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ISS Investor Presentation 2020
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Investor Presentation
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OneISS Stronger. Simpler. Closer.
16 December 2020
PEOPLE MAKE PLACES
ISS
Agenda
- Introduction
- Strategy and Market Dynamics
- Operating model
- Financials
- Concluding remarks
PEOPLE MAKE PLACES
ISS
3
Hygiene Steward
Thank you
INTRODUCTION
ISS is fundamentally in a healthy and attractive market, with a business model that will drive a competitive advantage in the Key Account segment
We have confirmed that our strategic direction is right ...
Market is attractive, continued high potential
- Attractive USD 400bn Key Account market – 2% current market share
- Covid-19 recovery and continued demand for deep cleaning and technology enabled solutions
Structurally healthy business model
- Demand for Integrated Facility Services (IFS) in the marketplace
- Capitalising on our industry leadership within cleaning
- Sharpen focus through divestments
Key Account focus confirmed
- Higher growth
- Attractive margins
- Higher barriers to entry
- Stronger cash flow profile
PEOPLE MAKE PLACES
ISS
INTRODUCTION
We are on a journey in the coming years to further strengthen our strategic focus and align our operating model to our Key Account strategy as OneISS globally
PEOPLE MAKE PLACES
… however, we have not yet fully executed on the strategy
We will sharpen our strategic focus further
- Country and business unit divestments
We will accelerate our investments into technology
- Technology will be a major source of competitive advantage and as a driver of future offerings
- Increased digitisation focus and investment
We will implement a global operating model that more robustly supports our Key Account strategy
- Alignment of country operating model to reap global benefits
- Strengthening of global functions including commercial, finance, operations, and IT
- Culture and incentives to support OneISS globally
ISS
INTRODUCTION
Our no. 1 priority is to deliver on the near-term recovery, while building ISS as the global FM leader for the future
Key near-term priorities include
Bringing underperforming contracts and countries back to acceptable profitability
- Deutsche Telekom
- Danish Defence
- United Kingdom profitability recovery
- France turnaround
Covid-19
- Dealing with Covid-19 impact in our countries and business units, with many being in lockdown situations
New operating model established to prevent underperforming contracts and countries
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ISS
IN PRODUCTION
ISS will emerge in the coming years as an even stronger company
We will emerge even stronger
FM market is structurally attractive and our business model is healthy
Clear path back to growth with mid single-digit operating margin
EBITDA recovery and increased focus on cash generation
Deleveraging to below 3 times EBITDA in 2022
PSONY MAKE PLACES
ISS
INTRODUCTION
Stronger. Simpler. Closer.
Our strategy will help us become the most respected global leader in integrated facility services and strengthen our position as number one in cleaning.
Our OneISS strategy will ensure we can live up to our purpose, to connect people and places to make the world work better.
Stronger. We will build on our unique heritage, doing what we do best and investing in the right areas to help us grow.
Simpler. We will make life easier for our people and our customers, and leverage our global scale to work better for all of us.
Closer. We will continue to embrace the right values, working together in a more aligned way and with a clearer structure, to succeed as OneISS.
PEOPLE MAKE PLACES
PEOPLE MAKE PLACES
Agenda
- Introduction
- Strategy and Market Dynamics
- Operating model
- Financials
- Concluding remarks
155
STRATEGY AND MARKET DYNAMICS
We see a strong outsourced FM market in the future despite Covid-19
Covid-19 is expected to generate some headwinds
However, there are also structural tailwinds and opportunities arising
- Reduction in covered square-meters over time due to a structural increase in work-from-home - estimated reduction of 10-15% over the next three years
-
Some customer segments hit structurally will take longer time to recover (e.g. aviation)
-
Increased importance of the workplace as a vehicle to enhance corporate culture, employee collaboration and innovation
- Increased corporate cost reduction focus drives outsourcing opportunities
- Increased need of deep-cleaning and services to manage Covid-19
- The global pandemic has made the value proposition from the self-delivered and integrated offering even more apparent
- Work-from-home services are a part of our future value proposition
STRATEGY AND MARKET DYNAMICS
Attractive Key Account market, with significant room to grow
USD 400bn global Key Account market
Estimated approx. 40% of the USD 1 trillion market
*Outsourced market.
