Coor Service Management Holding AB

Good morning, ladies and gentlemen, and welcome to the core service management Q3 report 2024 conference call. At this time, I'll answer in listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call require immediate assistance, please press star zero for the operator. I would now like to turn the conference over to Ms. Anna-Karin Grandin. Please go ahead.

Thank you. And welcome listening to core Q3 report. I will start by giving you the key highlights of the third quarter and then continue to present our triple bottom line results. I will hand over to Andrea to present some more details around financial performance before we summarize the key takeaways of the quarter and

have a Q&A. So starting with the key highlights,

during the quarter we have successfully extended several important contracts. In exclusive dialogue, the ISM contract with LA EMA in Sweden has been extended for another six years, including option years for an estimated total value of 780 million CX. In Norway, the ISM contract with AACS has also been extended in exclusive dialogue, a contract worth 150 million CX per year. And in competition, we have also been awarded a renewed six year contract for cleaning services to Sunde-Gylland Hospital with an annual turnover of approximately 75 million CX in Denmark. We also continue to win new smaller mid-size contract and in this quarter thereby strengthening our position in those segments. Examples of such contracts is the new security contract with Gävle municipality at an annual value of 17 million CX and the cleaning contract with DG Forsk municipality at an annual value of 12 million CX and both our municipalities in Sweden. In Norway, we have also won a new ISM contract with Semgo Moritam at an annual value of 15 million CX, which means that we also become even stronger within the Norwegian energy sector. And during the last two quarters, we have seen somewhat lower demand for verbal volumes in Denmark, mainly among our public customers. As we do not see an immediate recovery in these volumes, we have decided to implement staff reductions in our Danish operations in order to adapt our costs to lower volume. And towards the end of this quarter and looking into coming quarters, we also see lower demand for verbal volume in Sweden, primarily in property services, but they're also within conference services. We have proactively decided at the end of the quarter to initiate staff reduction also in the Swedish operation in order to adapt costs to lower demand. In total, the reduction in both countries affect approximately 70 employees. And a year ago, we presented an action program to accelerate development towards the company's long-term target of .5% adjusted EVTA margin. And during the last 12 months, the EVTA margin amount to 4.8%, which means that we are still not on par with our target. And the action program consists of three parts. The first part related to staff reaction of 75 administrative resources was completed during the second quarter. And that communicated previous quarter, the second part of the action program, the harmonization of underlying processes requires more resources and time that we what we initially estimated. This is due to more extensive change work related to new ways of working. But we truly believe to invest in resources to continuously harmonize our processes and implement standardized ways of working. And I remain convinced that the harmonization that is carried out will contribute to us reaching our margin target. And the third part, activities linked to purchasing efficiencies are going according to plan where the analysis work during the first half of the year has been completed, which will now generate continuous profitability improvements with first effects becoming visible towards the end of the year. And we are very proud that we this year take the first place in Albright's annual gender equality report. And we are the most equal listed company in Sweden. And at core, our employees, their experiences and skills contribute to our success. And this position contributes to attracting the market's best talents and make us even more attractive as a partner to our customers. And for us, it's important that we make use of all the talents that exist in the society, regardless of gender, age, ethnicity or other. And the market outlook for facility management in the Nordics remains good with a strong pipeline of new business. We see a pipeline with both first time outsourcing and tenders of existing contracts within both integrated facility management and single service. And of the summer, we see in our existing portfolio a clear trend that the proportion of employees who works from the office increase. And we also have continued high demand in our consultancy business advisory, which helps our customers to optimize

their workplaces. So let's move

to our triple bottom line results for Q3 and starting with the business dimension. In this seasonally weaker quarter, Core delivers both sales and adjusted EBITDA in line with last year. Organic growth is flat with positive effects by newly started contracts in Sweden that compensate ended contract in Sweden and Denmark and also somewhat lower variable volume. The EBITDA margin for Q3 is .1% slightly below last year and the LTM margin of .8% is still below our target of around 5.5%. Cash conversion is an LTM number and ended at 77%. There are more details around that later in the presentation. Leverage also an LTM number at 2.7 and in line with our target to stay below three. But our ambition to reduce our leverage somewhat during 2024 remains. And this year's customer survey was carried out during the second quarter and the result was then at a continued high level of 70, which is in line with the company's goal. And the customer survey also measured the net promoter score, which continues to be at a high level of plus 15 compared to last

year plus 11. Moving on

with our performance in social and environmental responsibility. In the third quarter, our trips amounted to 6.5, which is an improvement compared with the third quarter previous year, but somewhat weaker compared with the full year 2023. And on the environmental KPIs, we see a positive development. On scope one and two, due to emissions from our vehicle fleet and premises, we continue to see a decline in emissions in absolute numbers by 22% compared with our base year 2018. Even though Core has grown as a company by over 30% in the same period. We have a positive trend, but not sufficient towards the interim goals in 2025 and recognize that we need to do even more. For skills free and science based target aligned suppliers, we continue to make progress and we are now at 23%. We continue to push our suppliers to align their target with science based target and also actively steer our spend towards the ones who are approved. So with that, I hand over to Andrea to continue with the details on the financial.

