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

Ladies and gentlemen, welcome to Instalco Q3 Report for 2020. [Operator Instructions] Today, I am pleased to present Per Sjostrand, CEO; Robin Boheman, CFO; and Fredrik Trahn, Head of Communications and IR. Speakers, please begin your meeting.

Thank you very much. And first of all, welcome to this presentation of our Q3 report for 2020. And my name is Per Sjostrand. And as you heard, with me is Robin Boheman and Fredrik Trahn. We can start Slide #2 and just a short update on us. We are one of the leading installation groups in the markets of the Nordic countries, Sweden, Norway and Finland. Our main area of operation is installation and service of heating and plumbing, electrical, ventilation and cooling systems in all types of buildings. We have also started up installation consulting services in order to integrate the design work in our ordinary business. And the group now consists of almost 80 subsidiaries and just over 3,600 employees. We have a highly decentralized structure, and we are supported by a small central organization. And now we come back to that, but you will see we have strong profitability and high margins over time. So moving to Slide #3. As you can see, we have now reached sales of nearly SEK 6.7 billion. We talk on LTM here, 12 month rolling, along with adjusted EBITDA of almost SEK 590 million. That means an adjusted EBITDA margin of 8.8%. We also have a solid order backlog at nearly SEK 6.3 billion. I will say immediately that we don't like to talk so much about adjusted EBITDA, but -- and our adjustments are duly addressed to our earn-outs. We estimate our earn-outs every quarter, but as you can understand the figures can vary a little, both up and down. If you go to Slide #4, some highlights from the quarter. We can see that there has been a continued high rate of growth. And as I said, a good profitability. Adjusted EBITDA for the quarter was approximately SEK 150 million with an adjusted EBITDA margin of 9.2%. We have a very solid order backlog, as I said, SEK 6.3 billion. And that is quite high in relation to our annual sales, 94%. First of all, I'm very pleased to say that the results for segment Sweden, I'm very pleased with the results of segment Sweden. Also Rest of Nordic is performing somewhat below the desired level. And with that, also, I would like to point out, however, that it's a level below the standard that we ourselves have established. Looking at the industry overall, it's still relatively high. So we can move, I think, to Slide #5. I can also say on Slide #4 there, that we have made 6 acquisitions during the quarter. I will come back to that, and -- we will come back to that. As I said, we had a good quarter despite this prevailing pandemic. I mean, that affects us all in one way or another. There has been no impact on our rate of acquisitions during the quarter. And we also have been able to maintain a high level of acquisitions despite the pandemic. During the quarter, there has, however, been a slight decline in production in some parts of the organization. Sick leaves, sometimes as high as 6%, has approximately doubled -- that's approximately doubled compared to the lower, more around 3% that we usually have. Of course, that has impacted production and is reflected in the figures showing negative organic growth. If you also add that the higher absentees of parents needing to care for their child, there is no other conclusions to be made and that has impacted production and is the root cause of our small negative organic growth during the quarter. We will see how that will affect us in the future, of course. And at the moment, I also will add, we are back on normal figures. Also, it's still very difficult to assess the market. We are prepared to adapt should the pandemic affect us in future quarters. We are, of course, carefully watching how it all develops and closely monitoring our business areas and subsidiaries. We can, with that, I think, go to slide 6. There, you see that net sales increased by slightly more than 16% to SEK 1.6 billion. During the quarter, as you saw, we made 6 acquisitions where the combined annual sales is assessed at almost SEK 500 million, corresponding to acquired growth of 20.8%. Okay. We move to Slide #7 please. Please note fluctuations like summer vacation typically affect us each year in the third quarter. This year, however, performance in the third quarter was on par with the last quarter with even higher margins. That's rather unusual, but that's the way it is this year. Underlying our healthy margins is a large quantity of well-managed, small- and medium-sized projects at our company. Okay. Slide # 8. As I mentioned earlier, our order backlog is very solid at SEK 6.3 billion, and as I also said, which corresponds to 94% of our annual sales. So despite the pandemic, we are taking many new orders and signing new contracts, most of which are medium-sized projects in the range from SEK 1 million to SEK 75 million. So with that, I think in status we stand 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. So if we move to Slide #9. Maybe you can take that slide, Robin.

