Coor Service Management Holding AB

Good morning ladies and gentlemen and welcome to the Core Service Management Q4 2024 conference call. At this time, online turn and listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. I would now like to turn the conference over to Peter Binafu, Acting CEO and President of Core. Please go ahead.

Good morning everyone. My name is Peter Binafu and since the first of December last year, I am the Acting President and CEO of Core. And I'm here today with Andreas Engdahl, our CFO, and we together will try to give you now an overview of the business trading in Core and also about some of the profitability and the proposed dividend for 2024 as well. And we also of course, as usual, have a question and answers in the end of this call, so you will be able to touch down on any specific angle you would like to elaborate on. But let me start by talking about the market condition. We continue to see a stable market and conditions with good activities in all segments and also in all countries. During the quarter, fourth quarter, both we have successfully been renewing and continuing our services with several of our major contracts and we have also continued to be successful and once in the medium and small size segments. One example of the larger renewal is PostNord, which has an annual turnover of 155 million annually and we have now extended that contract to include two plus two years. And this is a pan Nordic contract where we are taking care of the services for PostNord's properties in the Nordic region, including building areas over two million square meters. The IFM contract with Borealis was extended by three years and was also expanded to include several new services. The extended contract means that Core will continue to provide integrated workplace services and property services to around 140 buildings in Stenung Sund on the west coast of Sweden. On new contracts, Teleno Tower in Norway has chosen Core as a new supplier for property and cleaning services for its technical telecom buildings across Norway. It's a five-year contract with a total annual value of some 15 million Swedish kronor. On top of this, we also signed new contracts in Norway with Steneström. We have DLR credit and the Copenhagen Towers in Denmark and we have also Education Consortium OSAO in Finland and Lampmäteriet to mention a few of the smaller contracts that have been signed in the course quarter. The market outlook for the facility management services 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 IFM and single services. Looking on the contract portfolio changes, in the previous quarterly reports we report for the first half year that we have positive net change of 192 million for the first half year 2024. During the second half year, we have signed 11 new contracts amounting to an annual value of 142 million, including Gävle municipality in Sweden, Semkommerite in Teleno, Towers, Steneström in Norway and the same size are examples of these new contracts. In the same period, seven contracts amounting to an annual value of 325 million has been concluded. This volume is largely related to concluding a cleaning contract within Region Ljubljana and a property part of the contract of Saab, previously also announced, and both of these are in Sweden. So the net changes are a positive 10 million Swedish kronor for the signed and cancelled contracts. Looking into the retention rate and contract concentration, this is a very good result outcome of 2024 where we have a secure prolongation of a value around 2.6 billion Swedish kronor during 2024. And that gives a solid retention rate of 88%. A strong improvement compared to the last three years average of 67%. During this year, we have also prolonged large contracts with PKA, the police authorities in Denmark, and we have also extended the contract of Arca Solutions in Norway, Alla Ima and Borealis in Sweden, as well as the previously mentioned Pan-Nordic contract with Post Nord. The solid retention rates provide a strong basis to get back to the organic growth. Successful prolongation has also reduced the volume of large contracts that are up for renewal to the two coming years. Moving into 2024, we had approximately 24% of our volume maturing in 2024 and 2025. That has now been reduced to 9%, which is a much more solid and stable platform for going forward. The chart also illustrates a well-balanced portfolio. We have, of course, customers are today in a mix of large corporations and small and medium-sized enterprises active in various sectors and industries throughout the Nordics, with close to 60% of the volume now in the medium and small-sized contract segment. Moving into the profitability, which is a focus for me and my team in the company. Both our adjusted EBITDA and margin is weak in the last quarter of 2024. It's largely impacted by operational challenges in Sweden and Denmark, but also impacted by a complex organization structure that drives increased cost and also creates some boundaries for efficient rollout of new initiatives. We will cover the operational challenges by walking through our different geographical segments and then comment on the organizational structure shortly. If we look into the fourth quarter in Sweden, the organic growth of negative 1% in the quarter were effects from new contracts that is offset by ended property parts with the contracts with Saab. And also from a normalized level of variable volumes compared to the high levels in the same period last year. Looking at Sweden full year, organic growth is 6% if we exclude the ended contract with Ericsson. This is a strong performance by the Swedish organization where the large loss has been fully compensated with the diverse of other contract volumes, both in small and medium segments. Within cleaning, we have a negative development compared to the last year in Skara Boys Day, which we previously have mentioned in the Q3 report. Although these actions taken now in Q3 and also in Q4 is paying off and we now see that we will be