more transformational deals like DWP? And also what it means for the exclusive negotiations you were referring to, I think, in Q3 and Q4 last year, whether these are still there, but in wait-and-see mode? So that's the first question. The second one is on contracts expiring this year, which I think is still 5%. So can you tell us in which quarters these contracts are coming due and whether there is any update on discussions with the specific clients? And then the third one is on the organic growth with key accounts, which I think was slightly lower than at group level, 3%. So I was wondering what explains the difference versus non-key accounts, whether it was pricing contribution, which was smaller or volume effect, which is slightly different with these key accounts versus the rest of the group?

Thank you, Remi, for 3 good questions. Let me take them in the same order as you asked them. So first, in terms of commercial development, as I said in my presentation, we have a healthy pipeline, and that's a pipeline that both consists of local accounts, so smaller accounts of regional accounts, but also some big ticket items. And you're right that we've had good traction on landing a number of accounts above DKK 100 million in the beginning of this year, and we are working hard on completing the processes with the other interesting prospects that we are talking to in terms of new customers at the moment. But it is just hard to predict when the processes are being completed. And I know I've said it over a number of quarters, but it continues to be the situation. And it is due to the fact that deciding on how to conduct facility management services is not just a price exercise. It's much more a value discussion where more stakeholders on the customer sites are involved. It's not only procurement and finance that are discussing price, it's also at CEO level and Board level where our customers want to be comfortable that they can articulate that the way that the design of the office is done and how services are provided is linking into the purpose that they are trying to achieve as their business. But again, in summary, healthy pipeline. We're not going to be specific around any expectation in terms of when we announce because it is uncertain and very hard to predict. In terms of the contracts expiring, it happens throughout the year. 5% of prospects or existing customers of above DKK 200 million is what you see in the table. There is no red flag, nothing that I will highlight as things that are particularly risky or where the risk has increased since we updated you in February. But of course, we never take anything for granted and the process is not completed until we receive the signature from the customer. And on your third element around key accounts, I mean, let me take a little bit more holistic and helicopter view on my answer to that one. There's nothing structurally that has changed in terms of our expectations to growth with key accounts. So we still have that as one of the core main points in our strategy to grow with existing customers and grow facility -- integrated facility management services as a concept with them. And that's also the majority of what we have in the pipeline. So nothing structurally there that you can read out of the Q1 numbers.

The next question will be from the line of Mads Andersen from DNB Markets.

If we just stay on the topic of net new. I mean, as far as I'm aware, you haven't really announced any losses, but you deliver minus or at least approximately minus 2%, down sequentially from 1.5% in the quarter before. I mean just trying to understand here what the main driver is. Is this smaller losses below the DKK 100 million sort of threshold that obviously, because of that not having been announced? Or is it phasing? Or is it something different? And just on that, if it's incremental exits on the smaller side, what kind of margin tailwind, if any, should we expect from this? Secondly, please, on North America -- or sorry, Americas. Obviously, above base growth looks incredibly strong. So maybe just if you could add some color on -- sorry if I missed it, but if you could add some color on that kind of growth rate. I know you had an easy comp, but still adjusted for the comp, it looks like incredibly strong growth. Please confirm, first of all, that it's not hurricane work or related to wildfires or any other natural disasters. And yes, if you could add some color on it, what the actual growth is, please, that would be great. And then the last one. I mean, I appreciate it's early in the year. By now you've seen 4 months. But still, I mean, Q1 was largely expected to be the weakest quarter, yet you deliver, I mean, within the guidance range, albeit at the low end. But if we consider -- I mean, you alluded to it yourself, Kasper, that it's going to be back-end loaded but you already delivered within the range. And if we think about pricing, we know from previous years that it's been very sticky. And yes, it's probably likely to continue throughout the year. And then if you look at underlying volumes, the comps are -- they were the toughest in Q1 and it gets easier throughout the year. So I mean, at this point, is it not more likely that you'll be at the midpoint or actually above the midpoint? And why haven't you adjusted the guidance accordingly?

Thank you also to you, Mads. So your 3 questions, again, let me take them one by one here. So in terms of your question on net new wins, I mean the number that we're reporting for Q1 is rounded negative with 2%, which is -- you alluded to our communication in February, where we said 1.5%. It's pure phasing. And again, it's rounded. And I also want to point the attention towards that the underlying volume of 0.5% is actually slightly better than expected. So if you take the 2 combined, then it's a wash between the 2, and they're coming out exactly in line with our expectations for the first quarter. And in terms of expectations for the full year on net new wins, I mean, the helicopter view of that is that we still expect a net positive for the full year. And obviously, it's going to be negative for the first half, but then it will turn positive in the second half and overall a net positive for the full year. On Americas, then I can confirm that the above base that you mentioned, none of that is related to the hurricane that we benefited greatly for in Q4 last year. It is a strong project delivery that we have had in Americas and actually not only in Americas in Q1, also in Europe. And I'm very pleased for that because it shows something about the commercial culture that is filtering through all the way down to site level and that our site managers are spotting the opportunities that we have with existing customers for project volume. So that's a good sign in my opinion. And just a little bit more color on your third one in terms of guidance. In -- if we take the different quarters here, then in Q2, we are going to face a slightly more difficult comps because last year [ Brittany Ferries and Defra ] started up in Q2. So I think it's fair and above base in the second quarter is also hard to predict at this point in time, but a good expectation around Q2 would be a growth of around the 4% and then we expect that, obviously, to increase in the second half as comparison gets easier. And we are starting up DWP in the beginning of October and the new wins that we have announced in the beginning of this year are also ramping up over the course of the second half. So an uptick in growth in the second half. But I just want to draw your attention to one thing, which is the record high above base revenue that we had in Q4 in Americas, which obviously makes the comparison difficult in the fourth quarter. So I think in summary, Mads, it's a fair question and a fair perspective that you have, but it's early in the years and the 4% to 6% is what we have maintained this early in the year because there's still a number of things that needs to fall into place for the rest of the year before we can be more specific.

The next in line is Kristian Godiksen.