Instalco AB (publ) (INSTAL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Instalco Q4 Report 2019. [Operator Instructions] Today, I'm pleased to present CEO, Per Sjöstrand; and CFO, Robin Boheman. Speakers, please begin.

Okay. Thank you very much. And I also want to welcome you to this presentation of our Q4 report for 2019. As you heard, my name is Per Sjöstrand, I'm CEO at Instalco. And with me today, I have Robin Boheman, our newly appointed CFO. Robin is not new in the team. He has been here from almost -- from day 1, and I want him to present himself. Please, Robin.

Hi, everyone. Yes, like Per said, I've been part of the team since 2014 and the funding of Instalco. I then headed up the M&A and Business Development Department. And since October, I changed over to the position of CFO. So really happy for that. I have a background from the industry from Scania a few years as a consultant as well as at PwC before joining Instalco in 2014. So very happy to be here today.

Thank you. And now let's move to Slide 1. Hopefully, you know by now that we are a leading pan-Nordic installation group in heating and plumbing, electrical, ventilation and cooling. And we have a 68 individual strong local brands. We have 68 companies within the group. Our business model is highly decentralized structure. Also, we have delivered high margins over time since the beginning. We have now reached more than -- or almost SEK 5.7 million -- SEK 5.7 billion, of course, and adjusted EBITA of SEK 500 million. We're talking LTM now. And an adjusted EBITA margin of 8.8%. We are almost 3,100 employees. And we did a very good acquired annual sales year of almost SEK 1.5 billion. We can directly go to Slide #2, talking a little bit about the market and the value of the total Nordic market is more than SEK 200 billion. Sweden, as you can see, it represents the largest component. We have some strong trends. Urbanization is one of those. And it goes throughout the Nordic region and also is one of the main driving forces in the installation sector. Housing shortage issues, another one, more complex buildings is another. And over time, the Nordic installation markets has had a stable rate for growth, although it is now starting to level off, as you can see. It's important to emphasize that it's doing so at a relatively high level. I think you can see the slide there and how we think the market will develop the next 2 years. If you go to Slide 3, and of course, I'm very proud to report that we have another quarter with growth -- stable growth in sales and continued high profitability. We also have a net sales growth of 30.7%, organic growth 6%. And as you can see, a very strong cash flow. And also a stable order backlog and also with 6 acquisitions, we'll come back to that, of 6 high-quality companies during the quarter. I mentioned that adjusted EBITA overall was 8.8%. This quarter, it was 9.5% adjusted EBITA margin. If we go to Slide #4. Here, you can see that we have this stable growth in net sales and also organic growth. We have -- you can see also that profitability has improved and our performance exceeds our targets for the profitability margin. And I think it all reflects the result of our strategy of working very well, and even many small and medium-sized projects, which keeps risk at the low level and with a high profit margin. This year, as you can see, we also had a very strong quarter 2. Yes, I think we can go to Slide #5 then. Our order backlogs, an overall situation remains stable, and thanks to the level of diversification we have as regards types of projects and markets. And our large order backlog also provides us with, I think, excellent opportunities for adapting our business when change occurs in the market. Turning to Slide 6, and here are -- 2 of our projects from the quarter that I'd like to highlight as great examples of how we work. In Norway, we won our largest multi-company assignment to date. Andersen og Aksnes and Teknisk Ventilasjon have obtained a joint installation assignment for an apartment complex project in Oslo. They have been contracted for the heating and plumbing and ventilation work. And collaboration in this project is a good example of how the Instalco model is now really starting to take off in Norway. I think we have it already in Sweden. Another great example of how the Instalco model works is a smaller project in Malmö, where 4 Instalco companies collaborated on construction of the new Lloyds pharmacy. They were contracted for installation of the heating and plumbing, electricity, ventilation and sprinkler system. And we are sure our own companies collaborating on the same project. We were able to deliver it quickly with high quality and cost effectiveness. So going to Slide #7, starting with Sweden -- segment Sweden. We think the market is stable. There is a high rate of construction for schools and preschools and hospitals. We have talked about that before. A good net sales growth, also a good organic growth. And as you can see, a very, very high EBITA margin, 10.7%. Our order backlog growth of 6.8% -- 16.8% and 2.1% in comparable units. I think that's also a good sign. If we go to next slide and look at the Rest of Nordics and our other segments, and also it's -- our net sales growth, high demand, and the net sales growth 30% in this case, organic growth 3.7%. And our order backlog is also growing. The EBITA margin is 7.6%. I think it's good. I'm satisfied with that. And we are now reaching our targets of 8%, sooner, I think we will see that. We had a very good quarter 3 in this case, and an EBITA margin of 7.6%. On a yearly basis, even the Rest of Nordics now have reached 8%. I think it's 8.2% or 8.4%. I'm satisfied with that. But I think we have -- it was behind us. So that is back. And now Robin, so we talk a little bit about how we create value.