Yes. So very happy to talk to you about some of the examples of projects that we've done in Q3. Especially very proud of the first one, which is a little bit of a milestone for us. It is our first sustainable Instalco project. It is a partnership project together with Skanska of building 50 apartments with a very stringent environmental requirements, and it is our subsidiary in Malmö, Rörläggaren, who is performing this project, so it's heating and plumbing project. And for those of you who don't remember, we launched our new sustainability program in the spring this year, which is called Sustainable Instalco Project, which is built around 6 specific sustainability indicators. And just to give you a little brief update about a few examples. So it's health and environmental. So it's a safe employment program that you have to go through in the start of the project. For instance, all our suppliers need to sign the Instalco code of conduct. And the project also has to demonstrate quite high climate saving. So it needs to be a climate-smart project, so to say. So that's just to mention a few of them. And this project with Rörläggaren together with Skanska is [Audio Gap] boxes. So very happy with that. Also quite exciting, other projects was the new head office at Fortnox in Växjö, where ELUB both designed and installed all the lighting in the 10,000 square meter building, which makes it mostly a quite spectacular office if you get the chance to visit it. It's only installed with LED light, which also is a good example of the environmental impact that Instalco can make when it comes to energy consumption. And last, but definitely not least, is a little hint of what's to come. And the first Sustainable Instalco Project is underway in Norway. It's not finished yet. So we can't really give it the full stamp yet, but they're well underway. It is our subsidiary, Moi Rør, who's doing the heating and plumbing, cooling and also the sprinkler system installation for a new school near Kristiansand in Norway. So that's few examples of projects that we have done and are doing in Q3 and gives a good understanding of type of projects we do in Instalco. And so if we could please move to Slide 10. And here, I would like to talk to you about a little bit more in-depth about the segments. So if we start off with Sweden, it's been very high margins. And we've coped very well with corona pandemic. I mean reaching a sales growth of above 20%. And we're even achieving some organic growth in the segment Sweden, which we're very happy about. And as you can see, the tremendous growth in the order backlog as well. So Sweden is performing very well, and there is still a high rate of demand for technical installation. And mainly, I would say, it's driven by public sector in Sweden, like schools, preschools, hospitals, clinics, nursing homes, that type of project. But it's also, I would say, we see productions in new rental apartments and condominiums remain at good levels. So that's also been driving. So really happy about the segment Sweden. And if we could then move on to Slide 11, please. Here, we see the development in Rest of Nordics. And as Per mentioned, the margin is somewhat lower here, but still 6.7%. I think that's good in the type of environment we are at in the moment. And as Per also mentioned, I think it's good when you look at the industry standard and especially if you count in that we are in a pandemic situation. And we've been affected mainly our -- mostly, I would say, Norway, due to the COVID lockdown. But as mentioned before, we have launched an action plan for some of our companies in specifically Norway, and we're following that strategy. So you'll see a little decline here in turnover due to the fact that we are downsizing some of our companies in Rest of Nordics to focus more on margin. And as you saw on the slide before or 2 before, we launched a sustainability program in Norway and Finland during Q3. And it was also very well received both by employees and customers. So maybe we can move on to Slide 12, please. And looking at acquisitions then. So as you see, the list has grown. We did 6 acquisitions in Q3. We see that the interest of becoming part of Instalco is really high. And I think that has a little to do also with the pandemic, that if you want to be part of the group, you want to be part of a network, you want to be comfortable and make sure that you have the resources needed for the future as well. So we're able to attract some really good companies. So the corona pandemic in that sense has not kind of impacted the rate of our acquisitions. You see, focus on Sweden here, and that has, of course, a little to do with the traveling restrictions. But we are on SEK 1 billion, almost at SEK 1 billion in acquired turnover during the year. And our goal is SEK 600 million to SEK 800 million. So we're well above target in Q3. And for those of you who follow us, you know that we also have done acquisitions in Q4 already. And the pipeline remains very strong at the moment. So we're looking at a very good year when it comes to acquisitions. And maybe, Per, you want to take a few examples of the companies we have acquired.