Thank you Anna-Karin. Net sales is

2% down compared to last year. Organic growth for the quarter was flat, where newly started contracts, such as Swedbank and Swefo in Sweden, compensates for ended contracts in Sweden and Denmark. Variable volumes are at a continued high level as compared to the same period last year, to see somewhat weaker demand in Denmark, mainly related to public customers. And looking ahead, we see lower demand in Sweden for variable volumes in property service and content services as Anna-Karin mentioned earlier. With flat organic growth and negative 2% from FX, that takes us to a quarterly net sales of around 2.9 billion Fiat. Adjusted EBITDA amount is 120 million Fiat, which gives us an EBITDA margin in the quarter of 4.1%. As Anna-Karin described earlier, we have decided to make some downsizing of both the Swedish and Danish operation to adapt our cost base for reduced demand for variable volumes. The downsizing affects approximately 70 employees in the delivery organization. Costs for the restructuring amounting to 27 million Fiat have been included in the third quarter as item affecting comparability. Financial net increase in the quarter, and that is driven by a slightly higher debt compared to previous year. Net income is 17 million Fiat and adjusted net income when adding back the monetization amounts is 32 million Fiat. And the full year numbers, we see that net sales is 12.5 billion Fiat. Full year organic growth is 1%, acquired 2%, and FX negative 1%. The full year adjusted EBITDA level is 607 million Fiat, which gives us an EBITDA margin of 4.8%. Adjusted net income for the full year is

244 million. Looking at Q3 country by country,

I'm starting with Sweden. Organic growth of 1% in the quarter, with strong underlying growth for new contracts offset the negative effects of the ended contract with Ericsson. This is the last quarter with volume from Ericsson in the comparable number. And for the third quarter, organic growth was 6% excluding the effects of Ericsson. Variable volumes are at a continued high level, but as I mentioned earlier, we see lower demand for variable volumes looking ahead, especially in property service, but also related to conference services. Adjusted EBITDA of 126, and margins at 8% plus is largely in line with last year. EBITDA was positively impacted by newly started contracts and the effects from the action program. The ended contract with Ericsson has a negative effect in comparison with previous year. Also affecting negatively, we see lower profitability in parts of the Swedish cleaning operation. That is explained by excessive resource utilization, and an action plan has been initiated to gradually return to previous level of profitability

during the fourth quarter. Moving over to Denmark,

organic growth of negative 5% in the quarter, primarily explained by a couple of ended mid-sized public contracts. We also continue to see lower demand for variable volumes foremost in the public sector. The adjusted EBITDA margin of lower compared to last year were both ended contract and lower variable volumes effect profitability negative. And after two quarters with lower volume, adjustments are made to the Danish operation to adjust the cost space

for lower demand. Moving over to Norway, we

see lower organic growth compared to previous four quarters where several newly started contracts from late 2022 now are fully reflected in comparable numbers. Variable volumes are at a continued high level from periodic maintenance stops in the energy sector. During the year, both the second and third quarters have had high variable volumes related to the energy sector. Volumes which mainly occurred in the third and fourth quarter in the previous year. This is also something we have seen historically, that maintenance stops vary in size and quarterly timing between years. Adjusted EBITDA are in line with last year, but with slightly higher margins where a more mature contract portfolio

affects positively. And last among the countries,

Finland. Organic growth of negative 3% in the quarter from a couple of discontinued small loss-making contracts in the northern part of Finland. Adjusted

EBITDA and margins are in line with last year. Moving on to cash flow

and balance sheet. We see in the top left hand chart, our key metric LTM cash conversion ended at 77% for the Q3 LTM period. And that is below our target of staying above 90%. You see a buildup in working capital during the quarter related to increased accrued revenue for ongoing work that takes net working capital as percent of net sales. The negative 7% compares to negative 8% Q3 last year. This is a development we are not satisfied with and we have full focus to complete an invoice ongoing work to secure reductions during the fourth quarter to get back to our cash conversion target. Leverage, and that is on the bottom right of the slide, remains at 2.7, the same as in Q2. After a week here third quarter from an operating cash flow perspective. We're fully focused on the networking capital buildup and a season of stronger fourth quarter, the ambition to reduce leverage towards the end of the year remains. And with that, I hand this back over to you, Anna.

