Edited Transcript of COOR.ST earnings conference call or presentation 28-Apr-20 12:00pm GMT

And if our customers move into a lower level of economical pace, also long term, that will also have effect on our subscriptions over time. We’ve worked hard since the outbreak in the beginning of March to reduce our cost base at Coor and to try to minimize the negative financial impact that we’re seeing, mainly now then from the decrease of variable volumes. We’ve gone into short-term layoffs or furlough programs throughout the Nordic region, working together with — in each of the individual countries with the programs that are run by the different governments in the different countries.

Summing it up. We’ve now laid off short-term in furlough or terminated the employments of around 20% of the employees of Coor or around 2,300 individuals are affected by furlough or termination of Coor. This, of course, is the main activity for us to come down in cost to make sure that we try to stay ahead of the curve. The negative impact in Q1 that we estimate from COVID-19 effects that’s around SEK 15 million on an EBITA level. So that’s the brief summary on how we think about our priorities and the effects on the business of Coor of COVID-19.

Moving on, you see some parts of this materialize in the numbers for the first quarter 2020. Of course, a quarter characterized by COVID-19 but also with a continued strong cash flow across the board of Coor. Looking first at the organic growth numbers in Q1, we showed a negative organic growth of minus 2% in the quarter. We had negative growth in Sweden, negative growth in Finland. We grew in Denmark and were fairly even in Norway. Acquired growth for the group of 2%. That’s the company, Norrlands Miljövård, that we bought in Sweden in the end of 2019 that is now coming through in the figures. EBITA margin of 4.8% in the quarter and with a cash conversion of 114%. Now the cash conversion, of course, is an LTM number. That all takes us down leverage as well compared to last quarter, and we’re now at 2.1x adjusted EBITDA on an LTM basis. So that’s the short version of the numbers for the quarter. More details will follow.

Moving on to the next slide, some words on business highlights for Q1. Of course, the first bullet is COVID-19. We covered that to some extent on Page 3 already. Now it’s been a high focus on activities, balancing the negative effects of COVID-19 in the quarter, but we’ve also done other things. During the quarter, we’ve had a strong focus on large integrations and general efficiency measures that we put through when integrating new contracts at Coor. Already mentioned Norrlands Miljövård that make up the 2% organic growth for the full group. They’re also a meaningful contribution to the profitability that we see in the quarter in Sweden.

We remain very happy with this acquisition. And we’re now in full integration mode, making sure that we learn a lot from how Norrlands Miljövård have operated very profitable operations in the SME segment. The Danish Police contract that was a prolongation and a substantial expansion of that contract ramping up from October, November last year. In the quarter, we’re now seeing that contract up fully ramped up and very happy with the start-up of that contract. And of course, with a substantial contribution of public sector exposure in Denmark, in troubling times, I think that’s also a very positive thing for us going forward.

ICA, the Swedish food retailer, also a contract that ramped up in November, seeing full volumes of that ramping up in the first quarter of this year in Sweden, another big startup. That’s a contract with a full yearly volume valued at around SEK 160 million. So it’s a substantial contract that’s ramping up in Sweden. We also signed — in the first quarter, we signed a midsized Finnish IFM contract that we’re now ramping up. That will be started in May.

Also during the quarter, there was continued market activity with several important prolongations of contract for us. In Sweden, we prolonged a couple of large IFM contracts, both Borealis on the West Coast of Sweden and Vasakronan, a total of over SEK 200 million volumes in those 2 contracts. And in Norway, we prolonged the contract with Equinor offshore where we service 5 platforms with a broad set of services. And we’ve done that for a number of years, and that contract has now been prolonged for a number of years. Very happy with that.

Also in the SME segment continued to prolong with Akelius and Hemsö real estate companies in Sweden, Arcus in Norway and Ballerup Municipality in Denmark. We’re also seeing a solid pipeline of new business opportunities ahead in the large IFM sphere. If you look at the SME activity, we’re seeing a decreased activity from SMEs. The social distancing and the working from home, which, of course, in the Nordic countries is of various degrees, but the types of meetings that we need to have to sell SME contracts on a personnel level, there are substantially fewer of those types of meetings, whereas the pipeline of larger IFMs driven then in a structural series of workshops, has worked well to transform that into digital types of meetings. We’re seeing those processes progress more or less according to plan. That’s on business highlight.