back on track regarding these contracts and this region starting in 2025. Personal expenses have also increased in a couple of other geographical regions within the cleaning organization and for our security services within the property segment. This is related to efficiency in our workforce planning. Therefore, the Swedish organization now has a full focus on the improvement to strengthen workforce planning. The staff rostering to restore profitability and the affected operations. And we expect the improvements to be visible in the coming months and to be included in the reports for the coming quarterly reports going forward. Looking into Denmark, organic growth of negative 3% in the quarter primarily explained by the couple of ended mid-size public contracts as well as somewhat lower variable volumes primarily related to lower level of snow removal. Adjusted EBITDA and margins are significantly lower compared to last year, also excluding some positive recreational effects included in the last year's result. As in Sweden, we are also experiencing operational changes in Denmark, primarily in the workplace and property service. It is largely related to the steering and control of the businesses that has resulted in excess use of resources. And this is one of the main reasons why we now have more focus on the resource planning, both in Sweden as well as in Denmark. A clear action plan for the management and governance of the Danish operation will be implemented during the first half year. And I expect us to see and have a better improvement of both the EBITDA level as well as of the quality of the service delivered in Denmark. As part of the action plan, we are also in the process now of concluding the appointment of a new CEO in Denmark. And I expect that to be announced within the next couple of weeks. Moving into Norway, we see an organic growth of minus or negative 6 percent. There is a periodic effect of variable volumes as committed in previously quarters, but also an effect of proactively terminated contracts where we didn't have conditions for sustainable delivery. Adjusted EBITDA and margins are somewhat higher than last year and explained by a more mature contract portfolio compared to the same period previous years, as well as effects from the proactive terminated contract. And finally, but not the least important, Finland. It's the smallest of our country segments. We see an organic growth of negative 7 percent in the quarter coming from a couple of smaller contract that was ended, as well as lower variable volumes related to snow removal. Adjusted EBITDA margins are in line with last year. Coming back to one of the initiatives that is very important now to restore our profitability and also enable our growth going forward is the implementation of a simplified organization. Going back to 2023, the third quarter, we announced an action plan aimed to accelerate margin improvement towards the long term margin targets of 5.5 percent. The program contained two main activities, realizing economies of scale and synergies through strength and harmonization of underlying processes, and an increased focus on procurement to utilize the Nordic economy of scale. Activities related to the procurement has realized the expected effects. However, the synergy targets related to the increased harmonization has not been met. The shortfall from harmonization activities is partly explained by a complexity in the organization that has resulted in both challenges in implementing harmonized process, as well as increased costs for these administrative functions. The action program is therefore supplemented now with a simplified unified organization for support functions both centrally at the group level, as well as within each of the countries. This program will give us a more efficient and flexible organization that better has better conditions to realize the desired effects of the ongoing harmonization works, while also reducing personnel costs within administration throughout the organization. This reorganization includes a reduction of 130 positions, both on group level, as well as in each of the countries. We expect a full year saving of approximately 120 million coming from this reduction. We have now finalized and completed the union negotiations for the new organization, and we are now in the phase of implementing the organization, and we expect the new organization to be in full force as from the 1st of April this year. The savings are expected to occur gradually during the first half year in 2025. Moving into another decision made by the board as a proposal to the annual meeting, and that's related to the proposed dividends for 2024. The board of the directors proposes a dividend of 1 kronor and 50 euro, 1.5 Swedish kronor per share, 1 kronor per share as ordinary and 1.5 kronor per share as an extra dividend. The ordinary dividend corresponds to 50% of the adjusted net profit and in line with our dividend policy. The extra corresponds to 25%, so in total the proposed dividend corresponds to 75% of the adjusted net profit for 2024. In addition to the dividend, the board of directors intends to initiate a share buyback program up to 50 million Swedish kronor after the annual meeting to be held later on in 2025, with the intention to reduce the number of shares in core through subsequent cancellation of the repurchase shares. That corresponds to approximately .5% of the outstanding shares and represents approximately 25% of the adjusted net profit. Furthermore, it is the intention of the board of directors to propose recurrent repurchases in the coming years and as complemented to the ordinary dividend with subsequent cancellation of the shares. In total, the proposed dividend and buyback program corresponds to 100% of the adjusted net profit and the total possible remuneration currently constitutes around 5% yield based on the share price at 2024 year end. With that, I would like to hand over to Andreas to provide some further details related to the financial performance.

