Organic revenue grew by 6.8% in the first nine months of 2019 and 8.4% in Q3 (Q2 2019: 5.8%), driven by the launch of the Deutsche Telekom contract, strong commercial momentum with a high level of key account contract wins, extensions and expansions as well as projects and above-base work. Organic growth from key accounts was 9.7% in the first nine months of 2019 and 12.9% in Q3, representing 62% of Group revenue (H1 2019: 61%).
On 1 July 2019, Deutsche Telekom, the single largest contract in ISS history, was launched across all sites, driving close to 4% organic growth in Q3. The operational stabilisation following the launch is progressing and is expected to be completed in the coming months. On that basis, ISS reports that contract revenue and profitability expectations for 2019 remain unchanged.
On 27 May 2019, ISS announced that its current contract with Novartis maturing 31 December 2019, with an annual revenue of around DKK 2.0 billion, is not likely to be extended. There are ongoing discussions with the customer and the new provider. ISS now expects to continue service delivery in a few key countries.
The 2019 outlook for organic growth remains unchanged from ISS’ Q2 Interim Report 2019, however its outlook for operating margin has been adjusted due to delayed operational improvements in France, and two loss making contracts, one in Denmark and one in Hong Kong.
ISS has also adjusted free cash flow, which is expected to be impacted by lower operating margins and a stricter factoring policy.
The company’s medium-term targets remain unchanged with 4%-6% organic growth, and around 5.5% operating margin. However, as a result of ISS’ decision to spread its transformational investment programme over 2019-2021 (previously 2019-2020), ISS has stated it may not reach these medium-term targets until 2022 (previously 2021).
Commenting on the results, Jeff Gravenhorst, Group CEO, ISS A/S, 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, 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.”