Earnings Call: Q2 2021

Jul 15, 2021

Ladies and gentlemen, welcome to the Core Service Management Q2 Report 20 21. For the first part of this call, all participants Today, I am pleased to present President and CEO, Anna Karen Grandin and CFO and IR Director, Klas Emberg. Please go ahead with your meeting. Thank you, and good morning, and welcome to this presentation of Chorus Report for Q2 2021. After a brief introduction of core and our triple bottom line, we will continue with the business and market update, followed by some details around the financial before a sum up and of course, Q and A. So Core 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 to our customers. We have a clear ambition of becoming truly sustainable, and we are increasing our focus on sustainability. We drive our organization in a triple bottom line perspective. We are striving for taking a business, And looking at core, Sweden is our largest country with 50% of total turnover. Norway and Denmark are both slightly above 20% and Finland 7%. The split by contract type has been stable over the years, with approximately 60% ISM contracts and 40% single service contracts. And looking at our turnover by service line, Cleaning is the largest service line with 39%. Property is the 2nd with 31%. Workplace includes several services like reception, conference service and office supplies. And together, are up to 18%, and food and beverage is now at 7%. And our top three customer segments are public customers by 27%, Manufacturing by 23% and Oil and Gas by 17%. So all in all, we have a well balanced and after a number of quarters with negative organic growth driven by negative impact of COVID-nineteen. We are now very happy to see a strong organic growth in the Q2, and all countries show positive organic growth. And in total, the organic growth in Q2 is 8%. So going into our financial figures, are pleased to present a second quarter with strong organic growth of 8% and historical high earnings level and continued strong cash flow. Acquired growth is 1%, and that is fully related to the acquisition of our core service in Norway. The EBITA margin is at impressive 6.8% compared to 6.2% last year with all countries improving margins versus last Q2. Cash conversion is an LTM number, and it continues to be strong at 94%, and that is well in line with the target of being above 90%. Leverage is also an LTM number with 1.7, we are below Q2 last year and well in line with our targets of staying below 3. And from an LTM perspective, organic growth is still negative by minus 4%, driven by COVID-nineteen. The acquired growth in the LTM period is 1%, and LTM EBITA margin is strong at 6.3%. And as you know from our Q1 reporting, 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 from the latest survey in 2020, up by 2 units versus the year before and now in line with our 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 that is well in line with our targets. The total recorded in Europe frequency is an LTM number and the level is 9.1 in the second quarter. 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-up this KPI, since 2016, we have reduced The injuries by more than half. 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 improvement. And we have focused for several years on improving the balance between female and male managers. And today, we are very proud of the fact that we have a very good balance of fifty-fifty. As of this report, we will start reporting on environmental KPIs on a quarterly basis, And we start with Scope 1 according to the Greenhouse Gas Protocol. This refers to CO2 emission from our vehicles in relation to our total net sales. In absolute numbers, the CO2 emission have been stable over the last years, but with lost volumes in food and beverage, a service line with low level public vehicles. We see that the relative measurement has moved slightly in the wrong direction. And to secure that we start moving in the right direction, KORE is taking the decision in Q2 to start the electrification of our vehicle fleet. So we will keep developing our external KPIs from an environmental perspective and adding both Scope 2 and Scope 3 are going forward. So over to our business and market updates. Looking at some of the highlights from Q2, we see that we have some important wins, Especially the IHM contract with DSP in Denmark, a security contract with Borealis in Sweden and a property contract with Tilke in Finland. We have also won a very important ISM prolongation with Equinor in Norway on the production site as well as a prolonged property contract with Atento in Finland. So within the area of innovation, I would like to highlight the updated version of Smart Drone. With Smart Drone, we can provide advanced aerial scanning combined with thermographic analyzers. The drone has been can be used to discover water damages, energy leakages and other types of maintenance needs in an early stage. The smart drone also allows for more efficient, accurate and safer inspections and planning for maintenance of roofs, facades and grounds. And the sales pipeline is still very strong across the Nordics, both in IFM and single services. And we continue to have a high activity in our M and A dialogues. In the quarter, we have decided to expand are in the experience a strong demand from all kind of customers how to create the happiest, healthiest and most prosperous workplace environment. We have designed a 360 readiness assessment for the workplace, supporting the customers to create a safe and attractive way back to work, But also enable our customers to rethink and design their future