Yes. I think many of you have seen this slide before, but I'll briefly run through it, so it's Slide #9 and how we create value. And as you see, they're divided into 3 different areas: You have the M&A; the subsidiaries approve -- improvement; the organizational development. And looking at M&A, you can see that we acquired the best-in-class companies with strong brands, good history. We can do that at an attractable multiple. We mainly focus on 3 different acquisition strategies. So the strategic one, being a new location or a new segment. The opportunistic one would be, for instance, where we have the possibility to buy a company at a reasonable price or a management that we like and add-on would be that when one of our subsidiaries and thus a known acquisition and kind of add-ons to already existing companies. Something that came up in 2018 was start-ups. So we've done a few start-ups as well. That will be kind of a greenfield start. So where we have our management team, but we start a company together with them. And in this M&A activities that we do, we also see that we are able to generate multiple arbitrage. Going into the subsidiaries and the improvement there. We have a way of creating value through lean effectiveness and cooperations between the units, mainly due to spreading of best practice and competence throughout our network. Those are very flat and decentralized decision and organization, which also improves the entrepreneurial spirit that comes into the organization. And we kind of focus on a demand-driven functions and then keeping our overhead costs extremely low, with a focus on our best-practice methodology called IFOKUS, which is a kind of go and see, and we also added on the Instalco Academy to teach our employees. So if we move into the next slide, I'll talk a little bit about the acquisitions for 2019. You can see that we had a record-breaking year. Like Per mentioned, almost SEK 1.5 billion in sales. Just to highlight a few, that I think, during the year, we have, for instance, Instamate, which was a little specific acquisition, where we brought the installation part of Scania, the truck manufacturers, called DynaMate, so we brought them over, remained -- rebranded into Instamate. And if you look at the quarter, we did 6 acquisitions in the quarter, and 4 of them in Sweden and 2 in Nordics. As we go to next slide, I'll give a few examples. So Slide #11 then. And we did the acquisition in Q4 of Ventec, which is a company in Kristiansand specialized in ventilation. There was a natural collaboration with our company, Moi Rør, that we acquired earlier this year -- last year in 2019. So this also helps us to become more and more multidisciplinary within Kristiansand, which is a new area for us. Going over to another acquisition that we're really happy with is Henningsons Elektriska, which is a Falun and Dalarna-based company that we've been looking at for many years, and they decided to join Instalco. They have a very long history with a very good track record, and we're very happy that they joined as well and strengthening our team in Falun and Dalarna.

Okay. Thank you, Robin. Shall we move to next slide talking a bit about sustainable installations? And we're providing safe, sustainable installations that help generate benefits to society is a high priority for us. And we also put much emphasis on having a stimulating -- a safe stimulating work environment. And we aim to every single day, in fact, generate benefits to society through our climate-smart energy-efficient installations that lead to lower consumption of resources. And for example, Instalco contributes to sustainability and achieve higher energy efficiency through its installation of solar cells, heat pumps, geothermal heating, heat exchangers, LED lighting, charging stations, energy savings program and so on and so on. We also installed more energy-efficient and environmentally friendly refrigerator system in, for example, grocery stores. And other examples are the ventilation system we installed to improve indoor climate, and we were involved in several water purification projects in the Nordic region. So if you go to next slide. I'm very extremely, I would say, proud of our major achievement, which is the recent launch of our sustainability program, "Sustainable Installations". It enabled us to expand our approach and taking even greater responsibility in the area of sustainability. The Sustainability program focused on 3 main areas that should remain all areas of Instalco's sustainability work. First, safe and modern work environment. The second is "Sustainable Installations", and third is mature leadership. And with these 3 main areas, there are 8 sustainability targets that we will measure and monitor, with a goal of achieving improvements each year in all areas. Okay. Slide #14. And the one key component of the new sustainability program is Sustainable Instalco Project, which is a classification system that we have developed ourselves. And in order for a project to become classified as a Sustainable Instalco Project, it must meet 6 specific sustainability indicators. So for example, it must meet the requirements on occupational health and safety by going through the safe employee program when the project starts up. And furthermore, our suppliers involved in our projects must sign Instalco's Code of Conduct. The project must also demonstrate qualities making it climate smart. Sustainability classification serves as a stamp, I think, of quality for the project, for our customer, Instalco and all our subsidiaries involving in the project. Next slide, on Slide 15, we also take another step. And we are now expanding our service offering with a goal that service account for a larger share of our business. We aim to take a different from 15% -- around 15% to 20%. And to achieve that, we are now building an organization, which serve -- with service departments at our subsidiaries. And when projects are completed, the task will be to offer customers service agreements. We will also start looking at acquisitions of companies that's focused purely on service. And that's, of course, in order to achieve the mix of service and projects that Instalco would like to achieve. I think those are expanding our service operations to create customer value and generate organic growth, of course, and the market for service is stable. We have identified many profitable service companies at our attractive acquisition candidates. Robin, shall we take the next slide, I think, 16?

