Coor Service Management Holding AB

STO:COOR

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the Coor Service Management Q2 report.Today, I am pleased to present President and CEO Mikael Stöhr and CFO and IR Director Olof Stålnacke.[Operator Instructions] Speakers, please begin.

[Mikael Stöhr, President, CEO & Director]

Thank you very much. It's Mikael here. And welcome, everyone. Thank you very much for listening in to our quarterly report this morning.Starting off, as usual, the first page, for those of you who are still new to Coor. Coor is a Nordic market-leading facility management company, market leaders in IFM. That's integrated facility management in the Nordics. Over the last 12 months, we turned over around SEK 8.5 billion with a profit and EBITA of SEK 482 million. That is around 5.7% EBITA margin LTM. And we have around 8,500 FTEs performing services all across the Nordic region. Sweden is the largest market for us. That's around 55% of Coor; Norway, 24%; Denmark, in this report you can see the growth coming through in Denmark, that's now 14% of the total volume of Coor; and then Finland at 7%. Slicing Coor by contract type on the bottom pie chart on this slide: IFM is around 65% of our portfolio, and single services around 35%. So that is Coor in a nutshell.Moving on then to the next slide and the numbers for Q2 2018. The second quarter shows very strong growth. We grew at a total of 25% in the quarter, strong organic growth and supplemented by acquisitions; and also a close to 20% increase in the EBITA in the individual quarter.Looking at the numbers on the slide then, the Q2 numbers, 11% organic growth in the quarter, strong number. That's strong organic growth in all of the core countries in the Nordics. We'll get to the details in a couple of slides when we walk through the countries. With the 11% growth in the quarter, that takes us now to a 9% growth over the last 12 months. To that, we've acquired growth as well. That's 11% -- another 11%, growth. That comes in Denmark and Norway, the 2 countries where we've made acquisitions in 2018. That also takes us up to an LTM number at 4% of acquired growth. EBITA margin, that comes in at 5.8% in the quarter. It's a strong number, I believe, especially when you combine that number with the strong both organic and acquired growth. We'll look at the drivers behind the EBITA margin again when we run through the countries in a while.Finally, cash conversion at 69%. That's an LTM number, a weaker number than usual; 2 effects hitting us on cash in the quarter. One is the weekend effect. Again, a quarter ending on a weekend, not helpful for us, but in the quarter, you can also see us building up a working capital, an unusual event for Coor but driven through a large extent by the acquisitions that have come through in the quarter; and something that we will work on, taking down the working capital, in the coming quarters as we move along in the integration of the acquisitions. That's the overall slide with the numbers.Moving on then to the next slide, for those of you who are following this on the web, business highlights on the second quarter. First item there, we've seen in the second quarter a continued ramp-up of new and renegotiated contracts. This was an event that was started in Q1 and flowing into Q2. The ABB contract is no longer a new contract but a contract that has been ramping up for a significant amount of time. In the quarter, you are seeing now a fully ramped-up ABB contract also with the Norwegian volumes. NKS, the hospital in Sweden, that came more or less fully online now in the second quarter of 2018. There are some small additions left in Q3 and Q4, but the absolute majority of that contract is now ramped up. Sokotel in Finland, ramped up volume-wise but still a fairly new contract for us in Finland; Bergen university in Norway, same thing there. Copenhagen Municipality in Denmark, that's a property service contract, that is still under ramp-up and more volumes to be ramped up before that contract is in full swing.So a continued, intense quarter for us in ramping up and just getting into gear with new and renegotiated contracts and also a strong quarter for signing new contracts. Very happy, the second bullet here, we signed a new large IFM contract with Storebrand in Norway. That was signed on May 14 this year. That is a broad-range IFM contract where we will deliver property services, security services, cleaning services, reception services, service center, et cetera, et cetera, so a traditional broad-range IFM contract to Storebrand; a 5-year contract and a subscription volume of around SEK 80 million in yearly volumes. And if you add a normal level of project volumes to that subscription, you'll end up with an IFM contracts well above SEK 100 million in yearly volumes, so a nice, large IFM contract signed. That starts on September 1, the delivery. And this contract is for Storebrand in Norway only. And for those of you who know the Storebrand operations: Of course, they have a sizable operation in Sweden as well, but that is not included in this part of the contract, obviously something we will look at to see if that's something we can do for Storebrand in the future as well. A nice, new