Instalco AB

STO:INSTAL

Earnings Call Transcript 2019-Q1

[Per Sjöstrand, Founder, President & CEO]

Thank you very much, and I also want to say welcome to this presentation of Instalco's quarter 1 report. And my name is, as you heard, Per Sjöstrand, I'm CEO of Instalco. And with me, I have Lotta Sjögren, our CFO, as usual.We start with Slide 2. And here, you can see it shows a brief overview of Instalco. And of course, I'm pleased to report that we now have reached sales in excess of SEK 4.5 billion on a 12-month rolling basis. We are around 60 companies today and a total of more than 2,000 employees. You can also see that we have an LTM adjusted EBITA margin of 8.5%., and our order backlog is high.So I think with that, we can go to Slide 3. And there's -- has been a very, very rapid growth in the Nordic installation market for some time. You can see that upper left on the slide. Now however, I think it's starting to level off, and in some regions, the rate of growth will likely slow down. But as I said, it's important to remember that the drop will be from an all-time high level. The value of the total Nordic market is more than SEK 200 billion, and as you can see, Sweden represents the largest component. And throughout the Nordics region, urbanization is a strong trend, one of the main driving forces in the installation sector. Other factors: fuel in the markets, our shortage of housing, technological development, investments in infrastructure, aging property holdings, higher demands on the sustainability and energy efficiency improvements. Now with that, I think we can go to Slide 4. Highlights, and I'm proud to report that in the first quarter, we not only had robust growth and profitability but also were able to make 3 acquisitions of top-quality companies in Sweden while we're continuing to grow in accordance with our acquisition strategy. Net sales, as you can see, increased by 25% to SEK 1.2 billion, organic growth was 5.8% and EBITA for Q1 was SEK 90 million with a margin of 7.6%. And our observation is that the installation sector is being stable, even though there has been an overall slowdown of investments. Our order backlog remains high at more than SEK 4.6 billion, which is an increase of 18%.Then we go to Slide 5, and Lotta, shall you take over here?

[Lotta Sjögren, Chief Financial Officer]

This diagram shows the trend in net sales and adjusted EBITA compared to last year. And as you can see, we have record high sales compared to early first quarters. Sales in first quarter are typically lowest compared to rest of the year.Next slide, please. [indiscernible] in 2014 when Instalco was established, we formulated our run rate EBITA target for SEK 450 million by 2019. And once again, I'm happy to report that we're well on our way to achieving that. Next slide, please.

[Per Sjöstrand, Founder, President & CEO]

Okay. And as I already mentioned, our backlog of orders remains high and our situation is stable and thanks to the level of the diversification we have in types of projects and markets, a focus on what we call the medium segment -- the middle segment, by which we mean smaller- and medium-sized projects. That's because of everyday reduction of risk. Our large order backlog also provide us with excellent opportunities for adapting our business if changes occurs in the market.We can move now to Slide 8. And here are 2 of our projects from the quarter that I'd like to highlight as a great examples of how Instalco works. Collaboration between Instalco companies enables us to deliver attractive solutions to customers and to meet all their needs. And for example, 3 of our companies working with heat and plumbing, ventilation and sprinklers have been contracted by Skanska, which is building a new major shopping center at Bålsta for their client ICA Fastigheter. Another example is Rörläggaren and Bi-Vent have won -- also won new contract on Skanska for -- at the site where ESS, the research -- a research institute at Lund is being constructed. We have been there for a long time. And this time, it is ventilation and pipe installation work for the ESS Campus area.If you go down to Slide 9 and closely look at operation in Sweden, we can see that the market for installation services remains stable, particularly in the public sector where the rate of construction and renovation for schools and hospitals is high. Net sales for Sweden increased by 21% with organic growth of 4.6% and will also have some -- have a very strong margin here at 9.1%.I think we can go to rest of Nordics, next slide, Slide 10. And for the rest of Nordic, net sales increased by slightly more than 35%, the organic growth of 9.7%. But as you can understand, we're still not quite satisfied with the margin for the rest of Nordic. They are taking several actions and have taken to aim at raising the profitability of this segment. For example, with this continued 2 significant loss projects, we are in the process of shutting down operations in one loss-making company and we also replaced the management totally. And we are confident that these measures will ensure that we achieve the same high level of profitability as in segment Sweden. The Norwegian market is stable, with growth in all areas where Instalco is represented. Market, I think, is also stable in Finland fueled by activity in the Helsinki region.And by -- last, we can go to next slide, Slide 11. We acquired 3 companies during the first month of 2019, which are in Sweden, due to the annual sales are around SEK 230 million, which puts us well on the way towards meeting our target of SEK 600 million -- SEK 600 million to SEK 800 million in acquired sales per year. And I'd like to highlight 2 of the acquisitions that were made during the quarter, one is EKTK i Sala, which specialize in electrical power solutions for the process industry. It's an acquisition that strengthens our position and offering to industrial companies. And we also acquired Aquadus, which is heating and plumbing company in Eskilstuna. It is situated in Mälardalen, which is a strategical important area to Instalco. I think both are good examples of acquisitions we made to strengthen our position in a particular area. And I think you know that but all our companies have a strong brand and reputation in their local markets. It's very important for us. We have also made 3 additional acquisitions after the end of the reporting period.So we go to Slide 12 now.