Sources: Frost & Sullivan, World Bank, ISS estimates
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ISS
STRATEGY AND MARKET DYNAMICS
Key Account strategy confirmed
Growth
Key Accounts more prone to bundle services; Larger opportunity to grow with customers
Margin
Key Accounts net margin above non-Key Accounts
Free cash flow
Key Accounts cash flow dynamics and payment behaviour are more attractive
Revenue stability
Key Accounts have longer contract duration, higher retention and higher predictability
Society
Better opportunities for our people, the places we maintain, and the people we serve
Risk profile
Key Accounts have high Corporate Responsibility ethics
+5pp higher organic growth p.a.¹
- Average organic growth from FY2016 to FY2019
STRATEGY AND MARKET DYNAMICS
Bringing our value proposition to life through Key Account stories
Context
Case study 1 Pharmaceutical customer
- FM services were managed by several players and partly done inhouse prior to ISS winning the contract in 2017.
- ISS contract covered integrated facility services in 39 countries across 69 sites. Later additional sites were added.
- Key reasons for winning were our self delivery capabilities, one-stop-shop solution and organisational ability to deliver predictable outcomes across a global portfolio.
Key drivers of success
Financial impact
Case study 2 Industry and Manufacturing customer
- Contract won from a regional competitor in 2016. Key reason for winning was our ability to offer integrated facility services on a global scale.
- In 2018, an additional country (Germany) was added to the contract. Further growth driven by extra project work (especially within technical services) and gaining more sites across several countries.
Financial impact
PEDPLE MAKE PLACES
- Global management support in terms of oversight
- Leverage of global excellence especially within technical services
- Successful integration of service lines
- Key value driver for the customer is our strong compliance offering such as health and safety and regulatory compliance.
ISS
STRATEGY AND MARKET DYNAMICS
Our ambition is to be a global leader in IFS, and #1 globally in cleaning
We want to be a global leader in IFS
Our core services going forward
Cleaning
- ISS' heritage
- Global leader position
Technical
- Critical for Key Accounts
- Growth opportunities
Food
- Supports IFS experience
- Opportunity for new offerings
Workplace
- Increased demand
- Addressing core needs
We will accept nothing less than being #1 in cleaning globally
Continue growth in core markets
Remain a cost leader through operational improvements
Embed technology into the core services to drive efficiency
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STRATEGY AND MARKET DYNAMICS
We have already taken the first steps in our tech agenda – now, we will accelerate investments to become a technology leader
Innovative technology already introduced
Technology will be a source of competitive advantage in facility management in the future
FMS@ISS: Powerful, data-driven platform for on-site operational performance tracking across sites and accounts
Internet of Things (IoT) and sensor technology to drive solutions, e.g., optimised diligence and frequency of cleaning in buildings
We will accelerate investments to become a technology leader, e.g.:
- Grow central IT resources 50% by 2022
- Enable operational performance benchmarking of ~85% of Key Accounts revenue by 2023¹
-
Accelerate roll-out of end-user digital applications
-
Facility Management Software roll-out to ~85% of total KA revenue
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STRATEGY AND MARKET DYNAMICS
Our country and business unit divestments are based on:
- Strategic fit
- Risk profile
- Ability to reach scale in the service/local market
We will further sharpen our strategic focus
Countries
We will exit Portugal, Russia and Taiwan
Business Units
We will divest selected non-core business units
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Agenda
- Introduction
- Strategy and Market Dynamics
- Operating model
- Financials
- Concluding remarks
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155
OPERATING MODEL
What has not worked in the past
Five key pain points identified
- We have strong country organisations, but we are yet to reap the benefits of global scale
- We have lacked robustness in our commercial bid process
- We have not developed a global approach to drive consistent quality and benchmarked productivity in our operations
- We have invested in technology and progressing fast, but we are yet to make technology a competitive advantage
- We have not been sufficiently aligned and rigorous in executing our strategy
PEOPLE MAKE PLACES
ISS
OPERATING MODEL
Initiatives to drive change
Five key changes that will transform our business and underpin execution of our Key Account strategy
- An aligned country operating model will drive needed standardisation
- A revamped Group Commercial function and enhanced commercial process will strengthen risk management and drive profitable growth
- A newly created Operations Performance function will ensure best practice is deployed across the organisation driving efficiency and quality
- A new operating model for IT will modernise our IT infrastructure and ensure accelerated roll out of the ISS technology Suite
- A cultural change with common goals, driven by a new and aligned leadership team – building on our proud people foundation
PEOPLE MAKE PLACES
ISS
OPERATING MODEL - GLOBAL FUNCTIONS
