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

Welcome to the Instalco Press Conference. [Operator Instructions] Now I will hand the conference over to CEO, Robin Boheman. Please go ahead.

Welcome, everyone, to this call regarding the exciting news that from today, Instalco has expanded outside the Nordics through an investment in a platform and a partnership together with our German friends, the installation group Fabri. Since Instalco was founded 10 years ago, we have gone through a lot of acquisitions. Early on, we expanded into Norway and Finland, 2016. In 2020, we launched our greenfield into technical consultancy through Intec, which has proven to be very successful. And earlier this year, we started the same journey again with automation through our new brand Inmatiq. My clear stated ambition when I took over as CEO, was to create a more stable and diversified company. At the time of a more challenging market as we are in right now, there was time to reflect and plan. And a lot of this time was spent on looking inwards and trying to support our subsidiaries that were in need, but we've also spent a lot of time preparing for the next big thing that we're launching today. And therefore, I'm very pleased to now say that we are expanding into Germany. Since the start, we have made us unique in the industry. We have always followed our decentralized approach where the local unit is supported by and coordinated by a small organization. And we will continue the same journey and Fabri is built on the same platform as well. Germany is one of Europe's largest installation market with a size of around 5x larger than the Nordic market where Instalco is currently represented. The market is fragmented. And what is usually said about our original countries is that it's a very local market, and that goes for Germany as well, where each state differs market dynamics, so to say, per state. The part with the highest amount of construction is in the South and West. The country has aging -- sort of the aging property stock in need of renovation, energy efficiency, very similar to our local market in the Nordics. We have long said that we believe our decentralized Instalco model can work well outside Nordics, and that remains true. But we have found very early on that it's very important to have local knowledge and local presence. The key has been to finding the right local partner entrepreneurs. And with Fabri, I'm very happy to say that we have done so. So to give you a feeling of the company, I would like to start off this with a short video. [Presentation]

Fabri is based in Nuremberg, currently employs around 400 people in 12 subsidiaries across Germany with an annual turnover of approximately EUR 700 million. Fabri is a fast growing and it was founded in 2020 with a presence in several locations in the fragmented German market. As you can see on the map, the location of these subsidiaries also overlap very well with the areas in Germany with the highest amount of construction. The company's acquisition-driven company as Instalco with a decentralized model and has subsidiaries with specialized expertise in areas such as electrical, heating and plumbing, ventilation and related disciplines. Fabri is a natural fit for us and our strategic vision. Just like Instalco, Fabri lets the company keep their own brand, their culture and way of working. We operate in the same model to acquire strength, best-in-class installation companies. As I mentioned in the beginning of the call, local's expertise and connectivity are crucial in the German market. for Instalco partnership with Fabri is a value-creating expansion with great risk minimization. Through Fabri, we get a unique opportunity and a platform to continue our growth into Germany with local knowledge of the market. We have a long-standing relationship with Fabri through their main owners, Waag & Zübert, which for several years was also one of the largest owners of Instalco. So we met around 1.5 years ago. And we have, through this process, really gotten to know each other and worked together to continue building this partnership. So shortly on the deal structure. The deal is structured in 4 segments. In the first step, Instalco will, through a capital increase, reach a minority stake of 40 -- 24% of -- the purchase price in step 1 is approximately EUR 15 million, out of which approximately EUR 13 million will be paid with newly issued Instalco shares and approximately EUR 2 million will be paid in cash. The number of Instalco shares that the seller Fabri will receive will be calculated based on the volume weighted average price of the Instalco shares during the period 14th to 20th of November 2024. The implementation of the first step is expected to have very marginal positive impact on Instalco earnings in the current financial year and 2025. Step 2, however, Instalco will acquire further 27% of the shares in Fabri, and step in 3 another 17%. The realization of these steps is, so as we agreed upon that Fabri reaches certain thresholds in profitability. The second step will resort in a majority ownership of Fabri and includes Fabri in Instalco's consolidated financial statement, which is based on current estimates, is expected to occur not earlier than first quarter 2026, but no later than second quarter 2027. The third step is expected to occur no earlier than '29. The purchase price of the second and third step will be paid in cash and within Instalco's current investment strategy and investment activities. The fourth and final step consists of an option to acquire the remaining outstanding shares during the period 2030 to 2033. This step-by-step approach ensures a successful establishment in Germany where Instalco in partnership with the founders and entrepreneurs share the upside and the risks. The deal structure with the ramp-up entered step-by-step means also a lower implicit multiple and represent the value creation expansion with great risk minimization. At each step, we intend to acquire further ownership, but as these steps -- this is times between the steps and Fabri has a strong M&A agenda, the profitability attribution to Instalco already from the previous step growth in between. So synergies. Typically, we don't speak so much about synergies. But in this case, we really see that the collaboration can increase between the parties. We have the local knowledge from the team at Fabri and with a 10-year knowledge that we have with M&A strategy and operations we really see that we can be a very good partner with the Fabri team. And finally, I'd like to include this slide from one of Fabri's own presentation as it showcases what a perfect Instalco fit this company has when it comes to the business model and values. And with that, that concludes my short presentation of this announcement, and I now open up for questions from the audience.

