Instalco AB

STO:INSTAL

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Instalco Q1 Report 2020. [Operator Instructions] Today, I'm pleased to present CEO, Per Sjostrand; and Fredrik Trahn, Head of IR. Please begin.

[Per Sjostrand, Founder, President & CEO]

Thank you. Thank you very much. And first of all, of course, very welcome, everyone, to this presentation of Instalco's quarter 1 report for 2020. My name is, as you heard, Per Sjostrand, and I'm CEO at Instalco. I hope you can hear me well despite the fact that I'm sitting at home, on the second floor. It's very hot in here, but I hope you can follow us. Starting, of course, with Slide #1. And as you can see here, we now reach sales of -- we have reached sales of more than SEK 6 billion on a 12-month rolling basis. We have more than 70 companies and in total more than 3,000 employees. We also -- you can see, we have a strong order backlog, and we also have an adjusted EBITDA margin, 8.8%, which is very high. So we can go on to Slide #2 with the quarter 1 highlights. Of course, I'm very happy to report that for this quarter, we have had a stable growth in sales and with continued high profitability. You can see that the net sales growth, 27 -- 37%. And we had a very strong organic growth, 11%. Also, I think I'm very satisfied with the strong cash flow, with a stable order backlog, and last but not least, we launched our new sustainability program during the quarter. I will come back to all this. So that's the highlights of the quarter, I think. Next slide, Slide 3. We had a strong quarter, yes, despite the difficult situation we face throughout the world from the COVID-19 pandemic. And the corona crisis has not hit the construction and installation sector quite as hard yet, I would say, as it has other sectors. So far, we have been able to keep up -- keep our workplace open. We have also been able to deliver materials to our various ongoing projects and assignments as usual. So for Instalco, the corona pandemic has not resulted in any significant or any major disturbance at group level. But there have, however, been some minor disturbance in some projects and service. And -- but most projects have been able to proceed as planned, and order intake has been strong.What you can see is during the period, there has been a bit more sick leaves, especially in late March than we have typically seen. We are, nevertheless, of course, very concerned about the situation, and we are taking it very seriously. And we expect that our contracts and service will, in some way and maybe in the long term, be affected. Accordingly, we are preparing for more flexibility in the future. And in all likelihood, we are going to notice the effects, even though, thus far, we have not noticed any significant impact, as I said before.It is very difficult, though, to assess the market. And in all sectors, there is a very high level of uncertainty about the future. We are all well aware of that because you can read, of course, all the papers talking about what's happening next. At Instalco, we are planning and preparing for the impact that is likely to occur in our sector. We handle a wide product portfolio and many subsidiaries with strong local ties. So the Instalco model provide us with a very flexible structure, I think. What we have to do now that we must now increase our flexibility even further, and we will be focusing even more on collaboration between our subsidiaries. We are also going to need to be more responsive and flexible so that together with our customers, we can solve problems and cope with all kinds of situations that could rise. As I said, it's currently difficult to assess how the coronavirus will impact the long-term market conditions in the global economy. But of course, like all other companies, Instalco is impacted by downturn in the economy. So hard to assess the market. If we go to Slide #4, of course, as I said before, I'm very proud to report that we have a stable growth in net sales and also a very strong organic growth. You can see that that's the situation. Also, you can see to the right there about the quarter -- has been before -- I think we have said that before. Quarter 1 usually is the weakest quarter of the year for installation companies or in the construction industry. So leaving that and going to Slide #5, mentioning that the order backlog -- or backlog of the orders and overall situation remains stable. I think it's thanks to the level of the diversification we have as regards types of projects and markets. And of course, the large backlog of orders provides us with a good level of flexibility to carry out operations in our sector as well. So that's the order backlog. If you go to Slide #6 for a moment. And there I would like to highlight great examples of how we work, and this is 2 of our projects from the quarter. And the first one, I'd like to emphasize is Instalco's collaboration with NCC, with the construction company, NCC, and Region Sormland in a very -- in a major hospital project. In this, we have 6 Instalco companies participating under the leadership of Rorgruppen and Ohmegi. It is our largest project to date, where hospitals in Eskilstuna, Katrineholm, Nyköping will be expanded and modernized. And the project will be going -- ongoing during -- from today to 2026 with an order value of approximately SEK 700 million. And the majority of which we'll be reporting order intake for the second quarter of 2020. I will also add that the project is taking on what we call partnering. That means open books, and I will say, 0 risk. The other project is a much smaller project. It's -- but I think it exemplifies, however, of many of the many smaller, well-managed projects going on in our subsidiaries throughout the Nordic region, it look like. Here, our Finnish companies, LVI-Urakointi Paavola Oy and Twinputki Oy were awarded contracts