Earnings Call: Q1 2021

Apr 26, 2021

Thank you, and welcome to the presentation of KOR's report for Q1 2021. If you have been able to read the report we released earlier today, you might have recognized that we have updated the format, adding some new information, and we are also starting to report on sustainability KPIs. I will start with an introduction of Core and our triple bottom line before we go into our performance in the Q1. Socor is the Nordic market leader in integrated facility management. We have a customer centric business model with a decentralized organization. We deliver a broad range of services, both as ISM contracts as well as single service contracts. We have a clear ambition of becoming truly sustainable, and we are, from now on, increasing our focus on sustainability. We drive our organization in a triple bottom line perspective, we are striving for taking a business, social and environmental responsibility to future proof Core, making us more attractive both from a customer, employee and investor perspective. We have a well balanced portfolio. And to become more transparent, we have now included a revenue split by service line and by customer segment in our reporting. And I will start from the left and the split between our markets. Sweden is the largest country with 51% of total turnover. Norway and Denmark are both account for 21% and Finland for 7%. The split by contract type has been stable over the years with approximately 60% in IFM contracts and 40% in single service contracts. Cleaning is the largest service line with 39% of our total turnover. Property is the 2nd with 31%. Workplace includes a number of services like reception, conference services and office supplies. And together, that adds up to 18%. And food and beverage is now at 7%. Our top 3 customer segments our public customers by 28%, manufacturing by 23% and oil and gas by 17%. So going into our financial figures. We are pleased to present a Q1 with improved earnings and a strong cash flow. We have a negative organic growth by minus 7% in Q1, driven by Sweden and Norway, while both Denmark and Finland shows a positive organic growth in the quarter. And acquired growth is more precisely 0.3%, and it's related to the acquisition of Aeroco Service in Norway that is included in the numbers from March. And the EBITA margin is 6% compared to 4.8% last year. Cash conversion is an LTM number, and it continues to be strong at 98%. Leverage is also an LTM number with 1.5 we are below Q1 last year and well below our target of staying below 3. And from an LTM perspective, organic growth is negative by minus 8%. The acquired growth in the LTM period is 1% and related to the acquisition of Norlandskla award that we made in November 2019, LTM EBITA margin is strong at 6 0.1%. As I mentioned in the beginning, we are now adding non financial KPIs in our quarterly reporting, and we will keep developing this over time. Customer satisfaction is measured on a yearly basis. The score of 70 is from the latest survey in 2020 and up by 2 units versus the year before and now in line with our long term targets. The employee motivation index improved for the 6th year in a row, and we are now at a very strong level of 78. And I'm also very pleased having a response rate at 85% among our 11,000 employees. The total recorded injury frequency is an LTM number, and the level is 9.8 in Q1. This is an improvement compared to a year ago and a significant improvement when looking back to 2016 when we started to measure and follow this in group level. Since 2016, we have reduced the injuries by half. But even if we have improved, we are not satisfied with our current level. We have a long term zero vision that no one should be injured at work. So there are still rooms for improvements. We have focused for several years on improving the balance between female and male managers. 5 years ago, we had 40% female managers and 60% male managers. Today, we are very proud of the fact that we have a fifty-fifty split. And we will start reporting on environmental KPIs on a quarterly basis. We have currently defining robust measuring processes and KPIs. During Q1, Core has decided to commit to the science based target initiative to set climate targets in line with limiting global temperature rise to 1.5 degrees Celsius. And prior to us coming to the science based target initiative, we had established targets to reduce the level of greenhouse gases with 50% by 2025 within scope 1 and scope 2. We have also activities ongoing within the area of Scope 3, for example, addressing purchase material. We will now start the process of aligning our targets to the science based targets initiative, but the 50% reduction of scope 1 and 2 is a first step towards that. So looking at Some of the highlights from Q1, we see that we have some important wins, especially the Pan Nordic IFM contract with PostNord, but also some cases in Denmark and in Finland. We also have a very important 4 years prolongation with Sandvik in Sweden. And in addition to the increased focus on sustainability, we are also gearing up in terms of innovation, digitalization and service development. Within the area of innovation, we are happy to see that our innovative solution, Core Smart Climate, powered by Light Air, is now being sold as a service, including installation and maintenance to our customers. This innovation destroys viruses where they still are in the air and provides a cleaner and safer indoor environment. And our sales pipeline is still very strong, but is progressing