workplaces. And we believe the workplace will still be central, but there will be a growing need for collaboration, innovation and social life at work with well-being and commitment in focus. And the demand for digital and technological solution has increased previous years and will continue to increase. And when making the workplace more attractive, the service levels also tend to increase. So with that, I will hand over to you, Claus. Thank you very much, Anna Corin. And if we then continue by looking at our P and L statement, we see that the net sales for the quarter is somewhat above SEK 2,400,000,000. That means that we are up approximately SEK 200,000,000 versus Q2 last year. That equals the total growth of 8%. And as Omer Korn mentioned, the organic part is also 8%, Acquired growth is 1%, and then we have a small negative FX effect of minus 1%, mainly related to Danish kroner. EBITDA is at SEK 167,000,000 compared to the SEK 141,000,000 in Q2 last year. And the EBITDA level of SEK 167,000,000 is an all time high level for an individual quarter at core, and that translates to an EBITDA improvement of around 19%. And that gives us a very, very strong EBITDA margin of 6.8% in the quarter. Net income in the quarter is SEK 81,000,000 and the adjusted net income when adding back the amortization that amounts to SEK SEK 125,000,000. On the LTM numbers, we see that net sales is approximately SEK 9 point SEK 6,000,000,000. And as Anna Karin mentioned, the organic growth in the LTM period is minus 4%, acquired were plus 1%, and the FX effects for the LTM period is minus 2%. And the LTM EBITDA margin is are 6.3%. And in absolute numbers, we're very close to SEK 600,000,000 with the SEK 599,000,000 in EBITDA. And as you've heard, We have a very strong quarter, both from a growth perspective and a profitability perspective. We're very happy to see that all countries show positive organic growth, with the highest levels being delivered from Norway with 19% and then Denmark with 10%. In Norway, we see a very strong contribution from variable volumes, and those are mainly related to ongoing maintenance stoppages at the in our production plants, but there is also a continued high demand for cleaning in Norway. In Denmark, we do see positive effects from the new contract with Post Nord that started already in Q1 for Denmark, While the deliveries in Sweden, Norway and Finland started on July 1. And in addition, we continue to see high demand for cleaning also in Denmark and we have also started to see some positive effects in Denmark around food and beverage. As the Danish society has now opened up More and more during Q2, people have started to return to the office, and they've also started to return to our Cancunns, Which is very nice to see. From a profitability perspective, all countries have improved their margins in the quarter, are most notable in Sweden and Norway. The solid cost control and efficiency work is evident across all the countries. And like in the previous quarters, we still have a positive volume mix effect. And we've also been able to perform a large share of the additional variable volumes with our own personnel, and that has also improved the margin levels. So there are many things across the organization that contributes to this very strong quarter. And that's what you get when you have many, many contracts that are all doing a little bit better than the year before. So that adds up to quite large numbers. So we're very pleased with that performance. Looking then at the contract portfolio changes for the first have a positive net effect of close to SEK 220,000,000. Three contracts have been finalized during this period with a total value of around SEK 80,000,000, but we have added new contract wins to a value of close to SEK 300,000,000 where PostNord, DSP and Borealis Security are the largest ones. And on the right hand side, you can find a new graph illustrating the customer concentration. This information has been included on a yearly basis in the annual report, but we will from now on start sharing that together with the portfolio development twice a year. And here you can see that the top 10 customers accounts for approximately 45% of the total net sales. Customer number 11 to 25 for an additional 17%, while the remaining parts then accounts for are around 38%. Moving on with the cash flow. We started off with an in going cash balance of SEK203 1,000,000. Operations have contributed with SEK 722,000,000, strong performance. The financing flows that reflects interest loans and leasing that adds up to minus €551,000,000 and the largest part of that is related to us reducing our debt level by lowering the utilization of the RCF financing. Taxes paid minus SEK64 1,000,000 and cash out from M and A is also minus SEK64 1,000,000, And that's fully related to the acquisition of Aerocor in Norway that we did in Q1. Dividend paid in May was SEK 190,000,000 and that relates to the ordinary dividend of SEK 2 per share. In October, there will be a second dividend payment as the extraordinary dividend of SEK 2.4 SEK per share will be distributed to the shareholders. And this takes us to an outgoing cash balance of 57,000,000 Finally, just a few words related to the balance sheet and our cash conversion. Cash conversion, well in line with the targeted level of being above 90%. We end up with 94% for the LTM period, With a continued low CapEx and slight improvement on working capital. We don't see Any negative indication around customer payments either, so that looks good as well. On the total level, the net working capital is negative by SEK 708,000,000 or