[Lotta Sjögren, Chief Financial Officer]

Since the beginning of the year, we have new financial targets for the group. Instalco now has a target of average growth that should be at least 10% per year over one business cycle. Growth shall come through a combination of organic growth and essentially acquisitions. Another new target is to achieve cash conversion rate of 100% on a rolling 12-month basis over one business cycle. And we're off to a great start and are well on our way to meeting targets.Next slide, please.

[Per Sjöstrand, Founder, President & CEO]

Thank you, Lotta. So looking ahead, looking forward, our assessment is that the market remains stable with a higher demand for energy-efficient sustainable solutions. The rate of constructions for new apartment buildings in metropolitan regions is slowing down as you know. Nevertheless, the overall demand for installation service remains high. There's a high level of installation service demand. As before -- and I said it before and I will say it again, one of the biggest challenges is find enough skilled labor to meet the demand. We're also saying that our future -- I would say that our future acquisition opportunities remain good, and we have an ongoing close dialogue with several potential candidates. With that, I think we can go to Slide 14, which is summary. And I can probably conclude that Instalco has had another strong quarter with high growth, high profitability and a very strong order backlog. And I am very enthusiastic about the year ahead for Instalco, during which we will celebrate our fifth anniversary. As you know, I used to have some music. Next, showing it from the last slide, this time I have show stuff from Niklas Strömstedt's hit Oslagbara, which can be translated to unbeatable. And that song is from the album, Halfway to the Future, because that's, I think, how it is. We are unbeatable, and we are halfway to the future. And with that, I'd like to thank you all for joining in on this call, and now I'd like to take your questions.

[Operator]

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

[Stefan E. Andersson, Analyst]

Three questions for me. First, Easter is falling into the second quarter. Has that had any impact on your organic growth, positive in this quarter? And it's just good to know if it has a negative impact on the second quarter.

[Lotta Sjögren, Chief Financial Officer]

The impact for Easter have very little impact on organic growth. It's more like whether projects are -- end or start. So if it's 1 or 2 more days in one quarter, it doesn't -- not so much.

[Stefan E. Andersson, Analyst]

Okay. And then the -- it feels like that you've -- one of the companies you acquired are not performing. I'm talking about the -- at the Nordics, where you refer to some projects that you want to close down. Could you maybe elaborate on -- is that a mistake in acquiring a company? And what kind of volumes are we talking about that you would close down? Is it going to impact the top line in some way?

[Per Sjöstrand, Founder, President & CEO]

Yes. It will impact the top line. It was a mistake maybe to acquire that company. I talked about it a lot before, and the company brings with them 3 years project that was loss making. We have now shut down the company. We have taken the costs. There are these some costs we have taken out this quarter and for the shutdown. But we are not having any loss-making projects in the company anymore. There has also been a little bit slowdown in Finland this quarter. So it's not just Norway that had affected the rest of Nordic figures this quarter. I'm not -- I'm very -- I'm still very confident that, on a full year basis, we will reach our goals in both Finland and Norway. There's been a little bit slowdown in the first quarter. And on top line, I think about SEK 40 million, SEK 45 million affect us for the loss-making company that we have now shut down.