Thank you for that Peter. We start with an overview of the business KPIs. In Q4, organic growth is negative 3% and that is from ended contract and somewhat lower variable volume. The EBITDA margin for Q4 is .3% below last year and the target largely impacted by the operational challenges in Sweden and Denmark described by Peter. The full year margin ended at 4.4%. Cash conversion is an LTM number and ended at 57% for the full year. More details around that later in the presentation. Leverage was an LTM number at 3 just on our target to stay below 3 and here we have a clear ambition to reduce our leverage during 2025. Net sales was close to 3.2 billion SEK, that is 3% down compared to last year, fully related to organic growth. It comes from the changes in the contract portfolio and somewhat lower variable volumes that Peter commented on in the country by country update. The adjusted EBITDA amounted to 105 million SEK, which gives us an EBITDA margin in the quarter of 3.3%. Items affecting comparability during the quarter amounted to 48 million SEK and is mainly comprised cost for severance pay for senior executives and restructuring costs for the Swedish operations in connection with the ending of the contract. Net income is negative 13 million SEK and adjusted net income when adding back amortization amounts to 2 million SEK. On the full year numbers we see that net sales is 12.4 billion SEK, full year organic growth is negative 0.5%, acquired growth 1% and ethics negative 0.5%. The full year adjusted EBITDA level is 546 million SEK, which gives us an EBITDA margin of 4.4%. Adjusted net income for the full year is 193 million SEK. Moving on to cash flow and balance sheet, we see in the top left hand chart our key metric LTM cash conversion and that is 57% for the full year. And that is below our target of staying about 90% more on that on the next slide. Leverage that is on the bottom right of the slide increased to 3 after a week quarter from both a profitability and cash flow perspective. With activities being implemented to strengthen our operational efficiency and profitability effects from a simplified organization, combined with activities being implemented to restore our working capital position that will reduce leverage below 2.5 during 2025. Cash conversion for the full year is impacted by a build up in working capital from three main things. We see temporary effects from balance data effects at the RM. We are now working through routines to secure that this is something that will be restored during Q1 2025. The effect from changes in the contract portfolio, both on ending contracts with below average profile as well as initial build up in new contracts. Effects from the initial build ups we expect to be restored in the beginning of 2025. And we still have some contracts with a backlog in the billing process, but it has improved compared to Q3. We are implementing additional actions to get those contracts fully restored in 2025. The overall picture is a build up in working capital from temporary and one time effects. And with the actions now being implemented, we are fully confident that the working capital profile will be restored during the first half of 2025. And with that, I hand it back over to you, Peter, to summarize.