for installation work that is a part of a major sustainability project in Esbo municipality outside of Helsinki. And the project involves construction of a new data center, entirely in fact in solid wood, where our companies will be working with the heating and plumbing installation, ventilation, automation and sprinkler system. Two good examples. So if we turn to Slide #7. There, we have a segment Sweden -- segment development in Sweden. And you can see that we continue to delivering high margins, 10.2%. This is still high rate of construction for schools, preschools and hospitals, a very good net sales growth and as well as organic growth, and also, I think, a very, very stable and good order backlog. Going to next slide on Slide #8, and rest of Nordic segment -- development rest of Nordics has been slower start of the year. It's been the shutdown of society due to corona situation in Norway and Finland that has slowed down the rate of production somewhat. A good net sales growth, a good organic growth and a good order backlog, but I'm not totally satisfied with the EBITDA margin. I think we can see an increase in that further on. Slide #9, a little bit about our acquisitions. We are continuing to sign new contracts, few new installation jobs, both large and small. We are also still engaged with several acquisition candidates as planned. And our acquisitions pipeline, as we say, is unchanged, and we hold on to our expected annual acquired sales in the range of SEK 600 million to SEK 800 million, which we feel rather certain of achieving. And 2 examples from the quarter is on next slide, Slide 10. As I said, we have started off the year in accordance with our acquisition plan. In Sweden, geographic expansion has continued with the acquisition of the electrical installation company, ELUB in Vaxjo, which means that Instalco is now and for the first time, represented in Kronoberg County. In Norway, we strengthened our position in Innlandet County with the acquisition of Haug og Ruud in Lillehammer. It offers installation of heating and plumbing and ventilation system. And Haug og Ruud is also a natural partner for collaboration with our prior acquisition in Lillehammer, Medby AS. It brings us one step closer to becoming multidisciplinary in the country of Innlandet. We have also acquired a smaller company, Ostersjo Elektriska, in Norrtalje during the quarter with the intention of merging it with Rodens Varme and Sanitet at the same town. Moving to Slide #11. Providing safe, sustainable installations that help generate benefits to society is a high priority for us. I have talked about this many times. We also put much emphasis on having a safe, stimulating work environment, of course. We aim to, every single day, generate benefits to society via our climate-smart, energy-efficient installations that lead to lower consumption of resources. And during this first quarter, we started rolling out our new sustainability program, we call it sustainable installations. It enables us to expand our approach and take even greater responsibility in the area of sustainability.The sustainability program focus on 3 main areas that should permeate all areas of Instalco's sustainability work. First one is a safe and modern work environment. The second one is sustainable installations. And the third one is mature leadership. And within these 3 main areas, there are 8 sustainability targets that will be measured and monitored, with a goal of achieving improvements each year in all of these areas. Going to Slide 12 then, and say that at -- one key component of the new sustainability program is our classification system. We call it Sustainable Instalco Project, which we have developed ourselves. And in order for a product to become classified as a Sustainable Instalco Project, it must meet 6 specific sustainability indicators. For example, it must meet the requirements on occupational health and safety by going through the safe employee program when the project starts up. Furthermore, all suppliers involved in the project much sign Instalco's code of conduct. And the project must also demonstrate qualities making it climate smart. And we think that, that sustainability classification will serve as a stamp of quality for both the project, our customers, Instalco and our subsidiaries involved in the project. So leaving that and going to the financials, on financial situations, financial targets on Slide #13. As you can see, and if you haven't followed us, you can see this slide every time we have a quarterly report. We have green dots, I will say, all over, both in growth, I would say, almost in margin, absolutely in the capital structure. Our cash conversion is very, very high, and we still hang on to our dividend policy. So I don't think it is so much, much more to mention about that. It's doing well. Slide #14, a summary. I had talked about all these bullet points. Strong quarter despite corona situation. It hasn't hit us in the construction and installation sector quite as hard as it has in other sectors. We have a good profitability. We have a strong growth, high cash conversion and high cash flow. So I'm satisfied with the quarter. We launched our all new sustainability program. Also continuing, we are with our new strategy for increasing service offering. We are, of course, very high -- we have a very high level of uncertainty about the future. As I have mentioned several times, it's very difficult to assess the market. I think that's the summary. As you know, I like to wrap up these meetings with reference to a song title. This time, it's the new Rolling Stones song, Living in a Ghost Town. I think it's symbolized the world's situation or the situation that we are trying so hard to cope with right now. And with that, I would like to thank you for all joining in on this call. And I now like to take your questions.