1: An aligned country operating model will drive needed standardisation of structure and processes globally
We will align our country operating model across functions
People & Culture
Operations
Commercial
Finance
Digital & Technology
Legal
PEOPLE MAKE PLACES
Key benefits
Higher degree of alignment and standardisation across the enterprise
Consistent, high-quality and efficient service delivery
Enables global talent management and capability building within functions
ISS
OPERATING MODEL - COMMERCIAL
2: A revamped Group Commercial function and enhanced commercial process will strengthen risk management and drive profitable growth in our prioritised segments
Stronger risk management
- We have implemented a new comprehensive standard for commercial bid processes to drive appropriate risk management, profitability and cash flow generation
Global commercial team
- Global commercial team
- Central customer segment expertise
- Global account support
Value propositions
- Strengthen value propositions to priority customer segments
- Design standardised service products
Commercial Excellence
- Investments in Commercial Excellence function
- Drive best practices across the business
- Collaboration platform for Commercial across countries
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OPERATING MODEL - OPERATIONS
3: A newly created Operations Performance function to deploy best practices across the organisation
Service Performance
- Best practices embedded for service delivery
- Standardised service products to boost competitiveness and enable scalability
Contract Transition and Transformation
- Dedicated transition team to ensure optimal transition of new contracts
- "SWAT team" for turnaround of underperforming contracts
Costing
- One system used for measuring and benchmarking productivity across the enterprise
- One costing tool to ensure correct costing of new bids
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ISS
OPERATING MODEL - TECHNOLOGY
4: A new IT operating model will modernise our IT infrastructure
Digital talent
- New Chief Information & Digital Officer (CIDO) in Executive Group Management
- 50% increase in central IT resources by 2022
Future-proof foundation
- New IT operating model
- New corporate hub in Warsaw
- Modern IT infrastructure
- ISS technology Suite and common set of business applications in all markets
Innovation
- Leading tech-enabled facility services company
- Innovative technology solutions
- Investments in digital experiences for our customers
2020 investments further include
- DKK 850 million in malware recovery and long-term enhancements
- DTAG migration and improvements
*Excluding other income and expenses
PEOPLE MAKE PLACES
OPERATING MODEL - LEADERSHIP
5: A new Executive Group Management with internal talent and strong external additions will drive transformation
Jacob Aarup-Andersen
Group CEO
New to EGM and in role
Functional Focus
Kasper Fangel
Group Chief
Financial Officer
New to EGM and in role
Corinna Refsgaard
Group Chief People & Culture Officer
Troels Bjerg
Group Chief
Operating Officer
Daniel Ryan
Group Chief
Commercial
Officer
New in role
Tob
Troels Bjerg
Group Chief
Operating Officer
Bjørn Raasteen
Group General
Counsel
TBD
Group Chief
Information &
Digital Officer
New role in EGM
Celia Liu
CEO, Strategic Transformation
New to EGM and in role
Andrew Price
Head of Strategic Growth
New in role
Pierre-François Riolacci
CEO, Europe
New in role
Daniel Ryan
CEO,
Americas
Scott Davies
CEO, Asia Pacific
New to EGM and in role
TBD
Head of UK & Ireland
New role in EGM
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ISS
OPERATING MODEL - LEADERSHIP
5: Significant talent inflow into service lines, functions, and countries over the last year
New Country Managers
| UK
14% of Group Revenue | United States
10% of Group Revenue | Pacific
6% of Group Revenue |
| --- | --- | --- |
| Germany
6% of Group Revenue | Denmark
5% of Group Revenue | |
| India
2% of Group Revenue | Hong Kong
3% of Group Revenue | |
PEOPLE MAKE PLACES
OPERATING MODEL
We are working to improve specific well-known operational issues
Current status on key focus areas
- F Deutsche Telekom
- Execution programme towards stabilisation of operational service delivery on track
-
Write-downs and provisions taken in H2 2020
-
F FORSVARET
- Ongoing dialogue with customer to adjust or exit the contract
-
Expected future losses fully provided for in H2 2020
-
F S
- Severely hit by Covid-19
- Actions and initiatives in place to improve profitability from 2021
-
New leadership team
-
F S
- Significant reorganisation being finalised
- Commercial strategy being rebuilt
- Large scale restructuring initiatives being executed
Lessons applied in new operating model design
- Commercial focus on risk management and bid-governance
- Stronger link between commercial and operations from bid to transition, launch and delivery
- Acceleration of digitalisation and IT capabilities
- Improved execution and leverage of best practice
PEOPLE MAKE PLACES
ISS
Agenda
- Introduction
- Strategy and Market Dynamics
- Operating model
- Financials
- Concluding remarks
PEOPLE MAKE PLACES
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ISS
FINANCIALS
Managing through unprecedented turbulent times in 2020
Customer type organic growth (Jan-Sep 2020)
- Our strategic focus on Key Account customers (66% of YTD revenue) has increased the quality of our revenue base, as evidenced by overall more resilient organic growth
Service line growth
- While food services (15% of revenue in 2019) have been severely impacted by Covid-19 as it is significantly volume driven...
