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

Ladies and gentlemen, welcome to the Instalco Q2 Report 2020. [Operator Instructions] Today, I'm pleased to present CEO, Per Sjostrand; and Fredrik Trahn, Head of IR. Please begin the meeting.

Okay. Thank you very much, and welcome to this presentation of our quarter 2 report for 2020. As you heard, my name is Per Sjostrand, CEO at Instalco. Fredrik Trahn is with me. Robin Boheman, our CFO, is also available. He became a father a couple of days ago, so I gave a couple of days for free. So -- but he can join in if there is some tricky questions about the figures. And we can go to Slide #2 and a short brief presentation of Instalco. We call ourselves a leading installation group in the markets of Sweden, Norway and Finland, a pan-Nordic group. Our main area of operation is installation and service of heating and plumbing, electrical, ventilation and cooling systems. It also includes constructing in these areas. So we often work in partnering with our customers, sharing best practice and know-how. Europe now consists of 77 subsidiaries and just over 3,300 employees. We have a highly decentralized structure, supported by a small central organization. And we'll also come back to that, but we have a strong profitability with high margins over time. So if you go to Slide #3. And for the last 12 months rolling, our sales are nearly SEK 6.5 billion, and an adjusted EBITA of SEK 565 million and adjusted EBITA margin of 8.7%. We also have a strong order backlog, you can see SEK 6 billion. And you can also see here that our taste when it comes to acquisitions is high. Moving to Slide #4, some highlights from the -- on the quarter. Of course, I'm happy or glad to report that we this quarter has -- we had a stable growth in sales. We have continued high profitability, and we have a strong quarter despite the ongoing pandemic. We've been relatively unaffected by it. But of course, we have made adjustments to it. So we can run the business much the same as before. Very good net sales growth and very strong cash flow, as you can see. Five acquisitions made, I will come back to that. Moving to Slide #5. As I've said, we had yet another strong quarter despite the difficult situation we face throughout the world from the COVID-19 pandemic. I think one reason is maybe that the corona crisis has been not hit the construction and installation sector quite as hard as it has other sectors. I think also another reason is that we have the scale and the ability and experience to change our focus and adopt the new situation. Actions have been taken, I will get back to that, and we're carefully monitoring the situation, of course. At the reporting day, the corona crisis has not -- adaptations to it has not resulted, as I said, in a significant disturbances at the group level. There have, however, been some minor disturbances in some projects with service activities. Most projects have been able to continue essentially as usual even with adaptations to the prevailing situation and order intake has been robust. We have handled the situation by making certain adjustments in staffing. We also put much higher requirements and collaboration between our subsidiaries. And also due to the ongoing pandemic, the future market outlook remains uncertain. However, it's still difficult to assess the long-term effects, and we are actively monitoring developments. We are also monitoring operations in our business areas and subsidiaries so that we can take whatever measures necessary to limit any negative consequences. But again, I will point out, it's very difficult to assess the future markets. If we can go to Slide #6. Net sales increased by 22.7%. So we are now over SEK 1.7 billion. Organic growth was 2.3%. During the quarter, we made 5 acquisitions, while the combined annual sales is assessed at about SEK 326 million corresponding to acquired growth of 22.6%. Slide #7. Adjusted EBITA for the group amounted to SEK 150 million for the quarter and a margin of 8.7%. And that is on par with previous quarters, as you can see in the slide there. So go to Slide #8. And for the first time, I would say, in our -- in [indiscernible] history, our backlog of orders exceeds SEK 6 billion, which is nearly at the same level as our total annual sales. And one of the reasons for the rise in order backlog is the hospital project in Sörmland, Sweden, which we announced in the first quarter. Also that project has now been included in the order backlog during the second quarter. So with this, I think our status stands strong, thanks to the stability from our sizable order backlog and the diversification we have across different types of projects and markets. It also gives us flexibility in the sector where we operate. If you could move to Slide #9, I will give you some examples from projects from the quarter. And I would like to highlight these as great examples of how we work. First of all, subsidiary LG Contracting, which won a contract for the heating and plumbing installation in 650 apartments, but is under construction in the new city districts of Upplands-Bro near Stockholm. The assignment also includes system design and installation of a unique and customized new general heating system. The order value is approximately SEK 60 million. Not only that I wanted point out that underlying our healthy margins is the large quantity of well-managed small and medium-sized projects. One example of such is a medium-sized project in Finland with a sustainability focus. And there, LVI-Paavola and our company have been contracted for the heating and plumbing and ventilation systems at Gasum's biogas plant at Lohja, west of Helsinki. This plant will process a total of 60,000 