Earnings Release • Nov 6, 2019
Earnings Release
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ISS (ISS.CO, ISS DC, ISSDY), a leading workplace experience and facility management company, announces its trading update for the first nine months of 2019.
For investor enquiries Martin Kjær Hansen, Head of Group Investor Relations, +45 38 17 64 31
For media enquiries Rajiv Arvind, Senior Communications Manager, +45 38 17 62 11
Group revenue for the first nine months of 2019 was DKK 57.7 billion, an increase of 6.3% compared with the same period last year. Organic growth was 6.8% and currency effects were 0.8%, while acquisitions and divestments, net reduced revenue by 1.3%.
The strong organic growth was driven by the launch of the Deutsche Telekom contract as well as generally strong commercial momentum with a high level of key account contract wins, extensions and expansions. In addition, the contribution from projects and abovebase work remained solid, albeit with a slow-down towards the end of the period. All regions delivered positive organic growth with double-digit rates in Continental Europe and mid-single digit rates in Northern Europe and Asia & Pacific. Americas also delivered positive growth despite revenue reductions on the back of planned exits from small specialised services contracts.
exits from small specialised services contracts. 1) All comments covering revenue and organic growth are on continuing operations.
Group revenue in Q3 was DKK 19.8 billion, an increase of 8.9% compared with the same period last year. Organic growth was 8.4% (Q2 2019: 5.8%), currency effects were 1.2%, while acquisitions and divestments, net reduced revenue by 0.7%.
Organic growth was supported by the launch of the Deutsche Telekom contract on 1 July driving close to 4% organic growth, as well as generally strong commercial momentum with a high level of key account contract wins, extensions and expansions. Organic growth from projects and above-base work was broadly neutral as a result of high 2018 comparator performance and lower demand in a few countries. All regions delivered positive organic growth with significant double-digit growth rates in Continental Europe. Northern Europe and Asia & Pacific delivered strong growth in the mid-single digit range. Americas continued to deliver organic growth despite revenue reductions on the back of planned
| DKK million | 2019 | 2018 | Organic growth |
Acg./div. | Currency adj. |
Growth 2019 |
|---|---|---|---|---|---|---|
| Continental Europe | 22.354 | 20,700 | 11 % | $(2)\%$ | (1)% | 8 % |
| Northern Europe | 18,412 | 17,979 | 4 % | (1)% | (1)% | 2% |
| Asia & Pacific | 10.179 | 9.414 | 5% | $\overline{\phantom{a}}$ | 3 % | 8 % |
| Americas | 6.229 | 5.770 | 2% | $\overline{\phantom{0}}$ | 6 % | 8% |
| Other countries | 558 | 483 | 9% | 4% | 3% | 16 % |
| Corporate / eliminations | (36) | (52) | $\overline{\phantom{a}}$ | $\overline{\phantom{a}}$ | ||
| Group | 57,696 | 54,294 | 6.8% | (1.3)% | 0.8% | 6.3% |
| DKK million | Q3 2019 | Q3 2018 | Organic growth |
Acg./div. | Currency adj. |
Growth Q3 2019 |
|---|---|---|---|---|---|---|
| Continental Europe | 7.977 | 6,889 | 16 % | (2)% | 2% | 16 % |
| Northern Europe | 6.068 | 5.956 | 3% | $(0)\%$ | (1)% | 2% |
| Asia & Pacific | 3.461 | 3,198 | 5 % | $\overline{\phantom{a}}$ | 3% | 8% |
| Americas | 2,122 | 2.006 | 1% | $(0)\%$ | 5 % | 6 % |
| Other countries | 191 | 164 | 8% | 4 % | 4 % | 16 % |
| Corporate / eliminations | (9) | (16) | $\sim$ | $\overline{\phantom{a}}$ | $\overline{\phantom{a}}$ | |
| Group | 19,810 | 18,197 | 8.4 % | (0.7)% | 1.2% | 8.9% |
Delivering service solutions to our key account customers, especially Integrated Facility Services (IFS), is a key part of our strategy.