- ... most other services have remained resilient and are expected to be faster to ramp up as sites fully reopen and end-user utilisation increases
Projects & above-base organic growth
- Contrary to any other historical economic downturn, projects and above base work have not declined – but rather increased
- While this part of the business has also been significantly impacted by lock-downs, it has been more than outweighed by the demand for deep-cleaning and disinfection
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ISS
FINANCIALS
2020 financial performance at a glance
While 2020 turned out to be a perfect storm...
... we are, despite 2nd wave impacts, set to deliver on the reinstated guidance announced in August
| | Original
2020 Outlook
(26 February 2020) | The perfect storm
(Malware attack, Covid-19 and other operational impacts) | | Reinstated
2020 Outlook
(12 August 2020) | Current
status |
| --- | --- | --- | --- | --- | --- |
| Organic Growth | Above 4% | -10% to -13% impact | = | -6% to -8% | ☑ |
| Operating Margin
(Before other income and expenses, net) | Above 4.5% | Significant impact
(excl. restructuring and one-offs) | = | Marginally positive
(excl. restructuring and one-offs) | ☑ |
| Free Cash Flow
(Reported) | Above DKK 2.0 bn | Around DKK -4 bn | = | Around DKK -2 bn | ☑ |
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ISS
FINANCIALS
Turn-around targets
ISS will remain an industry leader and will return to solid organic growth, robust margins and strong free cash flow...
... however, our previous medium-term targets are withdrawn to focus on the short-term recovery
New Turn-around targets:
EBIT-margin above 4% when entering 2023
Positive Free Cash Flow in 2021 and strongly improving in 2022
Deleveraging to below 3x by FY2022¹
Short term incentives adjusted to support the turn-around
Capped if minimum achievement on nominal Operating Profit and Free Cash Flow is not met
Overweight of Free Cash Flow versus Organic Growth and Operating Margin
Inclusion of specific targets linked to turnaround milestones
PEOPLE MAKE PLACES
ISS
FINANCIALS
Clear recovery path back to mid single-digit operating margin
| Initiatives to reach mid-single digit margin | 1 Improvement within specific key operational issues
Deutsche Telekom, Danish Defence, France and UK |
| --- | --- |
| | 2 Covid-19 margin recovery...
... driven by the gradual normalisation of revenue...
... and restructuring of the platform to be fit for purpose |
| Initiatives to sustain mid-single digit margin | Transformation of our operating model...
... to avoid future operational issues and build a strong global company
... supported by fully funded run-rate investments to help mitigate risks |
Recovery to mid-single digit operating margin
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ISS
FINANCIALS
2: Covid-19 margin recovery
Margin recovery driven by the normalisation of revenue...
... and restructuring of the platform to be fit for purpose
While food services have been severely impacted by Covid-19 as it is significantly volume driven...
...most other services have remained resilient and are expected to ramp up faster as sites fully reopen and end-user utilisation increases
Our working assumption with regards to recovery of the 10-13% of revenue lost in 2020 as a result of Covid-19:
- 1/3 will not be recovered within the foreseeable future (mainly within food services)
-
2/3 to be fully recovered within a few years
-
Adjustment of fixed cost structure...
...to right-size the business to a lower level of activity in the short term -
Adjustment of variable costs...
...to reflect the lower level of activity...
... and to help offset the impact from salary compensation schemes coming to an end -
Closing down of selective business units...
...which are structurally unprofitable post Covid-19 (around 1% of Group revenue)
Estimated 2020 restructuring cost
DKK 1.2-1.4 bn
Estimated annual net¹ operating profit impact to build over 2020-2022
DKK 0.7-0.9 bn
(hereof around DKK 0.1 bn in 2020)
- Gross benefit from restructuring offset partly by salary compensation schemes coming to an end
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ISS
FINANCIALS
Cost saving programme to fund investments into new operating model
Ramping up investments into the new operating model...