somewhat slower than expected. And we continue to be active in our M and A dialogues. And we have showed this slide before, and it is still valid. We believe Core is well positioned for the future. We are market leader in a geographical market where there are good growth opportunities going forward. And the trend of remote working started well before COVID-nineteen, but has been accelerated by the pandemic, we expect that the remote working will increase from approximately a half day per week pre COVID-nineteen to 1 to 1.5 days per week. But there will, of course, be variations depending on industry, geography and type of site. And before we will see a more stable phase, we believe there will be a trial and error phase for 1 to 2 years in the period to come where companies or organizations test out IDs and solutions to find the right balance between remote working and working at the office. And in terms of service development, we also expect companies and organizations To develop their offices with our services and expertise, we are supporting our customers in their ambitions to create attractive offices where people can interact and be creative together in a safe way. And we're making the offices more attractive, the service levels tend to increase. And the demand for digital and technological solutions has increased previous years and will continue to increase. We then expect increased demand for professional cleaning also in the future, while property services is expected to be fairly stable compared to the situation pre COVID-nineteen. And with that, I will hand over to Lars to take you through the financial details for our Q1. Thank you very much, Anna Karin. And if we then start looking at our P and L, Just to see if the slideshow will work. Bear with us for a second. Do have some technical issues in terms of changing the slides. All right. I'll just keep talking, and then we'll see if we get the slides to work. If we look at our P and L, we see that the net sales in total adds up to just over SEK 2,300,000,000. And that means that we are down approximately SEK 200,000,000 compared to Q1 last year. That equals minus 9%. And as Anna Karin mentioned, the organic growth in the quarter is minus 7%, And the FX effect was minus 2%. EBITDA for the quarter is SEK 139,000,000, And that should be compared to the 122,000,000 that we showed in Q1 last year. And that equals an EBITDA improvement of 14% in the quarter. And that gives us a very strong EBITDA margin of 6%, and We compare that to the 4.8% that we had in Q1 last year. If we look at the net income, That adds up to SEK 53,000,000. And the adjusted net income, when adding back the amortization, that amounts to SEK 104,000,000. SEK 4,000,000. Looking at the LTM numbers, we see that net sales for the last 12 months is SEK 9,400,000,000 and organic growth in the LTM period was minus 8%. Acquired growth plus 1% and FX effects of minus 3%. The EBITDA in 1,000,000 of SEK is SEK 573,000,000 and that gives us an LTM EBITDA margin of 6.1 percent. So compared to the period prior to COVID-nineteen, the top Line is more or less SEK 1,000,000,000 lower. But at the same time, we managed to improve our EBITDA in 1,000,000 of SEK with some EUR 25,000,000 to EUR 30,000,000. So very strong EBITDA performance from the organization. On a country by country perspective, there are many similarities in Q1 compared when you look back to the Prior quarters, we see the same types of patterns. We see that food and beverage volumes continues to be down compared to Q1 last year. And we also see lower levels of property related volumes. But at the same time, we see a high demand for the professional cleaning. And we also see some positive effects from some of the new business. Even if we're down in terms of organic growth in both Sweden and Norway, we're very happy to see that both Denmark and Finland shows organic growth of approximately 3% in the quarter. All countries are improving EBITDA margins compared to Q1 last year. And all countries except Sweden is also improving EBITDA in absolute numbers, while Sweden is on par with last year. The drivers behind the strong profitability are, As you have heard before, a strong focus on cost reductions, efficiencies, but also a positive volumemix effect that we have seen in several of the countries. And if you look at specifically Denmark and comparing the Q1 figures in '21 with last year, you should remember that we did have a negative one off in Denmark in Q1 2020 of approximately SEK 5,000,000. So that partly explains the big positive change there. If we then take a look at the cash flow and the sources and usage of cash in the last 12 months, You see that we started off with an ingoing cash balance of SEK578,000,000. Operations contributed with SEK 720 SEK 4,000,000 financing flows, and that reflects interest, loans and leasing, that adds up to minus SEK 817,000,000. And the vast majority of that is actually us reducing our utilization of the RCF Financing, as you can see in the bullet below, minus SEK 600,000,000. Taxes paid is SEK 52,000,000 and cash out from M and A is SEK 60,000,000 and that's fully related to the acquisition of Alok in Norway. And that takes us to an outgoing cash balance of EUR 373,000,000. Then I think we ran into some technical issues again. Talking a little bit about the cash conversion. We do have a strong cash conversion of 98% in the quarter as an LTM number. We see a relatively low level of CapEx, and we see an improvement in working capital. If we look at customer payments, we