[Stefan E. Andersson, Analyst]

Okay. Just so I understand correctly, you -- because when you talk about other Nordics, you said that as those projects are failing off or gone, your profitability should close in on the Swedish profitability. I mean are you saying that adjusted for the one-offs in the quarter and those projects, your other business is actually generating closer to the Swedish level of margin?

[Per Sjöstrand, Founder, President & CEO]

Yes. Almost at least.

[Stefan E. Andersson, Analyst]

So that's -- things works out fine, that's what we should expect for Q2 as well.

[Per Sjöstrand, Founder, President & CEO]

Right. Yes, right.

[Stefan E. Andersson, Analyst]

And then the second -- last question. You talked about your celebration, the 5-year celebration. Is there a lot of cost associated with that, that will impact the Q2? Or is it just smaller impact?

[Per Sjöstrand, Founder, President & CEO]

Smaller. It's smaller, but -- okay. We take all the chance we can to have a party but at a smaller cost.

[Operator]

And the next question comes from the line of Robin Nyberg from Carnegie.

[Robin Nyberg, Financial Analyst]

It's Robin from Carnegie. I have a couple of questions. First, related to cost inflation, is the situation right now quite similar to what we have seen during the past few quarters? Or have you seen any changes there?

[Per Sjöstrand, Founder, President & CEO]

No. I think everything's the same. I mean we have a couple of percent in salary increase and a couple of percent on material -- on the material side. So I think -- and we are used to it. And you know why we have these type of calculation. We call it the cost plus. So we are taking care of cost increases.

[Robin Nyberg, Financial Analyst]

All right. And then one question related to the margin in division other Nordics. You mentioned some actions that you have taken in order to improve margins. But when do you think it's more realistic to see segment other Nordics to reach kind of similar level you are seeing in Sweden?

[Per Sjöstrand, Founder, President & CEO]

Yes. On the cost, I -- we are -- of course, you always underestimate the cost for shutting down, and we have done that, too. But I think that's over now. The Finnish market is -- it's growing as we will, more to go. I think we will see the same margin for rest of Nordics in the coming quarter 3 this year as we have seen same margin as in Sweden.

[Robin Nyberg, Financial Analyst]

Okay. And then one question related to the backlog. It was up 18%, if I remember correctly, year-over-year. But how much was it in sort of like-for-like terms up? Or was it up?

[Per Sjöstrand, Founder, President & CEO]

It was up, but I don't have the exactly figure here. Do we have it, Lotta? Just a second. We will see what we can find here, like-for-like, year like-for-like.

[Lotta Sjögren, Chief Financial Officer]

I'm sorry. I don't have the quarter report. But it's under our financial information. You can find it, order backlog -- organic growth of order backlog.

[Robin Nyberg, Financial Analyst]

Okay. Then finally to Lotta, one question. Cash flow was quite strong, but I guess the IFRS 16 had some positive impact. Do you have any sort of calculation of how much the operating cash flow would have been with the previous accounting definitions?

[Lotta Sjögren, Chief Financial Officer]

Yes. You can -- we have made very detailed information of that in our annual report that you can read. I don't remember the pages. But I -- if I remember right, it's about Page 56 or 57 or something like that in the annual report. You can see all the calculation on how it's impacted on the figures in the balance sheet and result.

[Operator]

[Operator Instructions]

[Per Sjöstrand, Founder, President & CEO]

We received one question from the webcast. And it's about the decrease of the order backlog in rest of Nordics, and we can comment on that.

[Lotta Sjögren, Chief Financial Officer]

Yes. The negative development of the order backlog for the other Nordic is -- the rest of Nordics is due to the phasing out of the operation in Norway that we talked about. Because last year, we had quite a big order backlog in that company that we are shutting down now. And today, that order backlog is 0. And that impacts on the organic growth.

[Per Sjöstrand, Founder, President & CEO]

Okay. Thank you very much. If there is no more questions, thank you very much for taking -- for joining on this call, and we'll see you in next quarter.