Moving on to the next slide, just a quick run through country by country of the Nordic countries, starting with Sweden. Q1 organic growth of minus 2%, with an acquired growth of 5%. That’s the acquisition coming in from last year with an EBITA margin of 9.6%. Now from a volume perspective, a couple of moving parts in Sweden. On the negative hand, we’re seeing variable volumes decline already pre COVID-19 effect. We saw a decline in negative — a negative decline in variable volumes in Sweden. Of course, the comps from last year was very high. And then an acceleration of decrease in variable volumes from mid-March, mainly then a push on food and beverage volumes downwards.

On the other hand, we were seeing positive volume impact in Sweden in new business from ICA, as I mentioned, and then also with the acquisition, Norrlands Miljövård. The net effect of the downs and the ups in volumes, though, is a negative organic growth of 2% in the quarter. Margin-wise, a very strong delivery from the team in Sweden at 9.6% EBITA margin in the quarter. Continued efficiencies coming through across the organization and also a strong contribution by our new friends at Norrlands Miljövård helping us actually increase the margin in Sweden despite negative effects from COVID-19.

Moving on to Norway. Norway Q1, zero growth, both organic and acquired, an EBITA margin of 5.4%. We saw in the beginning of the year, in January, February, actually a pretty good solid start to variable volumes in Norway, which was then quickly turned to the negative side from both COVID-19, and, again, mainly driven by food and beverage volumes. But also in Norway, you have the downturn in oil and gas and the oil prices coming tumbling down also affects our customers and their willingness to perform variable types of volume. So in Sweden, it’s a double negative, both the COVID-19 and the oil and gas challenges that you can also see coming through in the margin decline in Norway.

Moving on to Denmark. Organic growth of 4%. There’s no acquired growth in the quarter for Denmark and EBITA margin of 2.1%. Now also in Denmark, there are a couple of moving parts from a growth perspective. Organic positive growth coming through mainly from the expanded Danish Police contract, which is then partly offset by lower volumes from COVID-19, again, mainly in the food and beverage segment.

In Denmark, in the EBITA level, we are seeing a negative one-off of around SEK 5 million in the quarter. That’s due to a restructuring we’ve done in Denmark, again, mainly driven by COVID-19. There are more efficiencies coming through in Denmark. As we talked about last quarter already, we’re moving in from last quarter — last year with a too high level of overhead cost in Denmark. There’s a continued structural change to make sure that we come down in overhead cost without damaging the quality of services we deliver to our customers. We’re seeing good progression in these efficiency programs, and we continue to expect effects of those as we progress in 2020.

Moving on then finally to Finland, an organic growth of minus 15% and an EBITA margin of 0.9%. Continued negative growth in Finland from contract closures from last year, contracts with very low margins that we’ve stepped away from. And we’re also seeing reduction of SG&A and other types of costs that actually, even with that level of organic growth decrease, pushes the EBITA margin slightly upwards.

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Klas Elmberg, Coor Service Management Holding AB – CFO & IR Director [3]

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All right. Looking then at the P&L, we see that net sales is basically on par with last year at SEK 2.5 billion. EBITA is down by SEK 9 million or 7%. And as Mikael previously said, we estimate that the COVID-19 has impacted the EBITA number by approximately SEK 15 million.

Financial net is slightly better than Q1 last year, and that’s mainly driven by FX effects. Amortization slightly up versus Q1 last year. And all this then takes us down to an adjusted net income of SEK 80 million for the quarter compared to the SEK 88 million in Q1 last year. Looking then at the LTM numbers, we see that net sales is still at SEK 10.3 billion. And that equals an LTM growth of 3%. 2% is organic and 1% is acquired. EBITA is SEK 541 million or 5.2%. And adjusted net income for the LTM period is SEK 347 million.

Going on to the cash flow for the LTM period, we see that we started out with an ingoing cash balance of SEK 351 million. Operations have contributed with almost SEK 800 million, which is a very strong number and the result of the very strong focus that we have had on working capital across the organization for a long period of time. We did not see any negative changes in payment patterns from customers so far. And we also had a positive calendar effect this quarter compared to the same period last year.

The financing flows, reflecting interest, loans and leasing adds up to SEK 22 million, and the paid taxes is SEK 47 million. Cash out from M&A is SEK 164 million, and that’s fully related to the acquisition of Norrlands Miljövård. And dividend that was paid out in May last year amounted to SEK 380 million. And that takes us to an outgoing cash balance of SEK 578 million.

Moving on to some of the cash flow details. And as you know, we focus on the LTM values, and then we see that we had a CapEx level of SEK 83 million. That equals 0.8% of net sales. The strong focus on working capital shows in the working capital improvement of SEK 188 million, and that adds up to the SEK 848 million in adjusted operating cash flow, which then gives us a cash conversion of 114%. Very strong number.