[Operator Instructions] The next question comes from Karl Norén from SEB.

Congrats on the entrance to the German market, things are interesting. A couple of questions from my side here. Just on the issuance of new shares in -- or you issue new shares to Fabri, so just so I understand correctly, will they be a shareholder in Instalco then do they have like lockup agreements or do they intend to sell the shares to fund acquisitions? Or how is that structured?

Yes, that is correct. So they -- Fabri will be shareholders. So the owners of Fabri is not getting any money at this stage, but Fabri will get the capital increase through shares. And I guess the intent of Fabri is eventually to sell the shares to finance continuous acquisitions in Germany.

Yes. That's good. Just to clarify that. And just on that -- I have a question on that, the late -- the balance sheet in Fabri right now, is it possible to give any indication of debt levels or how that looks?

Not at this stage. I mean, we're still a minority shareholder, but you will get more information along this sort of a journey that we're taking together with Fabri. But at this stage, they're well-funded for the continuous growth for the coming years. Let's say it like that.

Yes. That's good. And then just a question on the margins in Fabri. I guess that's a bit of the million-dollar question that everyone is wondering, so would be interesting to get some color on that.

I think their margin is slightly above ours on a typical market. So maybe around our goal. However, they have somewhat lower overhead costs at the moment since they're growing and so forth. So I would say that they are roughly in line where Instalco typically is.

Okay. That's very interesting. And just a question on the market. I may have missed it. I had some problems with my headphones in the beginning, but the market dynamic is that -- is the German market similarly to the Nordics, it's quite fragmented or it’s around a larger players holding large shares?

No, it's very fragmented. So it's very similar to the German -- the Nordic market. So it's very fragmented, a lot of small, medium-sized companies all throughout Germany, and it's roughly around 5x the size of the Nordics.

Yes. That's interesting. And just a final one for me on the valuation in the next steps in the transaction. Is that the term that already decided multiple on their earnings? Or how does that work?

So this type of, so to say, when this occurs is based on the profitability of Fabri Group and the multiple is set around the same multiple as we have today. But the implicit multiple will obviously go down since we are already shareholders.

Yes. And just on -- when you say the profitability of Fabri, do you mean the margin or the actual profit level.

Sorry, the actual profit level sorry. So numbers so to say. Euros to be very clear.

The next question comes from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. A few questions here as well. As you're buying the remaining part of the company, in various tranches over the coming years at a similar phase [indiscernible] but as you said, will probably go down depending on the EBITDA. What EBITDA could one expect over the coming years, i.e., what would you say is the EBITDA runway, the ambitions in terms of M&A, we could know roughly what the trajectory could look like at least?