In total, key accounts represented 62% of Group revenue in the first nine months of 2019 (H1 2019: 61%). Organic growth from key accounts was 9.7% (Q3 2019: 12.9%) significantly supported by the launch of the Deutsche Telekom contract on 1 July, the single largest contract in ISS history. The launch was on time and on all sites. The operational stabilisation following the launch is progressing and is expected to be completed in the coming months. On that basis, contract revenue and profitability expectations for 2019 remain unchanged.
Revenue from global key accounts represented 16% of Group revenue in the first nine months of 2019 and organic growth was 7.9% (Q3 2019: 9%).
Growth was driven by contracts launched in 2018, primarily with an international food and beverage company and a company in the Industry & Manufacturing segment.
Furthermore, growth was driven by the start-up of a new contract with a technology service company and the expansion with Vattenfall, as well as recent expansion of the Barclays contract, partly driven by our strengthened capabilities within catering and workplace management and design. We also experienced high demand for non-portfolio services across our global key account contracts.
Since full year results published in February 2019, we have signed a significant new key account contract with the Danish Building and Property Agency in Denmark. In addition, we extended and expanded a number of contracts, see the contract overview below.
On 27 May 2019, we announced that our current contract with Novartis maturing 31 December 2019, with an annual revenue of around DKK 2.0 billion, is not likely to be extended. The annualised first year net negative margin impact, including exit-related costs, is expected to be 0.1-0.2%-points. There are ongoing discussions with the customer and the new provider. We now expect to continue service delivery in a few key countries.
| MAJOR KEY ACCOUNT DEVELOPMENTS 1 ) | COUNTRIES | SEGMENT | TERM | EFFECTIVE DATE |
|---|---|---|---|---|
| WINS | ||||
| Public Administration Company | Iberia | Public Administration | 1 year | Q3 2019 |
| The Danish Building and Property Agency | Denmark | Public Administration | 7 years | Q4 2019 |
| EXTENSIONS/EXPANSIONS | ||||
| CITI Americas | Mexico | Business Services & IT | 5 years | Q1 2019 |
| Santander | UK | Business Services & IT | 5 years | Q2 2019 |
| Singapore General Hospital | Singapore | Healthcare | 5 years | Q2 2019 |
| Food and beverage company | Global | Industry and Manufacturing | 5 years | Q2 2019 |
| International bank | Italy | Business Services & IT | 5 years | Q2 2019 |
| Danske Bank | Global | Business Services & IT | 3 years | Q2 2019 |
| National University Health Systems | Singapore | Healthcare | 3 years | Q2 2019 |
| Roy Hill Holdings | Australia | Energy and Resources | 3 years | Q2 2019 |
| Financial services company | Spain | Business Services & IT | 5 years | Q3 2019 |
| International manufacturing company | Global | Industry and Manufacturing | 5 years | Q3 2019 |
| Global professional services company | Nordic | Business Services & IT | 5 years | Q4 2019 |
| International Bank | Switzerland | Business Services & IT | 5 years | Q4 2019 |
| Hotel chain | Norway | Hotel, Leisure & Entertainment | 5 years | Q1 2020 |
| Energy and resource company | Germany | Energy and Resources | 2 years | Q1 2020 |
| Vattenfall | Germany | Industry and Manufacturing | 2 years | Q1 2020 |
| Foreign Commonwealth Office | Asia & Pacific | Business Services & IT | 1 year | Q1 2020 |
| Brisbane Airport | Asia & Pacific | Transportation and storage | 3 years | Q4 2019 |
| LOSSES/REDUCTIONS | ||||
| Novartis | Global | Pharmaceuticals | - | Q1 2020 |
| Norwegian Defence | Norway | Public Administration | - | Q1 2020 |
| ICA | Sweden | Retail and Wholesale | - | Q4 2019 |
1) Update since Annual Report 2018.