Yes. So those of you who have followed us remember this slide as well. This is probably the last time we'll show this slide, but it was just to emphasize that we reached the financial target of SEK 450 million in EBITA in run rate for 2019 and we just wanted to show that we reached that target. We changed the financial target in the beginning of 2019. But this was just to show that we managed to reach the target. And we actually reached it already in Q3 2019. So that was ahead of schedule, actually. But let's look into next slide, so Slide 17, and talk about our financial targets. And as you all see, there is no changes from last time. So we an average sales growth of approximately 10% over a business cycle both through organically and acquisitions. And as you heard Per mentioned, before me as well, we are well above that plan as well. Looking at the margin, we're very happy to report today 8.8% year-to-date. And so we are above that target as well. When we come to capital structure, we have a ratio of 2.5, and we are at the debt level of 1.5x as of December 2019. So we have some headroom here as well to continue our acquisition journey. Looking at the cash conversion, we're also very happy to report that we are, year-to-date, at 102%. So also above our target here for a 100% cash conversion. And coming into our dividend policy, we continue with a 30% dividend of the net profit. That will calculate to a dividend of SEK 2.3 that we will suggest for -- to be paid out in dividends this year.

Thank you, Robin. And moving to Slide #18, which is the summary. And yes, you can -- as you have heard, I can conclude that the Instalco has another strong quarter, strong growth, high profitability. I think, also, we have a healthy cash flow. We are launching a new sustainability program as well as a service offering strategy for service offering. So we are very, very satisfied with this quarter and with the full year 2019 as well. And last slide now, this time, I'd like to conclude with the song Proud Mary, Creedence Clearwater Revival's hit from 1969. And the lyrics says, "A big wheel keep on turning. Proud Mary keep on burning. Rolling, rolling, rolling on the river." And that's how it is in Instalco but will keep on rolling. And with that, I'd like to thank you all for joining in on this call. And now we'd like to take your questions.

[Operator Instructions] Our first question comes from the line of Robin Nyberg of Carnegie.

It's Robin Nyberg of Carnegie. A couple of questions. First, I could ask about the outlook comment. You wrote in the report that you expect equal or even greater success in 2020. Could you please specify what do you mean by that? Are you referring to profitability, acquisitions? Or what?

Robin, I don't know if we wrote more success. We are very happy with our order backlog. As we said, we are happy with the margin outlook. We are satisfied with our margins, so I think that we have a good possibility to achieve good results in 2020. But I don't know if I said it should increase or...

Yes. Okay. I mean you just wrote -- you expect equal or even greater success in 2020, but that clarifies it. Then I could ask one on the service target. When do you think the 20% -- share of services, 25% could be achievable? And do you expect initially if maybe some small margin pressure? I mean you are setting up service departments. Or how should we think about this?

Yes, good question, of course. I think we -- it takes a year, I think, to achieve what we want, growing from about 15% to 25%. And of course, there can be some costs in this, but we think that we are in a very, very -- in many projects. And it's easy to just hand over a service contract to -- or to the customer in those projects. So I think it will be -- we can handle this right, and we will handle it right. I think we can have the same margin or even higher margin in the service sector. And I think that also that we can -- but we have -- it takes up a year, I think, to achieve this -- those 10% increase. And that is on top of, I think, of the growth that we'll see.

Okay. And maybe lastly also, in the long term, let's say, 2 to 4 -- or 2- to 4-year perspective, do you see the potential in services increasing to 30%, maybe 40%?

Maybe. But still, we are a lot -- we have a focus on projects with partnering and partnering and also fixed price. Of course, but also partnering. So I think it is 35%, maybe -- 25% to 30% is reasonable. Also, it's a matter of definition. You have to define what service is. And our way to define it is maybe a little bit different from other companies, but we are -- we should be very satisfied we can reach 25% to 30% over time. But there, I think it is -- we can be stable, and I think we can achieve that.

And our next question comes from the line of Peter Andersson of SEB.

Stefan Andersson here. A few questions. If we start with your M&A pipeline. Going back, you've been guiding a little bit, saying that you're aiming at SEK 600 million to SEK 800 million beginning in acquisitions annually. You're well above that now, of course. Are you willing to maybe indicate what kind of levels you aim to be on nowadays?

Stefan, Robin here. I think our guidance value be SEK 600 million to SEK 800 million. And I think what we have -- what we saw last year was a all-time high. So I think we will stick with our SEK 600 million to SEK 800 million over a business cycle. And then here it's also the -- here is also with the discussion of matter of buying companies, but the key here is the integration and to do the integration as well. And so a lot of focus will be put on integration, and we have also increased similarly a little bit to kind of take care of integration as well.

Yes. Then I was -- let's -- maybe I missed that. I was looking for the number of outstanding shares. At the end of the quarter, I see the average, that's -- but it didn't really work, when I look at your calculation of EPS, I don't get that to the fly. So could you maybe give me a number of outstanding shares at the end of the quarter?