I think our comments, so to say, idea of this is continuous growth to acquisitions. They have over the past years acquired 12 companies over 4 years. However, the last 2 years, the speed has increased in acquisitions. So I think you can anticipate higher speed than especially now with the knowledge and the team that we can bring in into Fabri as well. I think you can anticipate the higher growth. However, we are a minority shareholder at the moment, but we will obviously follow this very closely and continue to update you on the market situation going forward. But it's a growth case, let's say it like that.

I can imagine. I'm also a bit curious on-time allocation as a minority shareholder, how do you balance the time allocation from you and the team to this as a minority shareholder, but also you have quite a lot on going in Instalco as well with automation start-ups, of course, the market in profitability in Sweden is not where it should be. So could you discuss that a bit, would be separate? Do you think it's totally manageable and obviously worth the payback.

I mean we obviously think it's more than worth the payback. Otherwise, we wouldn't have done it. We're very cautious in how we spend money and time for that matter as well. As I said to many people, the last couple of weeks what I spend and my closest management team spend their time on is, so to say, subsidiaries that are not performing and organization; and thirdly, so to say, the next big thing. And the next big thing is what we launched now. So this -- we have put a lot of emphasis on getting to knowing the German market, getting to know the team around Fabri. We have numerous meetings. So I'm very confident that so to say, instead of negotiating and coming up with plans, now it's time to execute. So I feel that we have the time to spend. I will also become a Board member of Fabri, some very keen on getting to work together and bringing the knowledge that we have from 10 years in the installation market to Fabri and also getting to learn the German market from the inside through Fabri. Some -- and this will obviously like they have their own team, they're running their own business. They have area managers. They have in the last -- since we started this journey together with them. They have looked a lot on how we work and what they can learn from that. So they have already area managers in place and so forth. So I feel very confident about that.

And also, because you have the options, I guess, to either do it as you've done in other countries or you do it by a partner in this case. If you compare those 2 methods, why didn't you consider doing it yourself?

I think it's a bit -- as I just mentioned. This is a good way of risk minimization. We get a good partner, local entrepreneurs and founders in. We acquire them step by step, meaning that they are also very keen on getting to work together. And it's a long contract, you might say, but it also ensures that we will have a long relationship with the entrepreneur and the founder in a new market for us. So I have a lot of respect of going into new market. We have done that in Norway and Finland. And we know the challenges of being, so to say, the new kid on the block. Here, we get a running start. We become shareholders in a company that is -- or a platform and a company that's already up and running. So I think it's a lot about speed, but also around security and so to say, risk minimization. So we'll share the upside, but also share the risk.

Sounds good. And the final one from my side, if I may, is looking at their subsidiaries. The average size is, what is it EUR 5 million, EUR 6 million. Looking at the map you showed, they have a footprint spread throughout Germany. If I understood it correctly, it is a very local market. Do you think that you need to increase or build a stronghold in certain geographies going forward, i.e., higher density. I guess similar to what you experienced in Finland when you didn't have -- or Norway for that matter, when you didn't have full density in a certain region, it impacts the recruitment, et cetera. Do you think that, that will be the focus area going forward in Germany to build density?

Yes, absolutely. I know that Markus and his team is well underway to continue the acquisition journey that they've started. And I said that they have picked up speed in the last years. So I'm very confident that we'll continue. And obviously, we need to build size. The same thing as we've done in Sweden when we only had 10 companies in Sweden and now we have roughly 80 companies plus in Sweden. So it will be the same type of journey for Germany as well.

[Operator Instructions] The next question comes from Johan Lönnqvist Sundén from Carnegie.

A couple from my side as well. Let's start with the kind of founders of the Fabri business. It's quite young business -- I was coming a little bit later in the quarter. Can you gave some background story of how Fabri was founded and the team behind it.