Revenue increased 8% to DKK 22,354 million in the first nine months of 2019. Organic growth was 11% (H1 2019: 8%), while acquisitions and divestments, net and currency effects reduced revenue by 2% and 1%, respectively. Growth was mainly driven by Germany due to the launch of the Deutsche Telekom contract as well as high demand for non-portfolio services in the automotive and pharma divisions. Organic growth was also supported by key accounts in especially Turkey, Iberia and the Netherlands as well as price increases in Turkey due to high inflation. Adjusted for price increases in Turkey, organic growth in Continental Europe was 9%.
In Q3, revenue increased 16% to DKK 7,976 million driven by organic growth of 16% (Q2 2019: 9%) and positive currency effects of 2%, while the impact from acquisitions and divestments, net decreased revenue by 2%. The organic growth was especially driven by the contract launch of Deutsche Telecom, which went live on 1 July. Furthermore, organic growth was supported by key accounts in Turkey, Spain and Belgium and generally strong growth across the region with several countries reaching double-digit growth rates. Growth was partly offset by lower demand for projects and above-base work.
Revenue increased 2% to DKK 18,412 million in the first nine months of 2019. Organic growth was 4% (H1 2019: 5%), while acquisitions and divestments, net reduced revenue by 1% and currency effects had a negative impact of 1%. Growth was mainly supported by several contract launches in the UK and Denmark as well as a generally solid demand for projects and above-base work.
In Q3, revenue increased 2% to DKK 6,068 million, reflecting an organic growth of 3% (Q2 2019: 4%) and a negative currency impact of 1%. The organic growth was mainly driven by key account contract launches in the UK. The demand for projects and above-base work was broadly unchanged compared to the same period last year.
Revenue increased 8% to DKK 10,179 million in the first nine months of 2019. Organic growth was 5% (H1 2019: 5%) and currency effects were 3%. Almost all countries in the region delivered positive organic growth though mainly driven by contract launches in the second half of 2018 in Australia and global key account contract launches in China. Furthermore, growth was supported by project work in Singapore and price increases in Indonesia.
In Q3, revenue increased 8% to DKK 3,461 million representing an organic growth of 5% (Q2 2019: 5%) and positive currency effects of 3%. The organic growth was mainly due to contract launches, especially in Australia, as well as price increases in Indonesia. The demand for projects and above-base work was broadly unchanged compared to the same period last year.
Revenue increased 8% to DKK 6,229 million in the first nine months of 2019. Organic growth was 2% and currency effects increased revenue by 6%. North America delivered positive organic growth driven by key account contract expansions and launches in Food Services and the aviation segment. This was partly offset by the planned exits from small specialised services contracts. Mexico delivered positive organic growth due to key account contract launches.
In Q3, revenue increased 6% to DKK 2,122 million reflecting organic growth of 1% (Q2 2019: 2%) and positive currency effects of 5%. Organic growth was negatively impacted by the planned exits from small specialised services contracts. Excluding these exits, organic growth was 5%, mainly driven by key account contract launches on the back of strengthening capabilities within Food Services and workplace management and design. The aviation segment in North America also delivered solid growth, while the demand for projects and above-base work was broadly unchanged compared to the same period last year.
In December 2018, we announced our intention to divest 13 countries (in addition to Argentina and Uruguay) and a number of business units. The strategic divestment programme, to be completed by 2020, is proceeding according to plan.
Argentina and Uruguay were divested in January and Estonia was divested in July. Additionally, the divestment of the Group's activities in Israel was completed in October. Thus, by the end of October 2019, four of the 15 countries classified as discontinued operations had been divested.
During the first nine months of 2019, we divested some minor non-core cleaning activities in Spain and in October, we divested some minor non-core activities in Germany.
Furthermore, on 4 September 2019 we reached an agreement to divest the Group's Hygiene & Prevention business in France.
As communicated in the Q2 Interim Report 2019, we acquired JH Catering Ltd. in Austria and the Front of House activities of Avarn Security Oy with an estimated annual revenue of DKK 63 million and DKK 61 million, respectively and around 240 employees in total.