minus 7.4 percent of net sales. Net debt at SEK 1,400,000,000 and leverage at SEK 1 point have a question. So with that, I'll hand it over to you, Anna Karen, again. Yes. Thank you, Klas. We will shortly go into a Q and A session. But before that, I would like to sum up our Q2. It's great to see that we are showing a strong organic growth in the quarter and historically high earnings levels. All countries are just contributing both to the positive organic growth and margin improvement. And I really would like to thank all my colleagues at Core for an amazing work during the Q2. So with that, we will open up for questions. Thank you. Our first question is from Erik Paulsson of Nordea. Please go ahead. Yes. Hello there, Anna Kari and Klas. I have three questions. I'll start with the first one regarding your very good margin in the quarter. And obviously, you alluded to here that you have a target over time to be at 5.5%. But at the same time, we're seeing gradual volume upticks in variable volumes, etcetera. And I guess Also that maybe cleaning service will come down a bit given also that we see a good mix in this. And how will this play out now In terms of your margin for the coming quarters and for like 2021 in total. Well, you're absolutely right, Erik, that we do have many things that are very positive in the quarter. And margin level of 6 0.8% is not something that we see as something that we will keep over time. We still think that the targeted level of being around 5.5% is valid over time. As we get more and more variable volumes back and also some volumes where we use subcontractors. That will push the margins down a little bit. We also know that the margins on food and beverage as a whole is slightly lower Then other margins, for example, the high margins that we have had on cleaning. So when those volumes return, that would also put some pressure on the margin level. And you're also right around the high profitability in cleaning. That's probably not going to last forever at least. How long? It's very difficult to say. We'll see. I mean, we definitely hope that we will see a return to a more normal situation during the fall, but it's very difficult to say how long this will continue. All right. Thanks for that. And the second question is regarding what you presented here on the customer offering regarding advisory services, Etcetera, when societies and companies now start opening up for more office work, etcetera. What's the underlying, sort of say, business model And how will you actually gain money from it, so to say, how will it work? The advisory part of our offering is not something that will make a huge dent when it comes to The top line and things like that. We do charge the services to the customers, but it's fairly small numbers in comparison. But it's a very important service in order to both be attractive to win new contracts, But also to retain existing customers. So it's both about stickiness and attractiveness rather than Bringing in a large share of new volumes. Okay. And then finally on M and A. And as you, Anna Karin, alluded to in the forward in your CEO comment In the report, you seem to be you want to push more for M and A going forward, and you have been saying that before. But we haven't really seen that much, excluding the RK acquisition here recently. What can we expect from you for the coming quarters? Yes. As we have said before, organic growth is our number one priority at Core, of course. But We do have ambitions for our M and As as well, and there are a lot of high activity in that area for the moment. We can see that from incoming call as well as our more proactive things that we are doing within core. So yes, it is an important part for us, and we are working with that a lot. Are in the range of 2020. But also we have had a 2020 behind us with low activities in M and As, but now I think we can see that are starting to be more active, and we did one acquisition during winter of R&K Services in Norway. And as we have also said in the past, I mean, we're very picky when it comes to M and A. We only want to buy well managed companies. I mean there are, of course, companies out there that you could buy, but we are picky when it comes to potential acquisitions. All right. That sounds like our plan then. Thank you for that. Thank you. Our next question is from Robert Newberry of Carnegie. Please go ahead. Hello, Wanda, Karin and Klas. Robin here from Carnegie. Two questions. First, going back to the Profitability, you partly answered already. But of course, margins were very good now In Q2, and now it seems that sales is growing organically again, and you are likely to start investing more than in the previous quarters. So should we expect margins to come down To a more normal level already in the second half of this year. Well, you know, Robin, that we will not give any guidance around the coming quarters or the in years effect. But Historically, when we have had higher growth level, that has also been something that has pushed margins down a little bit. We still think that we can keep developing the EBITDA in absolute numbers, but the margins can go up and down a little between the quarters. Okay. Fair enough. Then you mentioned that the pipeline for new contracts is good. Could you say something about the in the total volume potential for new contracts that could come to the market still during this year. As we have mentioned before, we have a very strong pipeline with a lot of potentials in the pipeline. And we saw from the beginning of this year that the pipeline was are a bit more active than it was before in last year in 