tonnes of biowaste annually. [indiscernible] creating synergies and cross-selling between our companies, our fundamental cornerstones in our business model. Frequently, we have situations by 2 or more -- 2, 3, 4 Instalco companies are working on the same project, which simplify things for the customer and provides value added. So the third example here is Bi-Vent and Sprinklerbolaget, which have been contracted by Skanska for installation of the ventilation and sprinkler system both E.ON's new Nordic head office in Malmö. Okay. Shall we go to Slide #10 and look into our segments. As you can see on this slide, segment Sweden continues delivering high margins. Our Swedish operation has proved with the corona pandemic very well. The year started on a strong for Sweden, and our projects have continued to progress successfully, which is reflected in our results in the last 2 quarters. In this quarter, you can see there is net sales growth of 25.8%, organic growth 5.5% and EBITA margin 9.6%, which is very good. If you then go to Slide #11 and look into the Rest of Nordics. I can say I'm rather disappointed that the Rest of Nordics business area has been very weak, that we wouldn't have liked to have seen. It got off to a slow start in the new year, which has persisted in the second quarter. In Norway, there has been more of a lockdown during the pandemic compared to Sweden, for example. Accordingly, the rate of production has been lower and we have struggled a bit with our projects where the contribution margin hasn't been high enough. 5.7% in margin, it's in line with our -- or even higher than our main competitors, like Bravida and Caverion, but still I'm not satisfied with it. We shall, we will and we can do better than that. So we can move then to Slide #12. As I've said before, the corona pandemic has not impacted our rate of acquisitions. I would say something -- back to Slide #11 first. Because, of course, we have launched an action plan for the Rest of Nordics, especially in Norway, to raise the margins of some specific companies there, especially in Norway. Finland is a little bit better. And that means more focus on risk analyzed, better planning gives a better productivity and so on. But we will launch this during this fall. So let's move to Slide #12. The corona pandemic has not impacted our rate of acquisition, as you can see. During the second quarter, we acquired 5 high-quality companies, all of which contributes to our strong results. Four of the acquisitions were in Sweden, and one was in Finland. We are a little bit more cautious in Norway. When we have a more robust situation there, we will also continue to acquire companies in Norway, of course. We are continuing to pursue our acquisitions plan and have an exciting pipeline and dialogue with many interesting acquisitions candidates, as we have always had, I would say. And last at least on that slide, we have noticed that interest in becoming part of the Instalco group has increased in fact. So if we then move to Slide #13, I'd like to highlight 2 examples of companies that we acquired during the quarter. The first one is Avent group located in Kalmar, Sweden. They specialize in ventilation system. And the acquisitions of Avent strengthens our position and brings us a step closer to becoming multidisciplinary in the Kalmar and coastal Småland area. Second example is Miljöventilation in Sundsvall, it's is Sweden. This acquisition gave us a wider geographic coverage, which -- with Instalco now represented for the first time along the northernmost coast of Sweden. And the acquisition of this company gives us a foothold in this exciting market in a geographically important area. Here, there is a lot of larger industrial companies, like pulp and paper and others, and we want to be there. Other companies that we acquired during the second quarter are Norrtech in Umeå, Teampipe in Uppsala, both in Sweden, and SähköArktia in Helsinki. So going to Slide #4 of that -- 14, sorry, 14 of that. We can conclude that our performance is in line with or exceeding all our financing targets. It's also worth mentioning that we have set a target that we can maintain over time, and which enable us to prove any fluctuations in the market. To summarize that, we want to keep our promises. Okay. Slide #15, after that, the summary. And to summarize, we had a strong performance yet again in the second quarter. The society at large and the entire world economy have been struggling with the effect of the COVID-19 pandemic. The overall impact of the pandemic has several times in operation has, thus far, I would say, been surprisingly low. You can also see that the demand for technical installation has remained strong and stable. We've also been able to pursue a high rate of acquisition, as I said, having added those 5 new companies to the group during the second quarter. And to our last slide, Slide #16. As you know by now, I'd like to wrap up these meetings with a reference to a song title. This time it's the Phil Collins song, Against All Odds. So besides being a classic favorite, it's also a title that actually describes Instalco and what we have been able to achieve, I think. And at the start of our journey, there was some doubts. Of course, some doubts given the market outlook about our ability to deliver and achieve our growth. And nevertheless, 3 years after becoming listed, we have reported strong results in each of the 14 quarters since then, with good profitability and strong margins. And now I will say, for the first time, we have now been tested in tough times and have proved to perform also there. So with that, I'd like to thank you all for joining in on this call. And I'd like to take your questions. Please go ahead.

