ISS has announced its trading update for the first nine months of 2019, reporting a revenue increase of 6.3 per cent and 8.9 per cent in the third quarter.
Organic growth of 6.8 per cent in the first nine months of 2019 and 8.4 per cent in the third quarter, up from 5.8 per cent in the second quarter, was driven by the launch of the Deutsche Telekom contract,the single largest contract in ISS history.
Organic growth from key accounts was 9.7 per cent in the first nine months of 2019 and 12.9 per cent in the third quarter, representing 62 per cent of group revenue.
The 2019 outlook for organic growth remains unchanged from its second quarter Interim Report 2019, whereas outlook for operating margin and free cash flow is adjusted.
Organic growth expectations for 2019 remain unchanged at 6.5 per cent -7.5 per cent, with the company stating it is track to deliver organic growth of more than 4 per cent 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 per cent (previously 5.0 per cent -5.1 per cent). In 2020, ISS expects operating margin to be around 5.0 per cent.
Its medium-term targets remain unchanged with 4 per cent – 6 per cent organic growth, around 5.5 per cent operating margin and around DKK 3.0 billion in free cash flow.
However, as a result of the company’s decision to spread the transformational investment programme over 2019-2021 (previously 2019-2020), ISS said it may not reach these medium-term targets until 2022 (previously 2021).
Jeff Gravenhorst, Group CEO, ISS A/S, said the company’s organic growth of 6.8 per cent in the first nine months of 2019 was underpinned by strengthening key account focus. However, the need to reduce its 2019 outlook for both operating margin and cash flow is disappointing.
Our execution has proven unsatisfactory in a few areas leading to an operational shortfall, hereby triggering some negative one-off items impacting 2019.
“Our strategic choices are right, but our level of ambition and our desired pace of change, in hindsight, have proven too ambitious. We have overstretched ourselves. This will change.
“We will take an additional 12 months to complete our investment programme and we will launch an efficiency plan. This will reduce both risk and cost.
“Whilst 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 unchanged.”
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