Last but not least, some of the details from the balance sheet. We see that we have a negative working capital of minus SEK 852 million. That equals minus 8.3% of sales. And with the SEK 578 million in cash and SEK 364 million in leasing debt, our net debt is just below SEK 1.6 billion. And that gives us a leverage of 2.1, which is well below the external target of 3 and also well below the covenant level in our RCF of 3.75. And as you can see on the bottom part of the page, the financing sources that we have at Coor. There are 2. It’s the RCF of SEK 1.5 billion, of which approximately SEK 750 million is unutilized, and we have a duration until 2024 on that one. And then we have the bonds with a total amount of SEK 1 billion and the duration from the March ’19 is 5 years.

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Mikael Stöhr, Coor Service Management Holding AB – President, CEO & Director [4]

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And with that, summing up Q1, minus 2% organic growth, plus 2% acquired growth, EBITA margin of 4.8%, the continued strong cash conversion and looking forward, of course, 2020, our view is that it will continue to be characterized by COVID-19. But we’re also seeing that in a business model such as Coor’s when we’re through the more acute crisis period, we would expect a lot of companies in the Nordic region to be looking for the next level of efficiencies. And with both an IFM outsourcing or single service outsourcing, we believe that we will be — continue to be an important partner to the Nordic business community.

So with that summary, I think we’ll open up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Karl-Johan Bonnevier from DNB Markets.

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Karl-Johan Bonnevier, DNB Markets, Research Division – Analyst [2]

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First of all, congratulations for managing a very difficult market in a seemingly very proactive and good way looking at how the financial numbers has come out in the quarter. And I’m particularly impressed by the Swedish margin that you managed to, say, extend that. I know there was some dilutions in the numbers you had last year with ramp-ups and similar things. But is the strength of the Swedish operation really at this level that you can cope with these kind of short-term cost and short-term challenges? And I know customer close downs and still managed to basically keep margins at this high level.

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Klas Elmberg, Coor Service Management Holding AB – CFO & IR Director [3]

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Thank you, Karl-Johan. I mean, what we see in Sweden in this quarter, as we saw also in the previous quarter, is that we see a broad range of efficiencies across the organization, and that has, of course, impacted the numbers throughout the quarter. And of course, we’ve got some impact of COVID-19 for the last couple of weeks. But compared to the other countries, Sweden was not as affected, perhaps as we had expected, and they have done a fantastic job in actually managing this in a good way. So very strong contribution from Sweden, from efficiencies and so on. And then as Mikael said before, we also have strong contribution from Norrlands Miljövård that impacts the numbers in a very positive way.

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Karl-Johan Bonnevier, DNB Markets, Research Division – Analyst [4]

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And obviously, I think everybody is interested to see your take and your ideas of how Q2 could end up given where we are and then the uncertainty towards the end of the project, as you described. With 20% of the employees now in some sort of short-term redundancies, is that a good proxy for what kind of revenue impact one is supposed to see short term? Or how do you see that?

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Mikael Stöhr, Coor Service Management Holding AB – President, CEO & Director [5]

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No, I think that should give you an indication of what we saw over the last part of March. And having a crystal ball looking into Q2 and Q3, I mean, I would expect those quarters to be very challenging indeed with a continued impact on food and beverage volumes, a strengthened impact on variable volumes across the board, because the harder of a close down of a society that we’re seeing in the Nordics, the harder the impact specifically on variable volumes we’re seeing across the board. So of course, of trying to be proactive, trying to stay ahead of the curve, I think around 20% on furlough or terminations gives you a sense of the way that we view the world.

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Karl-Johan Bonnevier, DNB Markets, Research Division – Analyst [6]

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And then when you look at the risk that is then transpiring into the earnings, with, I guess, a lot of the costs relating to the furlough now covered by government programs in the different countries. Is that — should one think about this having some sort of operating leverage effect also on the EBIT numbers for you? Are you able to balance it?

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Mikael Stöhr, Coor Service Management Holding AB – President, CEO & Director [7]

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I think the net effect that we’re seeing will be negative for us because the — in the governmental subsidies, it’s not 100%. So of course, the key question is when all of the societies come back, at what level do the companies, that is our customers, come back. And I think both Q2 and Q3 will be more turbulent types of quarters. And only beyond Q3 I think it would be my view that we would expect any type of normalization of the overall business. And during the time with the furloughs, I think, the net effect will be negative for us at Coor.

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Karl-Johan Bonnevier, DNB Markets, Research Division – Analyst [8]

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Excellent. And just looking at key events like big customers now having the majority of their employees in work-from-home environment. How much of the contract is still there for you in a typical kind of situation?