[Operator Instructions] Our first question comes from Stefan Andersson from SEB. Apologies, it seems that Stefan has disconnected. Okay. There appears to be a question from Robin Nyberg from Carnegie.

It's Robin from Carnegie. And congrats to Robin Boheman.

Yes. He's [indiscernible].

Yes. A few questions from me. First, related to margins. Do you now see a larger variation in the performance of individual companies that normally -- and you mentioned that margins in Norway were somewhat lower than you expected. So could you still give some details why those margins were lower?

First of all, I think that strong companies still perform strong figures and strong margins. So that's something that we have learned. And they do it -- I mean, Sweden has the competence. Sweden has performed very, very well. In Norway, I would say that this -- it's about 2 companies who have -- they have been a little bit too large. They have a lot of projects, larger projects that they are not -- I don't think they have the right -- maybe the right project leaders of skill to manage such amounts of larger projects. So what we do is try to slow down and -- there and give them -- in the action plan, we will include more planning, as I said, more risk analyzed for each project and so on. So I think we know what to do and we can handle it. And it's not that -- it's not like red figures, but it's -- they don't leave so much margins that we want them to do. So that's the problem. There's a little bit deadweight there. But we will cope with that. But that -- I don't see any difference from now, during this quarter and then this pandemic situation from before. I think it's the same type of challenges, and the margin is almost the same I think.

Okay. And then second question related to acquisitions. You have already achieved your target for this year. So do you expect to close even more acquisitions this year?

Absolutely. We will close more acquisitions this year. We will close a lot of acquisitions next year and the year -- so yes. So our strategy is still to -- we are a buy and build case. Not only a buy and build case, but we also have start-ups and other. But we will acquire companies all the time and all the way, and we will not slow down our pace on that. So definitely, we will acquire companies during this storm as well.

Our next question comes from Stefan Andersson from SEB.

Can you hear me now?

Yes, Stefan.

Okay. Good. Okay, so 3 -- well, I have 4 questions, maybe one of them was answered, but I'll speak it a little bit. So the first question is really on the -- I mean a very dramatic drop in organic growth. We see it being very volatile over the quarter, 6% and 11% last quarter and then down to 2% now and especially in the other Nordic corporation. So maybe if you could -- I hear you saying some of the impact is COVID, some of the impact is projects going poorly. But in my world, that would be more of a cost issue and more of a margin issue. So if you just look at the growth and disregard the margin question, would that be primarily COVID-affected? Or is there something else affecting the minus 7% organic growth in other Nordic?

I think it's mainly due to the pandemic, but I will also say that when you have margins -- when you're not satisfied with the margins, then you get a little bit cautious taking on the projects. And I think still we have a healthy project intake into our order backlog. And we will not try to increase that just because to -- there is a lot of -- there is more, I would say, risks today than a year ago or half a year ago. So I think I'm not worried about the organic growth. I mean, overall, we had 2.3% during a pandemic going on, and I think that's good enough. Of course, you can look into the segments and say that, that is a poor or weaker intake in Norway and in Finland. But still, I'm not concerned about that. We will come back, and the pace is lower and the debt activity is a little bit lower. And the price maybe go down a little and we will not win a difficult situation where we take on projects with no profitability.