contract addition to us in Norway.In addition to this IFM contract, we've continued to see in the quarter a steady stream of small and midsized contracts signed in all of the Nordic countries. We've signed with IKEA and Attendo in Finland, MAN Diesel in Denmark and H&M in Sweden. So a continued stream of these types of contracts that we've seen now for a number of quarters. Moving on, the acquisition of West FM in Norway was finalized in the quarter, a -- the third company that we've acquired this year. We signed the deal on May 25; and we closed the deal, after competition authority approval, on July 2 of this year. West FM now adds around SEK 140 million in volumes to us. That's around 300 employees, mainly in cleaning in Bergen and Oslo, so continuing and helping us to build nice density in Bergen and Oslo area. West FM was acquired from a private individual in Norway.And when we look, in the quarter, of the integrations of the earlier acquisitions we made in Q1, Elite Miljø in Denmark and OBOS property services in Norway, those integrations are running along very nicely according to plan. The underlying business in these 2 businesses perform as we'd hoped and as we looked at these companies before the acquisition. And that, of course, helps a lot now that we're moving into a more intense pace of integration. So very happy with what we've acquired so far this year.So an active quarter, as you can see, from both ramping up new contracts, signing new contracts and integrating acquisitions in the quarter.We move on then and look at the slide country by country, starting off with Sweden to the left.Sweden in Q2 showed an organic growth of 8%. And that also takes, of course, Sweden to an LTM growth of 8%, strong number in Sweden. And you combine that with an EBITA margin of 10.2% in the quarter. I believe that's a very, very solid delivery of Coor Sweden. We're seeing continued growth from, and as we talked about for the group, NKS, the ABB contracts and also new SME contracts. And continued to be a strong level of project volumes in Sweden. Margin-wise, we're seeing a mix effect in Sweden from headwind in new and renegotiated contracts but then again project volumes with stronger margins that balances out that effect in the quarter.Moving on to Norway. Q2, very strong organic growth of 14%, takes Coor Norway up to 7% in LTM number of growth. And in Norway we can now also see the acquired growth numbers coming through, 4% in the quarter, 2% as an LTM number. And you combine that in the quarter with an EBITA margin of 6.4%. So the significant organic growth coming through is a combination of a solid flow of project volumes in existing contracts. We're seeing the oil and gas sector, with the oil price coming up, that is helpful in existing contracts of creating project volumes. And we're also seeing new SME contracts in Norway coming through. The acquisition number that you see here is only OBOS. The closing of West FM, the latest acquisition in Norway, was closed, as I said, on July 2, so that's not in these numbers. So the acquired growth here is only the OBOS number. Margin-wise in Norway, we're seeing a headwind effect in new contracts and ramped-up contracts in Norway. And we haven't been able to -- in the same level as we have in Sweden, to counteract that headwind with project margins in Norway.Moving on to Denmark, again very strong organic growth. 22% in the quarter for Denmark takes Coor Denmark up to an LTM growth of 15%; adding on then the acquired growth of a whopping 98% in the quarter, 34% LTM. So you can imagine there are a lot of integration activities and making sure that we work together with Elite and the new contracts that we're taking in, in Denmark in the quarter. So significant growth in Denmark. And also, combined with an EBITA margin of 4%, in a Danish perspective that is a solid margin and a step-up from the margin that we showed in Denmark in Q1 this year, takes Denmark to an LTM EBITA margin of 3.9%.Finland then finally, Q2, another country with strong organic growth, 13% in the quarter, takes Finland up to an LTM number of 16%. EBITA margin of around 1%. And we're seeing in Finland significant growth from new contracts: the Sokotel contract, starting in the beginning of this year; ABB contract, which is still in -- it's a large part of that contract is in Finland, still being ramped up; and SME contracts and projects. And with that strong growth in Finland, we've not been able to short-term balance out again the margins with other high-margin volumes.So that's a run-through of, country by country, Sweden through Finland.Next slide is a slide that we show every 6 months or semiannually, contract portfolio development of Coor. Over the first 6 months of 2018, we signed new contracts. We signed 18 new contracts of size. These are all contracts worth more than SEK 5 million in yearly volumes. So new contracts, 18 of them, at a total yearly volume -- value of SEK 355 million. Contracts that were terminated in the first 6 months of this year in the existing portfolio was 3 contracts at a volume of SEK 55 million. So that takes us into a net addition to the Coor contract portfolio organically of SEK 300 million or 15 contracts in the first 6 months.