Yes. I can jump in here and take the next slide, Slide #13. And I'd like, as Robin said, to highlight 2 examples of companies that we acquired during the quarter. And the first one is in Sweden, VentPartner Group, has its headquarter in Örebro and it has office in Närke, Västmanland and Östergötland. And this is our first major acquisition in the area of ventilation solutions. In that area, I would say. And it further strengthens our position as a multidisciplinary supplier in Central Sweden. And I think that's very important that we have a strong position there. And the other I want to highlight, the other company is MR Rör i StorStockholm. And the company primarily works with the municipal authorities and their housing companies. We have framework agreements. And with its main focus on providing professional service, the acquisition is also in line with our strategy to grow in the service sector, as we have talked so much about. Other companies that we have acquired during the third quarter are FTX Teknik & Service and Boman El, both in Norrköping; Tornby El in Linköping; Uudenmaan Lämpötekniikka in Helsinki. So good examples of acquired companies. And we can move to Slide #14. And maybe you take that, Robin?

Yes. So here, you see our financial targets and dividend policy. And as you can see, we are in line or exceeding our financial targets and like the slide here shows, also, we are ticking all the boxes. So looking at growth, we are well above the 10% annual growth over business cycle. We are also above when it comes to margin. So we're at 8.6% year-to-date. But looking at the capital structure, that also gives us a -- gives you a good understanding of our capabilities of kind of continuing doing our M&A. So we have a well -- we have a good headroom here when it comes to our capital structure. Our cash conversion is on point, so to say. We are at 100%, which gives us a very good and unique possibility of using the cash that the business generates to acquire new companies. And our dividend policy stays unchanged, 30% of net profit. And maybe one thing I would like to mention when it comes to this is that we frequently get asked the question, so why don't we raise our financial targets. And here, the answer is quite simple, and I'll explain it again. It has to do that these are financial targets that are made to kind of withhold both good times and bad times. And we are looking at the long-term cycles. And that's why I think we saw good financial targets. They can resist not only in its good times, but also in some tougher conditions as well. And we also like to hold our promises. And I think that is what we've shown over the quarters as well. So Per, I'll leave it to you to summarize.

Yes. Thank you. And I think we have shown that we hold what we promise for a long time now. But to summarize on the next slide, Slide 15. We delivered a strong performance yet again in the third quarter even though society at large, as you well know and the entire world economy has been struggling with the effects of the COVID-19 pandemic, and you're all well aware about that. I think still, the demand for technical installations has remained strong and stable. We also have been able to pursue a high rate of acquisition having -- as we have mentioned several times now, added 6 new companies to the group during the third quarter. And again and again and again, nevertheless, it's difficult to assess the market over time since the pandemic is still an ongoing concern. So last Slide 16. And as you know, by now, I'd like to wrap up these meetings with reference to some titles. And this time, I've chosen Ashford & Simpson hit song from the 1980s, Solid, solid as a rock and nothing's changed it. This is how the song goes and how I feel about Instalco and our situation now. Despite these challenging times, we remain strong. We demonstrated that even in a year as unusual as this, we are still able to grow, maintain our margins and paid dividends. Instalco, solid as a rock. So with that, I'd like to thank you all for joining in on this call. And we now like to take your questions, please.

[Operator Instructions] We have a question from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. I have a few questions. Firstly, if you could give us any idea of the organic impact throughout the Nordics from the sort of phase out of less-profitable business and also given that the margin is still down quite a bit year-over-year as well as sequentially. Are you planning on further measures? Or are we still waiting for the materialization further on?

Okay. Starting with the organic growth or not. I mean, as Robin mentioned, in -- especially in Norway, we are following our plans to tighten up and focus on margin instead of growth. So that's just in line with our strategy in Norway to do that and focus on margin. We have raised the margin a little from quarter 2 in other Nordics. Also, we -- I think we maintain good margins, and we have a high-margin in Sweden and we maintain it. So I think we're following our strategy from the beginning of the year. I don't -- maybe you have something to add to that, Robin?