That's good to do. I guess we're not used to you guys outperforming Bravida on organic growth. And in this quarter, you were in line. So that was a little bit unusual. So -- but then going to you have reversed some earn-outs. I don't know if the reversal is SEK 4 million or is that's the net figure on your one-offs in the quarter. So if you could maybe give us the gross reversed earn-out. And also maybe a short comment on what's happening with that acquisition? Is that an acquisition going forward? And how bad is it?

Stefan, you are hopeless with these tricky questions. But just wait a second, I will bring in Robin here, he will explain it to you all those -- because I have not that type of detailed figures in my head. So just a second, he will be here.

Well, you can -- maybe you can repeat your question.

Sure. Should I take another question while we wait? Or...

Yes. If you have some that I can answer, yes, please.

Yes. I think so. I mean it's going to the M&A. I actually was a bit [ intrigued ] on the M&A side. I mean you already acquired revenues for SEK 871 million this year. You have a couple of years behind you, where you have been significantly above the target of SEK 600 million to SEK 800 million. And I asked this before, why don't you raise the target? And you mentioned that you don't want to be too aggressive. You don't want people to -- have them be pushed into doing acquisitions. But I also just heard you say that you will do more acquisitions this year. You will definitely not [ slow ] down the pace. So I'll ask you again. Why the SEK 600 million to SEK 800 million? Because you're actually clear in saying that you will be above SEK 1 billion every year going forward.

That's right, Stefan. Absolutely. And as I said that we want to keep our promises. So something in between your -- but I think that we could -- maybe when we put our goals or targets 1 year ago, 1 point -- maybe 2 years ago, we couldn't see or worse we couldn't imagine that we would maybe come out 2 years in a row with almost maybe above SEK 1 billion in acquired sales. So maybe we take what you say, and we will try to discuss with the Board how to express that the next time we're doing a business plan. But Robin is here now. Robin Boheman is here now. He can answer to your other question.

Stefan, you asked about earn-outs, right?

Yes. The reversal in the quarter, the gross figure -- and congratulations, by the way, but the gross figure. And then also maybe some words on the reason, because I guess the reason would be some underperformance versus what you thought when you did the acquisition that booked the earn-out.

Yes. That is correct. So overall, you can say there is a mix, but this quarter, it was a little bit larger than usual due to a few older companies kind of closing the book on and then paying the last earn-out to them. So there was more of those in Q2 than the usual. So on that side, we had, sort of say, a positive effect of SEK 13 million, but a negative effect of roughly SEK 6 million. So in net, it was roughly like SEK 6.5 million, somewhere around there. And those SEK 13 million that came in positive on our side, to say, but actually negative due to the fact that they didn't reach the targets. And those were a bit also older companies. They kind of closed -- we closed the books on them. So they -- we don't have to save anything for coming years or anything like that. So I don't think there was any dramatical things happening that we needed to kind of take this down and that anyone is underperforming, especially. I mean Per mentioned to you earlier in the call that we might think that Norway is performing accordingly fully. So there was a little bit of that in these earn-outs as well.

And I guess -- so what you're saying is actually, interpreting you [indiscernible]. If you have a little bit of a deviation on the company, you would immediately do that adjustment, you would save a little bit as you've done now. And then when you close and you come to the last day, then you do the final calculations as you speak. You're not in every quarter against small changes, that...

Yes. We -- no, we don't do the small changes every quarter. That's correct. We do the larger because as you understand, a typical deal for us is a 2- to 3-year earn-out and then doing -- yes, like 10, 20 acquisitions. We have 30, 40 companies every quarter that we have to evaluate them. So it's no use of writing up and down too much.

Yes. Good. The last question then. Just the comment made there on efficiency measures that you -- I think you talked about Norway and maybe Finland as well. But to improve efficiency, you were taking actions. Could you maybe elaborate a little bit about the potential cost for such activity?