[Operator]

[Operator Instructions] First question is from the line of Stefan Andersson from SEB.

[Stefan E. Andersson, Analyst]

A couple of questions. I guess I'll start with the more difficult, I guess, to answer. But you mentioned the Nordics and the bigger impact on that business due to the COVID-19. Just to understand, you said on one hand that you expect that division to perform better when it comes to margins. Just trying to understand what kind of time frame are you talking about then because I guess that COVID-19 will have a bigger impact in Q2 than it had in Q1 since there was only 1 month really impacting, I guess. So if you could elaborate a little bit more on how steep was the decline in March versus January, February? And what do you mean by expecting higher margins? Is that next year? Or do you expect that already in the coming quarter?

[Per Sjostrand, Founder, President & CEO]

The reason, I will say, for the more moderate margin shown in the rest of Nordics is not purely -- not just the COVID-19 situation. We had some projects that we're now ending during the quarter, I would say, and especially in March, that didn't perform so well. But going through the order backlog now, I can see that we have a more healthy situation in the future. And I think also that the societies are, especially in our industry, installation industry, are opening up. They're also easier -- I mean the difference between Sweden and Norway, for example, is -- and maybe Finland as well, we -- they have more employees from, I would say, blue collars, obviously, from the Baltic countries and then have been a problem to handle that. That's a different situation from Sweden. But -- so it's not just the COVID-19 situation that had affected us in Norway. We're talking about Norway now, not Finland. Finland is going very well. So what I can see is that we will recover and we will increase the margin due to the better order backlog that we have and the really higher margin in the projects.

[Stefan E. Andersson, Analyst]

Okay. And then second question is relating to a little bit detail. But I think you have one-offs, which normally is transaction costs. It's high again. Was it SEK 11 million? Yes, SEK 11 million. While on the page in the report where you talk about transaction costs, it seems like they are SEK 2 million, SEK 3 million. So what is the difference there? Why are they on the high level? And what's the difference between what you stipulate on the transaction side page on your report there.

[Per Sjostrand, Founder, President & CEO]

Yes. That number is -- I think it is almost in -- to 100% the earn-out -- we have earn-outs in all -- when we acquire companies, we have an earn-out. And we have still not, I will say, leveled out the earn-outs totally, but we are heading to that. We thought we had that last quarter, but there were still some effects of leveling out the earn-outs. So I think it's 100% of those SEK 12 million is affected by earn-outs or due to the fact that we haven't 100% control, I would say, on that. But I think we have not taken -- we are doing a lot to see that won't happen in the future. And we have also -- I think we can also, after this year, just -- obviously, I skipped the adjusted EBITA and call it just EBITA from now. But still, we have some effects of what we have done before.

[Stefan E. Andersson, Analyst]

And just so I understand correctly, I mean, normally, the earn-out is booked in the balance sheet and taken against that booking. So what you're saying is that your acquired companies, some of them have done so well that they performed better than you thought when you...

[Per Sjostrand, Founder, President & CEO]

Exactly.

[Stefan E. Andersson, Analyst]

Yes. Okay. Then last question is financial net. The interest rate, I guess, is not as high as it looks in the financial net with SEK 11 million. Is that large negative there, is that relating to currency changes Norway or -- possibly? Or is there something else impacting that number?

[Per Sjostrand, Founder, President & CEO]

Oh, I don't -- I have not quite the figures, but I don't think I have addressed that. Yes. I think I have had to address that to Robin to be -- so I don't say something that is wrong. I think I will hand that to...

[Robin Boheman, CFO & Head of Business Development]

If can I come back to you with an answer on that question, Stefan.

[Operator]

[Operator Instructions] Next question is from [ Jorn Hutna ] from [ Interfunden ].

[Unknown Analyst]

I'd like to come back to the first question Stefan talked about for an employee. I had a bad line, so I didn't quite catch it. What did you say about some difficulties in some region with getting employees into the projects. Could you please repeat that?

[Per Sjostrand, Founder, President & CEO]

I mean it's more usual in Norway to have employees from other countries, and they have to be in [Foreign Language]. What you call that in English?

[Robin Boheman, CFO & Head of Business Development]

Quarantine.

[Per Sjostrand, Founder, President & CEO]

Quarantine, yes, for a couple of weeks when they got back to Norway. And of course, that will affect us. It also will affect the construction industry. So the pace is slower in those projects that are depending on more blue collars from Estonia, Latvia, Lithuania and other countries. And that means that it's a little bit slower pace in those projects.

