Coor Service Management Holding AB

STO:COOR

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the Coor Service Management Q2 Report of 2023. And afterwards, there will be a question-and-answer session. Today, I am pleased to President and CEO, AnnaCarin Grandin; and CFO and IR Director, Andreas Engdahl. Please go ahead.

[AnnaCarin Grandin, executive]

Welcome, and thank you for listening into our Q2 report. I will start by giving a summary of our second quarter, including a market update and then continue to present our triple bottom line results. I will then hand over to Andreas to present some more details around financial performance before we sum up and have a Q&A.

Starting with some highlights from the second quarter. Within the business dimension, we continue to see high activity. In the second quarter, we have won a number of small and midsized contracts: In Sweden, a new IFM contract with Fabege; and a cleaning contract with the National Agency for Education, just to mention a couple.

A stable inflow of small and midsized contracts adds up to almost SEK 200 million of new contracts for the first half year. We have also prolonged several important contracts in Norway. Equinor has extended the offshore contract. And in Sweden, we have prolonged the IFM contract with the configuration of Swedish enterprises. Also, the profit to contract with Hemsö

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and the contract of patient meals at Karolinska University Hospital in Solna have been prolonged. During the second quarter, we announced that after a tender process, Ericsson decided not to extend the more than 20 years old IFM contract with Coor. They have chosen to consolidate all of its IFM services under 2 global IFM players.

The Coor's existing agreement with Ericsson includes services to their

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to deliver nationwide cleaning to our customers in Sweden. Our efforts in digitalization continues. And in the second quarter

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Simply by Coor is our new digital interface for workplace services that aims to simplify work life for service users. We gather all [indiscernible] all the time, and we have created a simple and intuitive user interface

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access to room bookings IoT platforms and sustainability platforms.

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last year and well above our target of staying above 70. We also see improvements in our injury frequency of 6.8. Compared 8 to last year, we see a steady improvement. And finally, within social responsibility, we announced new potential contracts that will provide us with the opportunity to win both new first-time outsourcing contracts and on the market already existing contracts in both IFM and single services.

So moving over to our triple bottom line results for Q2 and starting with business responsibility and some of the key financial metrics in Q2. Organic growth is 2% in the quarter. The growth results from new small and midsized contracts as well as high variable volume. More on that later on.

Acquired growth is also 2% in the quarter, fully related to Sweden with the acquisition of Centrumstäd last year and our recent acquisition of Skaraborgs Städ. The EBITA margin for Q2 is 5.1%, and that is in line with the previous quarters. Compared to last year, we see fully normalized volume mix and use of resources.

Cash conversion is an LTM number, and it continues to be stable at 90%, in line with our target. Leverage is also an LTM number, 2.6, is an increase compared to Q1 after distributing ordinary dividend and finalizing the acquisition of Skaraborgs Städ.

So moving on with our performance in social and environmental responsibility. First of all, as I mentioned earlier, we see a strong result of 76 in this year's employee survey and an improved TRIF level of 6.8. Gender balance continues to be stable at around 50-50. And on the environmental KPIs, we see a positive development in all areas.

On Scope 1, CO2 emissions from our vehicle fleet. We still have an increase compared to baseline from 2018 in absolute numbers, but a decrease compared to previous quarters. All countries work actively with increasing their share of electric vehicles and more effective fleet management and to use HVO fuel instead of diesel whereas possible to turn the trend and to reduce CO2 emissions in absolute numbers.

Also in Scope 3 from food and beverage, we see a positive development where our reduction compared to baseline has decreased -- sorry, has increased with 18%, and we are well on track towards our 30% target.

For Scope 3 and science-based target aligned suppliers, we have reached 5%, and that is an improvement's compared to last year's measurement at 4%.

And with that, I hand over to Andreas to continue with the details on the financials.

[Andreas Engdahl, executive]

Thank you, AnnaCarin. Starting with a look at net sales and organic growth. As AnnaCarin mentioned, organic growth for Q2 is 2% and net sales amounted to SEK 3.2 billion. That is an all-time high for Coor.

Growth in the second quarter is driven by high variable volumes and several new midsized contracts. That is partly offset by the ended contract with Volvo Group as well as the completed large maintenance stops in the Norwegian oil and gas industry. Both items concluded during the second quarter last year. Looking at organic growth over a longer period of time, we see an average above 4% since our IPO in 2015, in line with our long-term goals.

Coor's total turnover of SEK 12 billion, another all-time high for us, can be viewed in different dimensions. From a contract type perspective, we see that the split continues to be stable with IFM contracts just under 60% [indiscernible] to previous quarters and a service mix fully normalized compared to the COVID period.

Cleaning continues to be our largest service line with 39% of net sales. And on our customer segments, the split remains diversified. All in all, we see a well-balanced portfolio in all 3 dimensions.

On EBITA and margin, Q2 ended at SEK 161 million and 5.1% in margin, a margin in line with the previous 2 quarters. Volume mix and use of resources are fully normalized versus comparable numbers. And looking at average margin over a longer period of time, it has been in line with our financial target at around 5.5% since our IPO in 2015.

Looking at Q2 country by country, starting with Sweden. Organic growth from high variable volumes and new midsized contracts partly offset by the contract with Volvo Group that was ended in May last year. With a fully normalized volume compared to the COVID period as well as normalized use of resources, we see margins in Sweden stabilizing in the 9% to 10% range.

In Denmark, growth is coming down due to more normal levels. The second quarter is partly influenced by a successive start of the contract with Danish Building and Property Agency in Q2 last year, and we also see high variable volumes. Margin is slightly stronger compared to previous 2 quarters.