There have been no material changes in our statement of financial position since the announcement of our Q2 Interim Report 2019.
On 14 October 2019, we announced the early redemption of EUR 700 million bonds (maturing 9 January 2020), with the purpose of reducing gross debt and excess liquidity, using EUR 200 million in surplus cash from operations together with net proceeds from the 11 June 2019 issuance of EUR 500 million bonds.
This outlook should be read in conjunction with "Forward-looking statements", cf. the table on next page.
The 2019 outlook for organic growth remains unchanged from our Q2 Interim Report 2019, whereas outlook for operating margin and free cash flow is adjusted.
Organic growth expectations for 2019 remain unchanged at 6.5%-7.5%, and we are on track to deliver organic growth of more than 4% in 2020.
Operating margin is, however, negatively impacted by delayed operational improvements in France. In addition, one loss-making contract in Denmark and one in Hong Kong are not recovering according to plan, which is expected to require a one-off provision for onerous contracts. As a result, the outlook for operating margin for 2019 is adjusted to above 4.2% (previously 5.0%-5.1%). In 2020, we expect operating margin to be around 5.0%.
We have made good progress on a number of free cash flow improvement initiatives, among others debtor days, supplier payment terms and capital investments. However, our free cash flow is expected to be impacted by the lower operating margins as well as a stricter factoring policy, leading to an expected reduction of factoring1) in 2019 of around DKK 1 billion (previously an expected reduction of around DKK 200 million). As such, our outlook for free cash flow for 2019 is adjusted to DKK 0.6-1.0 billion (previously DKK 1.8-2.2 billion) and to DKK 1.6-2.0 billion excluding the variation in factoring1) (previously DKK 2.0-2.4 billion). In 2020, we expect free cash flow to be DKK 2.1-2.5 billion with a broadly neutral impact from factoring1) .
We expect the divestments and acquisitions completed by 31 October 2019 (including in 2018) to negatively impact the revenue growth in 2019 by approximately 1%-point. Based on the forecasted average exchange rates for the year 2019 2) we expect a positive impact on revenue growth in 2019 of approximately 0%-1%-point from the development in foreign exchange rates.
| 2019 OUTLOOK | ||||
|---|---|---|---|---|
| Trading Update 30 September 2019 30 June 2019 |
Interim report | Annual report 2018 |
||
| Organic growth |
6.5%-7.5% | 6.5%-7.5% | 5%-7% | |
| Operating margin |
Above 4 2% | 5.0%-5.1% | 5.0%-5.2% | |
| Free cash flow |
DKK 0.6-1.0 bn | DKK 1.8-2.2 bn | DKK 18-22 bn |
| EXPECTATIONS FOR 2020 AND MEDIUM-TERM | |||
|---|---|---|---|
| 2020 | Medium-term | ||
| Organic growth |
Above 4% | Industry-leading organic growth of $4\% - 6\%$ |
|
| Operating margin |
Around 5 0% | Stable operating margins around 5.5% |
|
| Free cash flow |
DKK 2.1-2.5 bn | Strong free cash flow around DKK 3.0 bn |
Our medium term targets remain unchanged with 4%- 6% organic growth, around 5.5% operating margin and around DKK 3.0 billion in free cash flow.
However, as a result of our decision to spread the transformational investment programme over 2019- 2021 (previously 2019-2020), we may not reach these medium-term targets until 2022 (previously 2021).
1) Factoring and participation in certain customers' supply chain finance arrangements.
2) The forecasted average exchange rates for the financial year 2019 are calculated using the realised average exchange rates for the first ten months of 2019 and the average forward exchange rates (as of 1 November 2019) for the remaining two months of 2019.
ISS is a leading workplace experience and facility management company. In partnership with customers, ISS drives the engagement and well-being of people, minimises the impact on the environment, and protects and maintains property. ISS brings all of this to life through a unique combination of data, insight and service excellence at offices, factories, airports, hospitals and other locations across the globe. In 2018, Group revenue amounted to DKK 73.6 billion.
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