[Olof Stålnacke, CFO & IR Director]

If we then look at the P&L. We have Q2 net sales of close to SEK 2.4 billion. We added SEK 480 million versus last year. And this gives, as Mikael said, a total growth of 25% year-on-year: 11% organic, 11% from acquisitions and 3% from FX.EBITA grows by 19% to SEK 138 million, and EBITA margin is 5.8%. And the margin change versus last year is primarily driven by the geographical mix effect from high growth in Denmark.Financial net, minus SEK 26 million for the quarter. Interest and borrowing costs are in line with last year, but as usual the variance depends on the FX impacts from the NOK versus last year. The tax expense, slightly higher than normal and includes an SEK 11 million net impact from revaluation of our tax assets due to the recent changes in corporate tax rates in Sweden.Q2 net income SEK 22 million; cash net income, SEK 65 million when adding back amortizations.If we then look at the LTM numbers, growth of 14% and sales now very close to SEK 8.5 billion, EBITA margin of 5.7%, amortizations at normal level with no impairment, financial net of SEK 77 million negative. And again, it's the FX effects that's a primarily driver -- primary driver behind that.P&L tax rate of around 30% this time, and this is due to the tax asset revaluation and the nondeductible acquisition costs that we had in Q2. Adjusted net income is roughly SEK 290 million.Looking then at sources and uses of cash in the last 12 months. A year ago, we had a cash balance of SEK 460 million. Operations have generated SEK 327 million, which is as Mikael already talked about significantly lower than normal. We have a quarter that once again ends on a weekend. And we also have a temporary build-up of working capital from high project volumes across countries and from the acquisitions that we are now integrating. In the financing flow, we have a -- we have drawn on our existing credit facility. We have paid SEK 337 million for the acquisitions in Q1. And we have returned around SEK 380 million to our shareholders, as you know, in Q2; and end up with SEK 270 million in cash at the end of Q2.Looking then at the details of the cash flow. As we've said before, our key performance metric is LTM net working capital development. And after Q2, we have a build-up of SEK 77 million LTM. We have seen this at times historically. And we know that with our usual approach to working capital management, we'll work through this build-up during the second half of the year.Q2 CapEx is SEK 28 million, which brings the LTM level to SEK 93 million. And that's just above the 1% of turnover that we have talked about before. LTM operating cash flow is SEK 370 million, and cash conversion temporarily down to 69%. Total LTM cash flow is minus SEK 211 million; and that's after the acquisitions, the dividends and the RCF drawings.Summary of the key items on the balance sheet. Even after a weak Q2, we are at minus SEK 480 million in net working capital and still close to minus 6% of turnover. So even after this weaker quarter, we still look very good on the working capital side, and as has already been said, with SEK 270 million in cash. Net debt is SEK 1.45 billion, and leverage is at 2.7x. As we said before, we have no problem with temporarily being above 2.5 in connection with acquisitions and dividends. We know that with our normal cash generation,, we will quickly delever again.

[Mikael Stöhr, President, CEO & Director]

All righty then, summing up Q2.Growth -- strong growth, in the quarter, 11% organic, 11% acquired. 25% growth in total in the quarter takes us to a total of 14% as an LTM number. EBITA margin, 5.8% in the quarter despite the very strong growth, and that takes us to a 5.7% margin [ over ] LTM. Cash conversion at 69% LTM, so some work left to do there for us rest of the year. Interesting opportunities, business opportunities, across the Nordics. We didn't talk about the business pipeline, but that remains strong. There is a lot of work for us to do, both over the summer and moving into the fall, for new opportunities across the Nordic region.So with that, we are ready to open up for Q&A.

[Operator]

[Operator Instructions] And our first question comes from Henning Zakrisson from Nordea.

[Henning Zakrisson]

I have a question about the integrated facility management contract pipeline. Have -- has the pipeline for larger contracts in the Nordics changed anything?

[Mikael Stöhr, President, CEO & Director]

No, not really. I mean that's -- it is the same structure of the pipeline that we've communicated over a number of quarters now, a strong, solid pipeline for us at Coor; and a mix of large integrated contracts and all the way down to smaller single-service contracts.

[Henning Zakrisson]

Yes, okay. Do you see any potential in expanding [ Pan European]; and the gold business in, for example, Czech Republic?

[Mikael Stöhr, President, CEO & Director]

We're running a Nordic strategy at this point. So we are looking at interesting business opportunities all across the Nordics, both organic and with a continued pipeline for acquisitions in the Nordics. And with a total growth in the quarter of 25% in the Nordics, I say that we have a lot of opportunities going for us in these parts of the world, so that will be our focus for now.

[Henning Zakrisson]

Okay. If I may just ask one more question about the acquisitions pipeline. Do you have any more potential acquisitions coming up? And also, have the acquisition multiples moved in any direction?

[Mikael Stöhr, President, CEO & Director]

We have an acquisition pipeline that we've worked with since even before we listed 3 years ago that we're continuing to work with. We're meeting with entrepreneurs in our preferred segments of service across the Nordic region, something that we are very happy to continue with. Again, our strategy is focused on organic growth. And we will make acquisitions only when we see a perfect fit for us. That said, there are a number of situations that we are looking at, as we have done, over the coming years. So the pipeline remains interesting for us, I believe, in the Nordic region.