Thank you, Andreas. Before we then go into the question and answers, I would just like to summarize the key takeaways from the fourth quarter. We see a good underlying growth in a stable effort market and Core is demonstrating continuous competitiveness through successful tenders. And one of the examples is that we see high retention rate of 88 percent. And we see right now a good market activity in all of our four countries where we operate. Focus for 2025 remains on maintaining a strong service delivery to our customers while also strengthening our operational efficiency and, of course, the profitability. We have conducted a thorough analysis and have a clear picture of what actions are needed to be in place. We have already started to implement that action plan to address these challenges. So we are beyond the analysis and we are focusing now on the implementation in the first quarter of this year. A simplified organization will give us a more efficient and flexible organization that has better conditions to realize the desired effects of the ongoing harmonization work while reducing the staff cost in administration throughout the group. We look forward with confidence to 2025 where the measures we are implementing will position us well to reach our long term target of 5.5 percent for the full year in 2026. With that, I now open up for questions. Thank you.

And if you do wish to ask an audio question, please press star one on your cell phone keypad. And if you wish to withdraw your question, you may do so by pressing star two to cancel. Once again, please press star one to ask a question. We'll pause for just a moment to compile the Q&A roster. And we do have our first question coming from the line of Oliver Ossitalo with Axis Parakna. Axis, go ahead.

Good morning, Andreas. And hi to you as well, Peter. I guess my first question is regarding of the restructuring program. I was wondering if you could help me understand how specifically how reduced administrative position will help you to increase the efficiency in the local care delivery. I guess that reduced overhead will decrease your cost, but how will the efficiency increase?

Yeah, I think I understand your questions. If we look on the organization, both on group level as well as each of our countries, it has not been harmonized. So we have had different organizations set up in Sweden, Denmark, Norway and Finland. So what we are now doing is we are harmonizing the structure of the organization. And as you rightly point out, we are now reducing the number of administrative and staff functions, both on group level as well as in the countries. And this is just to reflect now the efficiency that we expect from the new structure related to the previous one, which has a lot of matrix complexity built into the structure. So my expectation and our expectation is now by implementing these new organizations, we will have a much more efficient organization without compromising on the quality service delivered to our customers.

Yeah, okay. I think I get that. And also, do you have any sort of estimates on the cost connected to this additional restructuring program?

No, we don't have the cost effect, but it's more related to the notice period for each of the individuals that has been given the notice.

We will have clarity during Q1 on that and communicate on that once we have clarity on it.

So I'd just like to emphasize that we have not produced a number of packages. So this is more that we have addressed the organization and based upon competencies and qualifications are manning the organization.

Okay, that's good. Looking into the contract, the world market pipeline really, could you explain what's the balance between large and small contracts?

Yeah, we can see a shift now over the past years. Well, we right now in 2024 have a portfolio going into 2025 with a balance of 57 in the large and small segment. Exactly,

in the existing portfolio. If you then look at the pipeline out there, we see a continued steady flow of small and medium sized contracts that we can bid for. And then we have a couple of larger ones also active in the pipeline right now.

Okay, and one last question really. I know that you have been growing with smaller contracts these last years, and I guess that this is good for diversification. But has this somehow affected your margins negatively? Do you think?

No, no, we actually we don't see that. Actually, we can see that we can be fairly profitable in the small segment as well as in the medium segment. So it's not only the IFM segment that we can create value. So that's why it's so encouraging also looking at the market. And the interesting, yes, you know that we have approximately 40% as market leader in the IFM segment. But looking into the general market where they outsourced FM market in the Nordics represent approximately 200 billion. We have 8% market share in all these. And this is a good indication also of the potential growth opportunities going forward.

Okay, thank you. That's loud and clear. I get back in the queue. Thank

you. And then once again, for those on the phone lines, please press the star one to register for a question.

And

I'm showing no further questions at this time. I would like to turn it back to Peter Winepoop for further remarks.

No, thank you so much. I think this was the presentation that we are intended to give today and the information. And should you have any specific other questions, you're of course always welcome to contact either me or Andreas going forward. So by that, thank you very much for your attention and look forward to talk to you soon again. Thank you for now. Bye bye.

Thank you. And this now concludes our presentation. Thank you all for attending. You may now disconnect.