ISS, the workplace experience and facilities management company, has published a trading update for the first nine months of 2019. Revenue increased by 6.3% and by 8.9% in Q3. Organic growth stands at 6.8% in the first nine months of 2019 and at 8.4% for Q3 driven in the main by the launch of the prestigious Deutsche Telekom contract and strong commercial momentum with a high level of key account contract wins, extensions and expansions. Organic growth from key accounts was 9.7% and 12.9% in Q3 representing 62% of overall Group revenue (H1 2019: 61%).
Operational stabilisation following the launch of the Deutsche Telekom contract is progressing and expected to be completed in the coming months. On that basis, the Group has outlined that contract revenue and profitability expectations for 2019 remain unchanged.
Organic growth expectations for 2019 remain unchanged at 6.5%-7.5%, with the business on track to deliver organic growth of more than 4% in 2020. However, operating margin is 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 the operating margin for 2019 has been adjusted to above 4.2% (previously 5.0%-5.1%). In 2020, the ISS Group expects the operating margin to be around the 5.0% mark.
The company reports that it has made “good progress” on a number of free cash flow improvement initiatives, among them debtor days, supplier payment terms and capital investments. However, 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 factoring in 2019 of around DKK 1 billion (previously an expected reduction of around DKK 200 million).
As such, the outlook for free cash flow for 2019 has been 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 factoring (previously DKK 2.0-2.4 billion). In 2020, the ISS Group expects free cash flow to be DKK 2.1-2.5 billion with a broadly neutral impact from factoring.
The organisation’s 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. As a result of the decision to spread the transformational investment programme over 2019-2021 (previously 2019-2020), ISS has explained that it may not reach these medium term targets until 2022 (previously 2021).
Jeff Gravenhorst, Group CEO at ISS, said: “Our organic growth of 6.8% in the first nine months of 2019 was underpinned by our strengthening key account focus. However, the need to reduce our 2019 outlook for both operating margin and cash flow is clearly disappointing. Our execution has proven unsatisfactory in a few areas leading to an operational shortfall, thereby triggering some negative one-off items impacting 2019. Our strategic choices are right, but our level of ambition and our desired pace of change have, in hindsight, proven too ambitious. We’ve overstretched ourselves. This will change. We will take an additional 12 months to complete our investment programme and launch an efficiency plan. This will reduce both risk and cost. While margin and cash flow expectations for 2019 are now significantly reduced, we expect a strong recovery in 2020. Our medium term outlook is delayed by 12 months, but otherwise remains unchanged.”