No, I think it is hard call to say like how much we need to downsize the specific companies in Rest of Nordics to become comfortable at the level that we think is profitable. So it's hard to give an estimate, but there are definitely significant cuts being made in a few of the companies. And we are talking about, just to give an example, like companies going from SEK 150 million, maybe down to SEK 100 million in turnover. And very few of them. But it's hard to say now before we kind of -- we need to find the level of where they are very profitable and then kind of feed that level. It's hard in the few -- beforehand to say exactly where that level is. Is it SEK 100 million, is it SEK 120 million? Or is it SEK 90 million even? But you'll definitely see some caps in -- especially in few of the Norwegian companies. Did that answer your question?

Yes. And are all cuts made or should we expect even further cuts to be made in Q4?

No. The cuts are not really made. I mean, you have to understand the business that if we announce something this month, they've already taken orders for a few months ahead. So there is a lag in the process. So if we announce something like in Q1, it takes a few months to kind of get that going. So you haven't seen the full effect yet, no. And that's also -- to comment on your -- so yes, some effect, you would start to see due to the fact that a few of these companies are not allowed to take new projects in the same rate as they have done before. And that kind of comes back to your margin there and discussion as well that, I mean, you won't see effect yet because, first of all, we need to kind of downsize a little bit. We also need to kind of make sure that the organization is at the right level. So saying that head ops and everything follows with that. So it takes a while before you will start seeing the margin effect as well in Rest of Nordics, I would say.

Okay. Perfect. And also on the backlog in Sweden, could you give us any idea of how much of the sort of growth in the quarter was driven by large projects?

I think the main thing when it comes to order book, I think you can help me out here as well, Per. As you understand, we're not located at the same place anymore due to the effect of the corona situation. So we have 2 different offices at the moment to secure this. But just to give you a quick understanding is that we took the large [ DLL ] project, the hospital project of SEK 700 million. And you've seen like a few hundred millions rolling in from that in Q3. You saw a few in Q2 and you see a few in Q3. We don't -- even if we had to announce the project earlier, we don't put it fully in the order book until it is signed. So that's also why the delay came now in Q3. Then the exact number of how much of this growth that you see in Sweden is driven by large projects, we don't have that number.

Again, you can also add to that, Robin, that we are going from what we call phase 1 to phase 2 in several larger projects, meaning that we are speeding up now, and we are -- phase 2 is more when we execute. And that means a difference. And then we put it into our order backlog first, which is in phase 1, it's more design work, lower base on that. And then we step it up and then we put it in our order backlog when it comes to phase 2.

Okay. Perfect. And the final one from my side. Also, I mean, your recent move to employ quite a few consultants from -- offering. Could you please share some more information of that sort of venture? And also, I know that you like the idea of entering projects early, at the early stage, or the sort of design phase. I mean, should we expect you to start expanding the consultant offering in the other Nordics as well? Or how should we look at it?

Yes, definitely. The main purpose with this is to integrate design work and execution, and we integrate it in many ways. As you mentioned, of course, we can be in earlier stages in some projects. We also employ specialized -- specialists in several areas, when we employ consultants from different companies, of course. So we can be closer to the customer. We can also take on more complex projects. We can also -- but the main purpose is also -- is, of course, to integrate the technical part, the more technical part and also with our with ordinary work that we do, installing. So that's the main. But there are several, I think, opportunities here. And we will continue to grow that part. And we will go to Finland and Norway as well with the consulting part.

And do you see the risk that the consultants, I mean, the big consultants view your move as an attempt to sort of compete with them and which could negatively impact your relation with them?

I don't think so. I mean, it is natural. The part that we are -- I mean, there is about 50% of the total costs for the production side today is installation. And it's natural that we take larger part of the design work with that. So we can offer to the customer more -- better solutions. I don't think there has to be a conflict there between us and more purely consultant companies. I think we can live together with that. And I think we can have an understanding for each other's part of the project. I mean, they -- we have -- we are their customer as well. And we will be in the future. So we are living side by side. I don't think this will interrupt that.

[Operator Instructions] Our next question comes from the line of Stefan Andersson from SEB.