I don't think that there will be any higher costs. It has to be more close to manage them. I would say also we have switched management in those 2 companies or we have switched the CEO. I think we have to be closer, and our area manager there has to be closer to those companies. So I don't think that we'll have any extra costs for it. But we have to be -- have a strategic plan for them and we want to be -- we had to risk minimize. We have to follow-up closer from productivity and -- there. So we have maybe to do some more management changes, but we have done it now. So I don't think there is no more costs involved just because we are trying to launch this action.

A moment, please, as I capture next question, full name and details.

We have 2 questions from the webcast. The first one is that Instalco now consists of 7 entities, how scalable is your business model structure? How many entities can you grow to? And how are you adapting the structure if you grow even more than 100 companies?

Yes. We have a structure that means that we have business areas, and I think a business area is -- consists between -- well, I think, I know, of course, that it consists between 15 and 20 companies. And I think that's a suitable size of companies. And also that we can scale up that just to start a new or divide some area that have been too large. And we can also start up new business areas all over, both in Sweden, Finland and Norway. In Finland and Norway, in fact, we have just 1 business area, 1 for Norway and 1 for Finland. We have 4 in Sweden. So it's scalable, definitely, and I don't see any limit there.

The second question, I think, it's partly answered already, but it goes like this. In Q1, you mentioned that the profitability for Finland and Norway was affected by finishing contracts and that should rebound in Q2. And the question is, what has impacted EBIT margins for Finland and Norway in Q2?

I can leave impact because we don't divide the Nordics in Finland and Norway, we talk about other Nordics. But we -- if I understand the question right, we had some projects that didn't turn out so well in quarter 1. And now, as I -- I think I mentioned, we have some -- a little bit deadweight, meaning that projects are still there, not -- we're not losing money on them, but they don't contribute so much to our margins and we have to get rid of those projects. And we are almost rid of them, but they are affecting our margins in quarter 2. Of course, I can add that, of course, the corona situation was also tricky because we have sick leaves -- started with sick leaves up to 20%, 25% at the beginning of the pandemic in March and April. And of course, that slows down the productivity, yes.

[indiscernible], any more questions?

We have our next question from Nathan, who is a private investor.

Just a few questions on the M&A. I apologize if I missed it earlier. The first one is on the pipeline. Could you share how many companies do you typically track on your pipeline? And how does it compare to maybe a year ago?

Nathan, sorry, but we can't say how many, but we have several. We start with a long list, cutting down to a short list. And we have 4 types of doing these strategic acquisitions that we point out. We want to be in Helsinki. We want to be in Tampere. We want to be in Bergen or whatever. We have opportunistic ones. There is one company coming and knocking on our door. We like the company, and we do the acquisition. We also have start-ups and we had add-ons. But we still have a dialogue with several companies. But as you can understand, we can't say exactly how many because they're also at different stages. We are talking with some. We have [indiscernible] with others and so on. So we will say just that we have a long list and we have a short list, and we have interesting dialogues with a couple of companies right now.

Sure. Fair enough. Maybe I move on to valuation. Could you just share based on what you are seeing in the current challenging market environment, have you seen some expectations change? And how does it compare to some of the acquisitions that you have done in the past?

Robin here, I can jump in. I think we've discussed this before, and we don't see any valuation changes because the type of companies we are buying are entrepreneurial companies. And the entrepreneur is usually the one running the company and founded the company as well, and they have a certain expectation and belief of what their company is worth. And I wouldn't say that, that has changed due to the, so to say, pandemic or the situation we are in now. However, there are more possibilities to negotiate different setup. But the overall price will be roughly the same, but you can kind of share the risks, people are more willing to share the risks. So you can use more part of earn-outs.

Okay. And in terms of integration process for an average acquisition, could you share how long does it take to bring in a target company and improve the level of operating performance to the rest of the group, given that you guys have probably the highest margins in the industry?