... to further strengthen our industry leading position
Run-rate investments to be fully funded by cost savings
New operating model for IT
Increased recurring annual investments into IT
Establishment of Operations Performance function
Investing to fully reap benefit from best practice and scale
Revamped Group Commercial function
Incl. strengthened focus on risk management and bid-governance
Establishment of second corporate hub in Warsaw
Investing in further resources to enable the transition
Incremental annual Group spend (DKKm)¹
Centralisation of spend
Centralisation of sub-optimised spend from countries to Group – including IT and Operations
Optimisation of real estate portfolio
Key Account focus allows for a reduced footprint
Gradual rationalisation of resources...
...following the establishment, initial overlap and stabilisation of the second corporate hub in Warsaw
- Around DKK 100m of the investments in 2021 are one-off or non-recurring of nature and as such will drop out from 2022
Incremental annual savings (DKKm)
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ISS
FINANCIALS
Further simplification and refocusing of the portfolio
Existing divestment program on track
13 countries and multiple business units divested to focus on Key Accounts
Around 60% successfully completed
Remaining future divestment proceeds estimated at around DKK 1 bn
Additional divestments announced
Further reduced complexity and standardisation by divesting Taiwan, Portugal, Russia² as well as selective non-core business units
New revenue to be divested around DKK 4 bn with broadly neutral margin impact
Expected divestment proceeds of around DKK 1 bn
Combined net divestment proceeds of up to DKK 2 bn¹
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ISS
FINANCIALS
Deleveraging to below 3 times¹ EBITDA to be achieved by FY2022
Three key levers driving de-leveraging
- Gradual EBITDA recovery over 2021-2022 and beyond
- Positive and improving Free Cash Flow in both 2021 and 2022...
...allocated fully to reduce net debt (no dividend paid until leverage target has been met) - Net divestment proceeds of up to DKK 2 bn
- Based on EBITDA excl. restructuring and one-offs
- Leverage target remains below 2.8x Pro Forma Adjusted EBITDA
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FINANCIALS
Preliminary outlook for 2021
The recovery journey has started and will progress gradually during 2021
| Organic growth | Positive organic growth | • Organic growth held back by continued significant Covid-19 headwinds in Q1 2021... • ... followed by gradual recovery from Q2 2021 • Limited support from price increases on the back of low wage inflation expectations • Selective contract exits as part of pruning the portfolio post Covid-19 |
|---|---|---|
| Operating margin before other income and expenses, net | Operating margin above 2% | • Improvements within key operational issues (Deutsche Telekom, Danish Defence, France and the United Kingdom) • ... supported further by restructuring of the platform to be fit for purpose • Investments in the business especially within IT • Lapsing of significant restructuring and one-off costs from 2020 |
| Free Cash Flow (Reported) | Slightly positive Free Cash Flow (incl. cash out from restructuring and one-offs in 2020) | • Return to positive Free Cash Flow supported by recovering operating profit... • ... partly outweighed by the cash impact from significant restructuring and one-offs booked in 2020 • Slight increase in the utilisation of factoring, driven by the launch of a new large International Manufacturing customer in the Americas (1% of Group revenue) |
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ISS
Agenda
- Introduction
- Strategy and Market Dynamics
- Operating model
- Financials
- Concluding remarks
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ISS
CONCLUSIONS REMARKS
We are a purpose-driven organisation
- A proud heritage based upon a deep respect for people...
- ...and a strong customer focus
- Originated in Denmark but successfully exported across the globe
- Embedded values of...
- Fairness
- Equality, and
- Inclusion
- ...are fundamental to our value proposition, for all stakeholders
- At ISS, we believe that people make places and places make people
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ISS
39
Our stakeholder ambition
We are driven by our purpose
'Connecting people and places to make the world work better'
"Making the world work better starts with our belief in creating a fair and inclusive society. We take care of, and provide opportunity for people, helping them to develop themselves and be the best they can be. We do this because we know our people can and do make a difference. We believe that people make places and places make people."
2025 ambition
Customers
'To achieve industry leading customer engagement'
Shareholders
'To deliver a top quartile TSR relative to peers'
Socially
'To be a sustainability industry leader on the DJSI Europe Index'
Colleagues
'To achieve industry-leading employee engagement'
ISS
ONE ISS
Connecting people and places to make the world work better
Q&A