Thank you, Andrea. Before we go into a Q&A, I would like to highlight the key takeaways from our third quarter. We continue to successfully extend important contracts and strengthen our position in the small and mid-sized segments. We see somewhat lower demands for variable volumes in Denmark. And since we do not see an immediate recovery in these volumes, we have decided to implement staff reductions in our Danish operations to adapt our cost base. And towards the end of the quarter and looking into coming quarter, we also see tendencies of lower demand for variable volumes in Sweden, primarily in property service, but also within conference services. So we have therefore practically decided to also initiate reductions in the Swedish operation to adapt cost base here as well. And in the ongoing action program, downsizing of administrative resources was completed during the second quarter, communization of processes and procurement efficiency are ongoing and we expect effects to be implemented gradually in the coming quarters. And in parts of the Swedish cleaning operations, we saw lower profitability in the quarter, which is explained by excessive resource utilization. An action plan has been initiated to gradually return to the previous level of profitability. And in the second quarter, during the fourth quarter. And cash conversion, LTM amounted to 77%, below target of 90%, and this is driven by an increase in working capital primarily from an increase in accrued net revenue. We have full focus to complete and invoice ongoing work to secure reduction during the last quarter of the year. So with that, we open up for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question over the phone, please press the star followed by the one on your telephone keypad. You will hear a prompt that your hand has been raised. And should you wish to cancel your request, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star and one to ask a question. Your first question comes from the line of Oliver Ocitalo from Atis Pararna, please go ahead.

Hello and good morning, Anacorn and Andrea. As currency effects turn over negatively this quarter, does this effect, how does this effect operating margins, does this effect operating margins negatively as well? Or do you have any expenses in foreign currencies that kind of balances this negative turnover?

Good morning, I'm sorry, I didn't fully hear your full question. Okay, can you repeat that

please? Yes, well, my question is basically if you have any expenses in foreign currencies as well that balances the negative impact from the turnover.

Absolutely, I mean, most of our businesses are in local currency on the expense side as well. So the negative effects we see on turnover sort of has a corresponding side of expenses in each country.

Yeah, okay, I see, thank you. And as you are reducing the workforce as well on the back of the lower variable volumes in specifically in Sweden and Denmark, and I know this might be quite early to have a say about it, but do you view this as a structural or rather a cyclical change?

Good morning Oliver, I can start and I think that Andreas will fill in a bit because when we look into variable volume, they have the recent quarters actually been on quite a high level. And what we are seeing at the moment is that a more of a normalized volume of variable volume.

So basically it's a cyclical change that we see here.

Okay, I understand, thank you for the clarification. And my last question as well, Q4 is quite an important quarter in terms of variable volumes with all the Christmas parties and so on, what can you say about the booking situation in Q4 so far?

I mean, looking into Q4 and that's basically the reason why we are doing some downsizing in Sweden, bookings are at the lower level today comparing to where we were a year ago. So looking into Q4, we expect the bookings to be somewhat lower compared to previous year.

Yeah, okay, I understand. Thank you for the extra color, that's it for me.

Thank you, once again, should you have a question, please press star followed by the one on your telephone keypad. And your next question comes on the line of Carl-Johan Bonnevar from the NB Markets, please go ahead.

Yes, good morning Anna-Carn and Andreas. Just want to understand if anything underlying has really changed in the operation because historically it used to be very good that doing these kind of personal adjustments within contracts without having to do big programs. But is there any fundamental change out there in the market that now requires these kind of annual programs that you had one you kicked in last year with a slightly different kind of focus and now you have this one coming out here in Q3.

Good morning Carl-Johan, I think it's important to keep those programs apart. I mean the previous one was very much related

organization and administrative

resources and I think we're talking about it. But what we're looking at right now is something in operations based due to some over capacity in those market in Sweden. And agree we have been very good handling changes in demand doing that in sort of ongoing business. I think what we are seeing right now is this, I mean we are booking some small volume to be in order here at the summer.

We have been running on very high

volume for a couple of

years now and that also sort of ties to the organization accordingly. We are right now making 70,000 employees. Some of the absence to make the organization and the cost space a bit more flexible here. Seeing that demand is somewhat weaker here looking into the coming quarters. But agree, basically, we are able to handle existing ongoing work.

But you would agree that that seems to be an increase in complexity in your business model that might not have been the same a couple of years back or?

No, not really. Not

really. I mean I think we are now looking into a position where we have seen and also built an organization for a couple of years here. And

if we turn back to the program you launched a year ago that was supposed to generate 50 million in cost savings within 12 months, where do you feel that you are now giving the kind of postponements you are talking about and then maybe procurement saving coming through in the latter part of this year? Do we see any of those 50 million benefits in the numbers today or all those to come? Are those numbers still relevant?