I would say that the integration is very light in Instalco. When it comes to financial side, we do an immediate integration and kind of take control over the books, and that takes a few -- I mean that is done the next day, and we start taking control of the books and the financial situation. But the integration, otherwise, I would say, it takes a year. You need to go through a certain amount of meetings, get connected and also the projects that you're in, you have to finish those before you can kind of start new projects together with our other subsidiaries. So it's like a year process, I would think, until you are fully integrated.

Until you're fully integrated. Absolutely.

But on certain steps, you would be integrated day 1. Like on purchasing side, you will be able to use our purchasing agreements fairly quickly and so on. But of course, you are in -- what I mentioned, is that you are already, when we acquire, typically a good company. So you might even already have a short order book when we acquired you. So you have to kind of first work that order book of and then kind of do -- start to do projects with other subsidies in the group.

Great. That's very helpful. Maybe just one last question for me, if I may. If you look longer-term out, maybe 5 to 10 years out, what are your key bottlenecks to grow? If you could comment maybe on labor issues or on acquisition in terms of capacity to do more?

You can go in many ways. You can broaden your offering. You can go into new business areas. You can go into new geographic areas. You can go into -- and I think it depends on new countries, of course. New countries, of course. But I think it also depends on which situation you are right there and what type of companies or the strategic decisions that you make during the way. And we are not locked up in like just one way to do business. And I think we will develop the way we do business in the future as well. We have new -- we have new management comes in, new companies, new management and others. So I think we cannot just answer that question, that we're doing it this way or that way. So it's a little bit depending on the situation and the market outlook and other things.

We have 2 more web questions. The first one relates to the last question, could you see any other areas, if you exemplify any, what could it be?

Geographically, of course. There is a lot of areas that we can enter into. But also technical skills, we can also enter into consulting, more on consulting to help our customers. We can also broaden our offering by going into more like security or other things, surveillance and more technical skill. But mainly geographically, more consulting, more integrated projects and more partnering. So we have a lot of opportunities. And I think that, sooner or later, we will enter some of those areas that I mentioned now, both geographically and technical.

And the second question there relates to the M&A situation. How do you plan to organize the M&A in the future compared to today?

Yes. I think -- I mean going ahead, I mean, as Per mentioned, we have -- so they almost guarantee that we do acquisition SEK 600 million to SEK 800 million. But as Stefan mentioned earlier, I mean, we have cleared those targets last year and the year before, and we have already exceeded now. Of course, we will continue to do M&A. And I don't see any changes here. Like I mentioned, we can open up new areas and also open up new geographical areas and new business areas as well. So I think that will have a tremendous opportunity to continue to do M&A for a long time.

And organize, I think. It is more like how [indiscernible].

Yes. And organization-wise, I mean, as mentioned, I think, on last calls as well, I mean, we also see that the pipeline is growing mainly through that. Our area managers are also doing more of the acquisition in terms of finding these companies, talking to a lot of entrepreneurs. So a lot of the acquisitions come from these channels, I would say. And those channels we didn't have when we started Instalco, then it was kind of more or less [indiscernible] chasing these M&A entrepreneurs. So in that sense. An organization-wise, they're taking more and more responsibility on and we -- the head office is supporting and also teaching them the kind of skill and then things you need to do M&A.

Okay. Thank you. And then one last question to Per. During these years, in the construction and installation business, can you elaborate a bit on price competition? How does it work? What is your say on that?

I think that our customers, especially those in larger projects, like hospitals and others, they -- we are talking more and more. We are in collaboration earlier, in an early stage of the project. We are talking a lot about partnering. The price, of course, is always important. But I think what we call soft parameters are more and more important. And I think that Instalco is well suited to handle this. It also appears that, that will come to more and more in Norway and also in Finland. And I'm looking forward to that because I think that's a form with partnering that is a win-win situation. So I think that that's closer and closer to our customers. And we're also adding -- as I mentioned before, adding these consulting part to guide them for best solutions, cost-effective projects and solutions, of course. And also environmental considerations is very important in the future. And we are launching, as I had mentioned, I think, before, a very strong environmental program.

Yes. I think we round up there. So thank you for joining in, and...

Yes. Thank you. Thank you, everyone. Thank you very much.

This now concludes your conference call. Thank you for attending. You may now disconnect your lines.