Sure. So basically, Waag -- so tell me if I get too technical, but Waag & Zübert is basically founded around 2 main owners, so to say. It's a found -- it's founded by Johan and Markus. They both have a long experience, one from financing -- both from finance, but one with more operational background and one with more financial background. And Markus with a more operational background. They invested in Instalco. I think it was around 2018, became a large shareholder, then realize that they could do this set up in the German market, started doing that in 2020 when they founded Fabri. And Markus is the CEO. He has a good understanding of what it means to become or what it means to be an entrepreneur and running this type of companies in different sizes. So that's basically a short background on them. And they have then acquired these 8 companies with the same type of setup as Instalco and they also now have brought in one of their CEOs as an area manager. They also have an M&A team. So they're very similar setup and background as we had when we were 12 companies.

Excellent. Just on a deal as such, say, if things don't play out as maybe you envision at this point, it's -- is it mandatory for you to proceed with all 4 steps? Or can you just cut your losses at an early stage? Or what commitment you have.

So in certain scenarios, we have a possibility of not continuing with all the steps, but obviously, we deem that as quite unlikely. But there are steps. And that's also why we structured the deal around that they need to reach certain thresholds before we continue the next step. But there are also, so to say, worst-case scenarios for both parties in the agreement.

Excellent. Just from the kind of disclosure perspective going forward until the Fabri will be consolidating to your accounts how will we be able to monitor the development of Fabri.

Yes. With the first 24%, it will become sort of an associate. So it wouldn't have a significant influence on the numbers. So in step 1, it will be more up to sort of say, as to give you the information. However, once we go into step 2 in roughly a year, 1.5 year depending on sort of how fast we reach the first threshold. It will be consolidated and you will be able to monitor more closely. But in the beginning, it will have a marginal impact. I will try to explain this in the coming quarters as well on the effects. But I can't really say anything today on how that will be done, but we will try to be as -- yes, give you more information during the process.

Yes. I think that would be very appreciated if we can, in some way, follow how Fabri develops despite not being fully consolidated. Just on the market structure and kind of project risk, maybe you covered that in the beginning, which I didn't catch. But can you give some kind of comments on if there's big differences, how projects surrounding Germany compared to the Nordics. And is there the kind of risk profile is different here compared to the Nordics.

Yes, the setup of these companies are fairly similar as the Nordics. So it is, like was mentioned earlier on the call, roughly the same size as the average company in Instalco. It's run locally, and they do small, medium-sized projects, ranging from service to smaller projects. They have the same kind of risk structure as it is with customers. So there is no single customer that is above the 5% of turnover. So very similar risk structure. There are, not to my knowledge, any major differences in how the business and the structure is run in that sense.

Then kind of construction project in general, is there any kind of big differences from the German market compared to the Nordic one that we should be aware of that can maybe squeeze or make the risk profile different from a similar construction project in Sweden.

Not to my knowledge at the moment, the only thing that is maybe a slight difference is that it's typically the construction company holds a certain amount until the construction is fully functional. So they hold the last payment, but that's typically run with insurance in Sweden, but there might be a small difference, but it's a small amount. So it's no major difference. That's the only one we have seen so far.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Yes. So thank you, everyone, for taking the time. We're very excited, me and the team of now entering into the German market. We think we have found a really good partner and that also helps us to grow in a very fragmented business and also market. So very excited to launch this today and looking forward to giving you more information as we come. Oh, sorry, there came one more question. We'll take that last one as well.

The next question comes from Karl Noren from SEB.

It's a follow-up from me. If, let's say, the Fabri is performing even better or that you want to increase the stake at an earlier stage, is there an option to do so as well before they like predetermined functions, I'd say.

Not really an option. There is always room for negotiation, but mainly we'll stick to the years announced in the agreement. So thank you once again for listening in. Like I said, I think this is a great way of entering into a new market with risk minimization, but also a great potential to grow with a local professional player with operational experience and to bring the Instalco team with 10 years of experience in this market together is really excited and really looking forward to giving you more information on the progress of this journey together with Fabri. So thank you very much for taking the time today.