continue to see the same positive signs as we have seen in the past that Big customers continue to pay according to the invoices and according to the agreements, so solid customer payments. If we look at net working capital, that is negative by SEK 891,000,000, and that equals minus 9.5 percent of net sales. Net debt is at SEK 1,100,000,000 and leverage, as Anna Karin mentioned, EUR 1,500,000,000. So I think that concludes the more detailed financial part. And I'll hand over to you, Anna Karin, for the last summer. Yes. Thank you, Klas, and we do apologize for the technical issues. Before going into questions, I will just briefly summarize our Q1. Even if the organic growth is down by minus 7%, we are happy to see that the stability of our subscription volumes is strong. From a growth perspective, our main priority is winning new contract, but as always, we need to win it on the right terms. We have now been affected by COVID-nineteen for more than a year. During that time, we have been extremely clear in our prior stations. Number one priority have been the health and safety for our employees and our customers' employees, followed by focus at cash and EBITA. And EBITA margin is 6% in Q1 and 6.1% for the LTM period. Cash conversion is 98%, well above the target of 90%, and leverage is at 1.5%. We have succeeded through our ability to adapt and stay close to our customers. And I would like to take the opportunity and send a great thank to all Core employees for another strong quarter for Core. And with that, we will open up for questions. Thank Our first question comes from the line of Karl Johan Berndevier from BNB Markets. Please go ahead. Your line is open. Well, first of all, a reflection just looking at the performance you have done over the last year, considering the strength of the And all the volatility we have seen in the market, very impressive, keeping the whole financial model together like you have done, I must say so. And looking at the new business breakup, I thought that was very interesting on Page 3, and I noticed in the annual report as well. Anna Karin, could you maybe elaborate a little on the successes you have had in the different customer segments? If I look back, obviously, the public segment, particularly in the customer segments, has been something that has moved up a lot. I guess It is the Karolinska Hospital, a big part of it. But maybe talk a little about the business momentum you see in the different segments here, When you look at opportunities maybe for the second half of this year as well. Sure. Hi, Karl Johan, and thanks The question, yes, you're absolutely right that the public segment has increased in its share of the revenue. And as mentioned, It's now at 28%. It was slightly over 20% if you look back a year ago, and it's Related to the Kalkuset in Stockholm, but you also have the Danish police, for example, as one of the larger public contracts that we have, that has also increased during the last 12 months. And if you look into that segment, it's also quite a lot related to cleaning, But you also see that cleaning has increased its share of the total turnover as well in the last 12 months. And when you look at that from a business mix perspective, I guess you imply with the comments you have done in the report that, that is something that is also driving your overall margins. Yes, that's correct. And when you look at the financial targets, you're obviously meeting them in a good way except for one of them, the organic growth. And As you see the COVID-nineteen pandemic situation normalizing, clients getting back to offices, Do you see yourself being back in that range? And then also then, obviously, adding to that the Equinor challenge you see in it for the moment? I think that is, of course, a challenge for us that we will lose some volumes by the end of this year related to Equinor. And then it's, Of course, very much related to when will people start returning to the office. And as Anna Karin mentioned before, I mean, the importance of us So winning our share of that very strong pipeline that we see out there. So very difficult to say when We will be back in our targeted level, but we're very confident that we will get back there. And I noticed the commentary, Anakorin, did on the very strong pipeline across the Nordics, but maybe a slower conversion of that. Is that what do you see playing in there? We still can see some delays in the processes. So it's taking a bit longer time than we actually expected. But the pipeline, the strong pipeline is still there. And do you see, say, normal kind of delays compared to, So, say, weaker business climate, if you put it like that, also playing into an acceleration in your being able to convert these orders With that or at least? Yes. I think before, more normal, we can see a 3rd wave of COVID-nineteen, and I think that has been delaying some of the processes we have with our customers. Good, good. And the final one for me at this stage. Looking at pay tax in the cash flow statement, I saw it was up. Have you done any reevaluations of your loss Carryforward. So is that just the early start of the year impact of paying taxes? No, no changes there. Thank you very much. Stay safe. Thank you. Thank you. You too. Thank We have no more questions from the line. I will hand it back to our speakers for their closing comments. Yes, thank you for listening to this presentation. I hope you enjoy our new format to be more transparent. We We feel a bit more margin as well. And stay safe out there. Thank you.