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Mikael Stöhr, Coor Service Management Holding AB – President, CEO & Director [9]

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Difficult to give a general answer, KJ. It’s very, very customer centric. And we’re staying, as we always do, very close commercially to our customers. And various customers actually have very different requirements. Some customers wants us to continue — with the exception of food and beverage because if there’s no one in the office, there is no one there to eat. But some customers actually want us to continue to do the cleaning and continue to do the property services that we’re doing continuous. Others want us to stop as much as possible. So what we do is we sit down with the customer. We bring the agreement that we have with them to the table, and we look at that and we see what types of opportunities are there in the agreement. And of course, we will be commercial with our large and long-term customers and try to — in a very difficult situation like this try to help them as much as possible. So whenever we can shed costs at Coor, we’ll, of course, try to be very commercial with the customer, but always with the agreement and the basis and on a very much listening to what the customer wants. So thereby very difficult to give a general answer. But of course, the old business model of Coor of on-site services, sort of, there needs to be people on site over time for our business model to work. And I think our view is that longer term, this has not affected the Coor business model. This has not affected the need for companies in the Nordic region, both of large size and of smaller size to want and need efficient service solutions, which, in effect, is what we deliver.

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Karl-Johan Bonnevier, DNB Markets, Research Division – Analyst [10]

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It sounds like a good market in 2021 or something like that, if not before, in that perspective. Just on that note, can you just remind us, is there any large new — old contract renewals coming up in, say, the next 6 to 12 months in your calendar? It seems like you’ve been very successful in renegotiating your old contract pipeline quite early.

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Mikael Stöhr, Coor Service Management Holding AB – President, CEO & Director [11]

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Yes. Both ’18 and ’19 were larger years for us. So ’20 is a smaller year. ’21 is only the year where things will get back to normal levels of renegotiations.

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Karl-Johan Bonnevier, DNB Markets, Research Division – Analyst [12]

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Excellent. And Klas, just to — on the working capital boost we saw in the quarter, how much of that would you say is timing due to the favorable end of quarter? And how much would you say is coming out of the long-term proactive work you have been doing on the working capital side?

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Klas Elmberg, Coor Service Management Holding AB – CFO & IR Director [13]

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The vast majority is from the proactive work and the close relationship that we have with the customer. I mean, there was a very intense focus in Q1, following each customer invoice, each overdue invoice and so on. The majority comes from that. But then, of course, compared to last year when March 30 and 31 was Saturday and Sunday, that has an impact, but somewhat difficult to quantify that with a number.

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Karl-Johan Bonnevier, DNB Markets, Research Division – Analyst [14]

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Excellent. And when you look at the customer receivable risk, I guess, everybody is slightly worried about what’s going on in Norway for the moment in the offshore sector with the low oil price. Is there — do you see any risk for the receivables?

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Klas Elmberg, Coor Service Management Holding AB – CFO & IR Director [15]

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No. I mean, I think we have strong solid customers in Norway. So we don’t foresee any major risks there at this stage. No.

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Operator [16]

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(Operator Instructions) And we have a follow-up from Karl-Johan Bonnevier from DNB Markets.

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Karl-Johan Bonnevier, DNB Markets, Research Division – Analyst [17]

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Yes, one more that I missed on my list here. On the food and beverage side, if you’re looking at normal volumes in that, at what kind of level are you for the moment if you compare it?

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Klas Elmberg, Coor Service Management Holding AB – CFO & IR Director [18]

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I mean, in Norway, we are at very low levels, I would say, since that has been a complete lockdown. In Denmark, also fairly low. Sweden, not as affected. Some customers have closed down the sites, but some have remained open. And we also have food and beverage deliveries to the hospital in Stockholm, the NKS and so on. So they were not that affected.

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Karl-Johan Bonnevier, DNB Markets, Research Division – Analyst [19]

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So the group average would be 30%, 40% capacity utilization of normal. I know Compass talked about basically 55% of their volumes being, say, gone for the moment, looking at their footprint.

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Klas Elmberg, Coor Service Management Holding AB – CFO & IR Director [20]

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Yes. Give or take, that’s probably a reasonable estimate now.

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Operator [21]

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And as we do not have any further questions, I will hand the word back to our speakers for the final comments. Please go ahead.

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Mikael Stöhr, Coor Service Management Holding AB – President, CEO & Director [22]

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All right. Thank you very much. Thank you very much, everyone, for listening in. We look forward to speaking to several of you over the coming days and explaining more and talking more about how we see the world at Coor. And until then, thank you very much, and stay safe, everyone.

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Operator [23]

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This now concludes today’s webcast. Thank you all for attending. You may now disconnect your lines.