The past year, our Danish organization has had a strong focus on start-up activities and reinforcing central staff functions to handle the growth, but also to identify synergies with the rest of the operations, further strengthened customer relationship and build for continued profitable growth.

In Norway, as we have described the past quarters, we had high project contracts as well as starting up new contracts that was won late last year. Margins are lower compared to last year, primarily an effect of lower volumes and scalability. At the start of the second quarter, the utilization rate for the offshore contract with Equinor was less favorable compared with the same quarter last year that temporarily affects profitability negatively.

In Finland, new small contract wins brings Finland back to growth, and the lost contract with ABB is now fully included in comparable numbers. Margins are in line with both last year and previous quarters.

Looking at the contract portfolio, we see that there is a positive net change in the first half year of 2023. This is driven by a number of new small and midsized contracts being awarded, while 2 contracts ended in the same period. The contract with Ericsson continues until the end of August and will be included as ended in the second half of 2023.

For this quarter, we also include maturity for large contracts. That is contracts with an annual turnover above SEK 100 million. For 2023, the 4% represents Ericsson that are still in our books. For 2024, we have 9% of our total net sales that expires. Small and medium-sized contracts represents just over 50% of Coor.

Moving on to cash flow. We see that our key metric LTM cash conversion remained stable at 90% in Q2, in line with our target of staying above 90%. As always, there is a strong focus on cash flow in our organization, and we also continue to see stable payment patterns from our customers.

On the LTM cash flow, the M&A item is relating to finalizing the acquisition of Skaraborgs Städ.

And on the balance sheet, net working capital as a percent of net sales is stable compared to Q2 last year at around negative 7%. Leverage ended at 2.6, an increase compared to previous quarter, and as AnnaCarin described, driven by distributing ordinary dividends and finalizing the acquisition of Skaraborgs Städ in the second quarter. We're still well in line with target of staying below 3.

And with that, I hand it back over to you, AnnaCarin.

[AnnaCarin Grandin, executive]

Thank you, Andreas. And before we go into our Q&A, I would like to summarize our second quarter. Coor achieved a historically strong turnover of SEK 12 billion LTM, and we continue to see growth opportunities ahead from our strong pipeline across the Nordic, both in IFM and single services.

In a quarter where profitability is below our long-term financial target in combination with the lost Ericsson contract, we are focusing even more on margin strengthening activities as we are committed to continue to deliver on our long-term growth and profitability targets.

We have a solid cash flow at 90% and a leverage of 2.6, in line with our targets. And we continue to focus on employee engagement and see strong results in our annual employee survey. And I would like to extend my warm thanks to our customers for the confidence you have in us and equally big thanks to my colleagues. Together, we are contributing to building and developing a sustainable and successful company.

And with that, we open up for questions.

[Operator]

[Operator Instructions] We have one question from KJ Bonnevier from DNB Markets.

[Karl-Johan Bonnevier, analyst]

A follow-up on some of the things you talked about. Looking at contract pipeline, there seem to be a lot of activity going on out there in the market for the moment. How still the temperature in the market is now compared to maybe 6 months ago?

[AnnaCarin Grandin, executive]

I would like to say that we have had quite a strong pipeline for half year. And we have seen that some of that has been materialized during both Q1 and Q2, and we will continue to see that materialize for the next half year.

[Karl-Johan Bonnevier, analyst]

And when you look at Ericsson going out the books, is there enough volumes out there in the market if you are successful in tender activities to balance that kind of headwinds that we're going to see on the organic side?

[AnnaCarin Grandin, executive]

Yes, we are quite confident to mitigate the loss of Ericsson over time.

[Karl-Johan Bonnevier, analyst]

And looking at Ericsson, should we expect any extra effects in Q3 due to the ramp down of that contract?

[Andreas Engdahl, executive]

I think Ericsson, we will end that contract end of August. And obviously, the Swedish organization are working really hard to also to phase out all the costs. But the timing of that, there might be some costs left in September. That could be the case.

[Karl-Johan Bonnevier, analyst]

And when you look at the employees that you now, say, get out of the Ericsson contracts, are you able to circulate that in other parts of your operation in Sweden?

[AnnaCarin Grandin, executive]

Yes. I think there will be a combination, of course. And some of our employees will be transferred to subcontractors in the new contracts. And some of them, we use them, of course. They are valuable assets for Coor. People is one of our most valuable assets in Coor. So we really try to take care of our people in the best way and use them because they have a lot of competence and knowledge that we need to further grow the company, of course.

[Karl-Johan Bonnevier, analyst]

But you don't really have any, say, feel for how many of the people you see that you are able to, say, make use of other -- in other places, maybe in-sourcing things that you have for the moment subcontracting another contract or something like that?

[AnnaCarin Grandin, executive]

I think it's a bit too early to give you a number. But of course, we are working actively with that.

[Karl-Johan Bonnevier, analyst]

And when we -- I know it's early days, but I guess everybody is slightly worried about [indiscernible] and I guess Q2 is the quarter where you normally have the highest gearing level looking at the annual cycle. Is there any reason to believe that you shouldn't continue to be a big dividend payer going forward?

[Andreas Engdahl, executive]

I think as we mentioned, the driver behind that is a stable cash flow, and we continue to see stable cash flow and with a stable payment pattern from the customers, and we don't see any changes in that.

[Karl-Johan Bonnevier, analyst]

So no changes to capital allocation as far as you see at this stage at least?

[Andreas Engdahl, executive]

No. We continue with the prioritization that we have on capital allocation.

[AnnaCarin Grandin, executive]

Thank you.

[Andreas Engdahl, executive]

Thank you.