A few questions from me. Just trying to understand the organic drop there. In Q2, Norway, for instance, or also Finland were closed down to some extent, and people were home -- kids were home from school, and we had all that, that has an impact, calling it sick leave, I guess. I would have expected less negative effect from that during the third quarter, some easing, really some improvement. So would you say that the further deterioration here is more relating to the downsizing of some of these naturally operations? Or am I misunderstanding the situation?

I can comment a little bit about the sick leave situation. And you also have to understand that, I mean, there are a lot of restrictions not only lockdown. But in Norway, if you have 1 person contaminated of COVID in the construction site, you need to put the rest of your people in quarantine as well. So we have been, quite unfortunately, in a few cases where we had to put a lot of people into quarantines, like self-quarantine and that has affected us. And that is also what you see in the sick leave numbers. So that's -- I mean, I guess we were luckier than many companies in Q2 and did not have as much sick leave, but instead, we got a lot of sick leave in Q3 and mainly due to the fact that, that we had to put people into quarantine. And I mean, we are running a business where you cannot work from home in much sense. I mean, me, Per and a few others, we might be able to work from home, but like the rest of the 3,600 people that we have employed are not able to work from home. So I mean, I think we'll see some higher sick leave numbers than we are used to due to that fact. Also we want to take our stand for site as well and not some people that are -- might be sick to work as well, so. I don't know if you want to add anything to that, Per, or you agree with me.

No, I think that's right. And I mean, we are taking care, and we have strict rules when to go to work or not. And I mean, it's -- we're trying to take care of our employees, of course. So -- but I think we're doing the right thing there. And I think we are down on sales, so we are down to normal figures now when it comes to sick leave. I think we have done the right thing.

So let me have a follow-up on that. Does that mean that you're growing again in the fourth quarter organically?

You are very focused on growing organically. As we said, I think we are -- looking at -- for the first 9 months, we have grown with about 4.5%. I'm rather satisfied with that. And we are not looking into each quarter organic growth or not. But -- and we have a strong -- I mean, we have a strong -- I mean, we were doing a lot with cooperation between the companies, and that will lead to organic growth. But of course, it can go up and down. And if you look just to a quarter, I can't assess next quarter or even how it was this quarter, third quarter. But in the long term, I'm absolutely sure that we will grow organically because that's the fundamental of the Instalco model. And with the close cooperation between the companies, helping each other, best practice and all that, we will grow in the long-term perspective, organic as well. But we don't focus on it. It's better to, as Robin mentioned, in Norway, to decrease the turnover little and focus on margin. And then from that point of view, going up works.

Okay. And on that topic then, could you, in any way, give us a little bit of indication of what magnitude of downsizing you're talking about in Norway? Are we talking about 2% revenues or 10%? Or just so we understand what we're talking about here.

Yes. I think I said this. I'll say the same view, as I said in the call just a few minutes ago. I mean, it's hard to say how many percent we'll downsize. So we need to find the level of where the company can turn over our 8% in margin that we demand from our subsidiaries. And until we find that point, it's very hard to say where that is, is that at -- if it's SEK 150 million company, is that at SEK 120 million, it is at SEK 100 million, is it at SEK 90 million. It's very hard beforehand to say but you will definitely see a few companies in Norway where we need to cut probably SEK 50 million, SEK 60 million in turnover and a few of them.

Robin, what I can add to that, straightforward, is it's -- we're talking about 2 companies, 2 companies in -- I think we have 13 or 14 companies now in Norway. But we're talking 2 -- about 2 companies. So you can -- yes, we can assess it almost yourself, Stefan, how much that will be, as Robin mentioned, the figure there. But we will not say if it's 2% or 5% or whatever. We will wait and see, and we will take it slowly and from what is a level that we think and where the management can handle the situation and the levels from.

Yes. No, that's fine. I mean, yes. So it was possible in the end. But just -- I mean, my problem was, I didn't know if you were talking about 60% or 10%. So...

No.

That's -- I mean, we didn't know anything. And that's what we're trying to figure out. So thank you for that.

No, no. You're more close to the truth. When you say to something, but not, of course, not 60% or something like that. Yes.