[Operator]

Our next question comes from Mats Hyttinge from Jarl Securities.

[Mats Hyttinge, Senior Analyst]

Some very short questions here. I mean, you show very strong organic growth, especially to your new countries -- well, relatively new, Norway, Denmark and Finland. Is there anything that's changed in the market that you continue to show this strong organic growth over time?

[Mikael Stöhr, President, CEO & Director]

No, not really. I mean, we're -- the markets across the Nordic, they are stable. There are no new entrants of new competition outside. It's a continued hard work here from us at Coor. What we have done over now a number of years is adding onto our old, traditional focus on the integrated contracts, also building up a sales organization of SME contracts. And we've now seen that for a number of quarters flowing through in organic deals. And of course, when you then add on the occasional IFM -- because the IFM contracts, that business tend to be much lumpier. So the large IFM contracts, when they come, typically they are large, as the Storebrand contract now adding in project volumes. That's a one singular contract volumes of around SEK 100 million or even beyond, SEK. Of course, you have to sell a lot of small contracts to get up to that volume, but part of our strategy is to try to do both in -- across the Nordic region. But you could say for Coor adding on the additional focus also on the SME segment is still fairly new to us.

[Mats Hyttinge, Senior Analyst]

Okay. I have another question. I think I'm pretty impressed by the Denmark situation. I mean you added a lot of growth both organically and acquired, and you -- still the margin is actually quite nice there on EBIT margin of 4%. What's the driver behind that? Is that just a good management? Or what happened there in that case? I would suspect a little bit more of an effect there on the short term negatively affect.

[Olof Stålnacke, CFO & IR Director]

I think it's 2 parts to that really. And one is that we have managed to, while doing the integration, continue to drive the sort of the old Coor operations. We see quite strong margins in our variable volumes in sort of the old Danish contracts in the quarter. It is also an effect of the first synergies coming through from the Elite acquisition, so we are starting to see the synergy effects. So I would say those two: high project volume margins and synergy effects.

[Mats Hyttinge, Senior Analyst]

Okay. Just one last question before I let you go for vacation. You have the -- I mean, integration and restructuring costs in the quarter or where they're adding up to about SEK 25 million. Is this something we should look forward, like, continuously? I mean you have a lot of the acquisitions done and everything, so is there something you -- is this the level that we're going to look for in the rest of the year? Or is this going to be slightly lower?

[Olof Stålnacke, CFO & IR Director]

It will definitely go down in the second half, but we feel we are not done with the integration in Denmark and also the first integration in Norway. Also, we are adding a new acquisition will -- which will drive some restructuring and integration costs, but it will definitely go down from the level we've had in the first half.

[Operator]

Our next question comes from Karl-Johan Bonnevier from DNB Markets.

[Karl-Johan Bonnevier]

Lots of good answers already to my questions, but when you look at the acquisitions, have you managed to retain the key people that you wanted to keep, so to say, to really keep this good momentum and getting the start going?

[Mikael Stöhr, President, CEO & Director]

Karl-Johan, yes, we have. We're very happy about that both in Denmark and in Norway. Of course, being a people business, that's something we, you rightfully put a lot of effort into. And we put the -- and the larger integration obviously is the Danish one. And what we did is it's already day 3, I believe, of finalizing that acquisition. We could communicate a new organization and new structure, thereby being able to talk to the important people in the company we acquired, explain to them where they would fit into Coor. And that has gone very well.

[Karl-Johan Bonnevier]

Excellent. And just also looking into the second half of this year is obviously the organic growth has been extremely high, if we are looking at it in the first half of this year of double digits. Would you be disappointed if you slide below or if you slide down a couple of percentage points going into the second half?

[Mikael Stöhr, President, CEO & Director]

I think, from a growth perspective, we've seen this historically as well. And by historically, not only over the last 3 years, where we'll be listed, but also before that: that the organic growth, some quarters, we show double digits. Some quarters, we show very low. What I am very comfortable with is the long-term target we have of the 4% to 5% organic growth over time. So you are absolutely right that the 11% that we see in the quarter and we've seen over the last couple of quarters, it's a very high number for us historically.

[Karl-Johan Bonnevier]

And to some extent, I guess, that's also now coming into your comparables.

[Mikael Stöhr, President, CEO & Director]

That's true.

[Operator]

[Operator Instructions] Okay, as there appeared to be no further questions, I'll return the conference to you.

[Mikael Stöhr, President, CEO & Director]

Okay, thank you very much. Thank you, everyone, for listening in to us today. And I hope to meet at least some of you when we are back from holidays in a couple of weeks.Thank you very much.

[Operator]

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