Absolutely. I mean we see some of it already today. As Anna-Karin mentioned, the downsizing of around 75 FDs have been completed. And in that respect, also reflected in the numbers. So that part of the program is sort of completed. Looking into the procurement part, as we mentioned here, all the analysis have been completed. We know what to do and we have started actually to access some of those work streams and expect to see some effects of that in Q4. And the part of the program that takes a bit more time than we initially expected and also drives more resources than we expected is the harmonization of processes. Where especially changing the way you're working for many people is a bit more work than we expected initially. So that's perhaps the downside right now in the program compared to our initial estimate. But we absolutely see effects from both downsizing and expect to see effects from procurement here by the end of the year.

So if you try to quantify what is to come from what you now expect as the procurement saving and maybe also what you expect from the harmonization of the processes and maybe then the hot timeline for when we could expect the impact from the harmonization of process to come floating through.

Yeah, the harmonization part is very much around making the downsizing to stick and to make them last over a long time. And right now, then driving a bit more resources that we expect to continue for a few quarters ahead. As I said, that takes a bit more time and effort than we expected. But the procurement efficiencies where we expect to realize around the 50 million that we initially thought without. And that should be gradually implemented in the

coming couple of quarters.

Excellent, I'll come back and discuss it in more detail with you because I'm still not getting the numbers to add up fully here, I guess. But then just on the final thing for me, looking at the working capital, is there's nothing structural that happened that created the headwind in Q3 with payment pattern from clients becoming worse or anything like that? It's more of

a

end of quarter effect or how should we see it as you describe it as being something that should normalize all of the doings before?

No, I know nothing structural in that. But we see a build up here in occurred revenue in a few parts of the organization. So that is something we just need to put a lot of focus on here to get that invoice and get back on track on our networking capital position.

Excellent, good work and all the best out there.

Thank you and

your next question comes from the line of Freeman Kev from Nordea. Please go ahead.

Hi Anna and Karin, Nordea. So first question for me, just regarding sort of the variable volume situation. I mean, could you maybe provide some color regards to each sector and whether you see this being a particular problem

in a specific sector?

We can

start just looking into Denmark, for example, we see a decline in the variable volume coming from the public contract actually. And in Sweden, we see another situation where it's more like within property related projects that we can see a decline. And as we also described, we also can see a decline in our conference services as well. But we can't see a pattern that we can see a specific industry having a negative impact. I think we can see a few things, but as we have mentioned before, we do not see this as any really dramatic change, but nevertheless, it is a decline volume coming from high variable volume going down to more normal volume. And the normal level is actually something that we expected to see in the coming quarters as well. So that's why we are doing the adaption of our cost base.

Yeah, got it. And regarding ISE since Q4 has already begun, I mean, what should we expect in terms of, should we expect more ISE here in Q4 as well? Or how should we think about that?

No, we are made the changes we feel is necessary for the time and as I commented to another question. Also with the flexibility we have in our cost base, we should be able to also for the continuously monitor the development of variable volume and adjust organization in sort of

ongoing business.

Yeah, very clear. And

just the final one for me

in

terms of run rate savings here in Q4, I don't know if I've missed anything here, but I assume it's no longer perhaps the previous guidance of 100 million. What should we expect there if you have any more color there?

I think we are fairly close to the 100 million in run rate. We have completed large parts of the program. We have a clear view on procurement. So those are the fairly confident around them and then making the changes stick is something we also feel that we, with the sort of guidance of some delays here in Q2 have also a clear track on. So we are still confident about the 100 million in run rate is something that we will realize.

Got it. And just one more actually came up regarding sort of your pipeline, you say that it remains strong. Could you maybe comment in terms of geography where your pipeline is perhaps the strongest or any differences between geographies?

Absolutely, I can comment on that. And I think we can see the same pattern in Q3 as we have seen before. And we can see that it's a strong market in Sweden. Most of the activities we can see in Sweden, but there are also activities coming up actually in Norway. And I think we have talked about that before. It's been a bit of a low activity in Norway, but that activity is picking up. And that's good because we still need some volume in

Norway.

Okay, perfect. Thank you so much for that color and all the best out there.

Thanks. Thank you, once again, should you have a question, please press star followed by the one on your telephone keypad. There are no further questions at this time. I will now hand the call back to Ms. Anna Karin Grandin for any closing remarks.

Thank you. And thank you all for listening into this call and both me and Andrea wish you all the best for today.

Thank you and this concludes today's call. Thank you for participating. You may all disconnect.