[Unknown Analyst]

So is that due to construction companies outside yourselves are using foreign workers? Or is it your own companies that use foreign workers?

[Per Sjostrand, Founder, President & CEO]

Both. I will say both. And we have what we call POC, percentage of completion that -- and when we have that a slower pace or slower tempo in project means that we have more fixed costs to take care of. So it affects us a little. Absolutely. But I think they are returning now and the quarantine has started to -- it's not so usual anymore.

[Unknown Analyst]

Okay. But this hasn't been an issue for Sweden. I would assume that there are a lot of foreign workers in the construction industry as a whole in Sweden as well that might be affected.

[Per Sjostrand, Founder, President & CEO]

Yes. But you can't compare it with Norway, for example. And we have managed that in Sweden well. I mean we have a more open society, and we have not been closing down so much. And the workplaces at the construction sites has been more -- I mean, yes, we have another situation also.

[Unknown Analyst]

Okay. Then a final question. On the big order of SEK 700 million that you talked about, you typically work with much smaller orders. Will this be a challenge for your company to work with such a large order, you may be forced to turn down other orders because they are full on capacity? Or will -- do you think this will just be a very smooth visible order to work with?

[Per Sjostrand, Founder, President & CEO]

Yes. I mean we will have these projects ongoing for, I think, 5 or 6 years. So on yearly base, it's not a very, very large order. I'm very glad that I have it today because of the situation, of course. But we are also involved, 6 of our subsidiaries to participate in the project. So I think it's just -- it's a normal situation we have, and we don't -- we will not say no thanks to other orders just because of this. You also built up a specific organization for this taking care of such a large order, and they are rather independent from other subsidiaries of company.

[Unknown Analyst]

Okay. But when the -- what will happen with that organization when the project is finished?

[Per Sjostrand, Founder, President & CEO]

Yes. It's 5 or 6 years. I think we can manage that during that time. And hopefully, they will go to another project, maybe not in the same size, but I think we will fix that during these 5, 6 years that we have today on the project.

[Operator]

And there are currently no further questions registered. So I'll hand the call back to the speakers for any closing comments. Please go ahead.

[Fredrik Trahn, Head of IR and Communications]

Yes, it's Fredrik here. We have a few questions from the webcast. So Per, if you can talk about the large driver behind the organic growth this quarter, what were the main drivers that helped the organic growth?

[Per Sjostrand, Founder, President & CEO]

I think that we have the same situation that we often have. First of all, I will say, organic growth is something that you have to see all the time. We have had a fantastic organic growth, both in quarter 3 2019, quarter 4 2019 and now in quarter 1. The base for it is that we start -- when we acquire new companies, they start to collaborate with other companies in the group. We can see that we can take on larger projects, as we mentioned earlier here. And what question was talked -- what it was about. We can see larger projects. We can also see more complex, I would say, projects that we can take on. So it's a natural thing that our organic growth is going so well.And I will also say, it can depend on companies that we acquire for more than 1 year ago that maybe they can -- they show a little bit less organic growth and also that companies that were acquired within the year that didn't count in that organic growth, that they are growing faster. So we have this organic growth, but for some different reasons. I think the main reason is that the new company starts to collaborate very closely.

[Fredrik Trahn, Head of IR and Communications]

Right. Thank you. And the other question were, if you can comment on the acquisition market, do you think there the price has gone up or gone down? Or has it been affected at all by the COVID-19 situation?

[Per Sjostrand, Founder, President & CEO]

Not what we can see so far. Has the price been affected? Of course, in the long run, it will be. And -- but also companies that we acquired, the owners, they know what they want to have for the company. And so I guess that, in the long term, maybe it will affect and that maybe we can maybe see a decrease in prices. But not yet, I will say. And in the acquisitions that we have made this year, I think that they were -- we had a agreement before -- long before the corona 19. And I think that the prices that we give just today -- but in the long run, I think it is a little bit down, I think, the price level [indiscernible] maybe.

[Fredrik Trahn, Head of IR and Communications]

Okay. Thank you. That was the questions from the webcast. So I guess we can then summarize that, Per?

[Per Sjostrand, Founder, President & CEO]

Yes. I have not so much more to say. I think, as I said, we are very glad that what -- we keep up to speed and our margins and also our order backlog so good. And I'm certain that if we can hold on and, yes, stay focused on what we do and also be as committed, everyone in management, the management team as we are, I think we can handle this situation as well. So thank you very much.

[Operator]

And this concludes the conference call. Thank you all for attending. You may now disconnect your lines.