2020. So there are a lot of movements are in the pipeline for the moment. And we can see cases both in public cases as well as from the private sector. And we can also see IFM contracts in the pipeline as well as single service in the pipeline and also a mix between virgin contract as well, the first time outsourcing contract for ISM. All participants There are some sizable contracts in the pipeline right now. And I think What you already know from since it's public information is, for example, in Denmark, a large potential contract with Bigningsdilson That hopefully will be decided on late in 2021. And there are also some other fairly large cases. Okay. Thank you, Anna Karin and Klas. That's all for me. Thanks, Robin. Thank you. Our next question is from Karl Ewan, Donohue of DNB Markets. Please go ahead. Yes, good morning. First of all, congratulations to a very solid quarterly report. Just to come back to Erik's question a little again on how you currently stand in the different service areas when if you compare it to maybe normal market Pre pandemic or something. If you could just give us, say, some sort of indication how you see, say, where is food and beverage now compared to what it was in a normal market before, where is Property services, cleaning services and so on. Sure. I mean, if we start with the food and beverage, that Today only accounts for 7% of the total turnover. And pre COVID, which means full year 2019, That was around 13% of the total turnover. Property today is just over 30%, 31%, to be very precise, and that's approximately the same share of the total volumes as we had in 2019, but then you know that the absolute number has then decreased. Cleaning is the service line that has really increased its share from 31% prior to COVID up to the 39% that we see now as of Q2 LTM. So it's an improvement both in relative terms, but also in absolute numbers. And in absolute numbers, that's €500,000,000 approximately in cleaning volumes increase. And would you say that then turning that reasoning around that there is still a doubling potential, so to volumes for you in Food and Beverage compared to where you stand now and how it used to be, say, in a normal environment. I mean, there is definitely potential to regain volumes within food and beverage. Happy to see that we saw some signs of that in Denmark Already in Q2. Haven't seen it yet in Sweden and Norway, at least not to that extent. So we do think that there is a potential. Whether that will return to the exact same level as before, hard to say. But there is definitely a potential. And similarly, when you look at the normalization between base and variable volumes, good to hear that you are getting variables volumes back in there again. But I guess compared to normal market, you must be still quite Low to where you used to be. Yes. It is lower than it used to be. You're right. And if you could put a number to it or some index indication or I mean, Prior to COVID, we said that around 25% to 30% of our total sales were variable And the remaining part fixed in terms of subscriptions. The subscriptions levels have been very stable during the pandemic. So basically, the volumes that we have lost are within variable volumes. And compared to normal market, there should then be, say, 15% to 20% upside? Or where how should we see it? There is an upside. How big and how fast, it's difficult to say. So we'll see during the fall and how quickly things returns. Excellent, excellent. On that new pie chart you showed us, the customer concentration, is there a big number of contracts up for renewal in the among your top 25 customers, say to say, for the rest of this year and 2022? Not a big number. I mean the 2 largest the largest parts of that renegotiation was related to Equinor and that we've got the prolongation when it comes to the Equinor production sites. Then, of course, there is always a number of contracts that will be up We should, on average, renegotiate some SEK 2,000,000,000 per year almost. So There are a few, but nothing of the size of the Equinor production size. So when you look at it, you can argue that Your own renewal pipeline is basically derisked now as it looks for the, say, the next 12 months or so? Yes. I mean, the Equinor production site was a very important prolongation that derisks the portfolio. Excellent. And when you look at the part of the Equinix contract that you now lost in Norway, How do you see yourselves handling and say neutralizing the effect of getting out of that, let's say, on the profit and loss? Is there a big closing down costs to come? Or how should we see that? We mentioned that during even our first the Q1's report, and we have a lot of activity within our Norwegian organization to try to adapt us to a new situation in Norway. I would like to say that we have high speeds in that area, and we also have still very good dialogue with Equinor, of course, and we still have received a lot of project volumes from them for the office sites, think that we will be doing before we will hand over the contract. In terms of closing down costs, we don't expect that to be a huge will be employed by the new service provider as of November 1. So that shouldn't drive Any major closing down costs are based. Excellent. Good to know. Thank you very much and good luck out there. Thanks, TJ. Thank you. There will be a brief pause while any further questions are being registered. There are no further questions at this time. So I'll hand back over to our speakers. Thank you, and thank you for listening to our presentation, and we hope that you will have a a warm and wonderful summer.