Instalco AB

STO:INSTAL

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Instalco Q1 presentation for 2023. [Operator Instructions] Now I will hand the conference over to CEO, Robin Boheman. Please go ahead. Hello, everyone, and welcome to this Q1 presentation for Instalco. My name is Robin Boheman. Please go ahead.

[Robin Boheman, executive]

Hello everyone and welcome to this Q1 presentation for Instalco. My name is Robin Boheman. I'm the CEO of Instalco. And with me today, I have my CFO, Christina Kassberg; and Fredrik Trahn, Head of IR. Just to start off a little bit and give you an update. This is Instalco. Instalco is one of the leading installation groups in the Nordic market, so Sweden, Norway and Finland. Our main business areas is installation, service, design, planning of electricity, heating and plumbing, ventilation, cooling system, along with that we also have solutions for the industry. We also have a technical consultancy part of the group as well.The group consists of around 130 subsidiaries with a highly de-central structure, as you can see on the map here. We are plotted around the Nordics, around 6,000 employees. So this is basically Instalco in short. Going over to some numbers and looking at rolling 12 months, as you can see, we have a net sales of SEK12.7 billion and EBITDA of SEK975 million, meaning an EBITA margin of 7.6%. We have a steady good cash flow of SEK765 million, and we have the last year done acquisitions with an estimated annual sales of around SEK2 billion.Our order backlog is almost SEK9 billion, meaning that it is record levels for us. Looking at some highlights for Q1; Q1 was a strong quarter for us. We had a strong sales growth of 26.4% with a high organic growth of 12.5%. We strengthened our profitability in the quarter compared to last year's Q1. So we are at 7.1%, meaning that we have around -- we have SEK233 million in EBITDA and net sales of almost SEK3.3 billion. We also had a strong cash flow, SEK222 million.As I mentioned before, we have a solid order backlog of almost SEK9 billion and very high activity when it comes to M&A, and I will come back to that later in the presentation. Somewhat increased level of debt due to that we did a lot of acquisitions in the end of the quarter, meaning that we did not get the EBITDA, but we paid the purchasing price. So we'll come back to the M&A situation a little bit later in the presentation.But I will hand over to you, Christina, to go through the numbers a little bit more in detail.

[Christina Kassberg, executive]

Thank you, Robin. In this slide, we can see the increase in the net sales with the comparison of Q1 present and prior year. Our strong position continued to generate robust growth in the quarter. Net sales increased by 26.4% compared to last year and amounted to SEK3.3 billion. We have a stable and solid portion of installation service, which is an excellent pre-req for success on the year ahead. Growth is driven by the high demand of sustainable investments and energy optimization as well as our high rate of acquisitions.We are satisfied with our organic growth rate, which was 12.5%. Both of our segments, Sweden and rest of the Nordic contributed to this. Acquired growth amounted to 13.8%. This slide shows the quarterly trend of EBITDA in both millions and margin. Earnings tend to be lower in the first quarter of the year since many projects are wrapped up in the fourth quarter and new ones are just starting up in Q1. Overall, despite the seasonal effect, our earnings performance was strong and the margin improved. It is thus a very nice improvement from the previous period Q1 2022. And the downturn in the economy has this far not given any significant negative impact. EBITDA increased in absolute number by 34.1% and amounted to SEK233 million, which corresponds to a margin of 7.1%.The business area Industry generated many positive effects. And in combination, we are working diligently to integrate our latest acquisitions and ensure that they quickly contribute to our continued growth in earnings. Overall, it was a strong earnings performance that improved compared to the previous period, together with the positive effects for the business area industry. This slide shows the quarterly progression of the order backlog. We have a substantial order backlog, which was further strengthened during the quarter.The composition and quality of the order backlog is good as well with variety in terms of types of projects and contract forms, all of which provides a balance and soundness in spreading the risks. For new production of residential property, we noticed a slowdown due to the new interest rate situation. But our exposure is relatively low, approximately 13% and well-compensated by other parts in the order backlog. Our order backlog, all-in-all, grew by 18.2% and is at a record high level in absolute numbers. In total, SEK9.0 billion which corresponds to roughly 70% of annual sales.Organically, the order backlog grew by 0.8%, and the order backlog of acquired companies contributed with growth of 17.4%. Over to summary of Segment Sweden in Q1; the business situation in Sweden remained strong. Inflation is impacting the industry and our companies have managed the market situation successfully, achieving both high profitability and strong growth. In general, the market for new construction, renovation and energy efficiency is good in both the private and public sector. The supply of installation projects in certain regions has declined somewhat.For new production of residential property, we noticed a slowdown due to the interest rate situation. Investments in construction and basic industry are increasing, the need for energy efficiency and investments in the grid. For our technical consultants, short-term demand is good, and this has a strong correlation with the demand for energy efficiency improvements. Overall, net sales increased by 17.2% to SEK2.3 billion, organically 12% up and acquired growth amounted to 5.3%. EBITDA was SEK185 million, and the margin was 8%.As already mentioned, business area industry generated many positive effects. And here we have a summary of rest of the Nordics. Rest of Nordic is overall delivering a strong trend of growth in absolute numbers. The seasonal variation is obvious for Q1 with a lower margin because many new projects are starting up and not yet fully underway. The market in Norway remained stable in terms of both construction and renovation. The main driving forces are major investments in the public sector. The market in Finland is still somewhat tentative.But in conjunction with Finland, becoming a member of NATO, more military investments in construction and installation are expected. And this is a clear business opportunity for our Finnish companies. Overall, net sales increased by approximately 57% to SEK0.9 billion. Organic growth amounted to 14.3% and acquired growth amounted to 42.1%, and this is a clear confirmation of our focus to grow in the rest of the Nordics. EBITDA amounted to SEK48 million, and the margin was 5.1%. We are happy that we, in this quarter, do have an underlying positive trend among our Finnish companies, and this is a recovery from previous quarter.To summarize our performance in relation to our financial targets; all-in-all, over a business cycle, we are confident that we are delivering in line with our financial targets. Regarding growth, we are performing well beyond our financial target. EBITA margin, we are pleased that it has improved compared with previous quarter, and our companies, as said, are quickly adapting to challenges as well as opportunities. This is in the heart of our business model. Indebtedness, the high rate of acquisition, especially at the end of the quarter, has raised our level of indebtedness.But thanks to our strong earnings growth, we still managed to achieve our goal of net debt in relation to EBITDA of 2.5x. The group is having a good and healthy headroom to the stated bank covenants. We are secure of the rate of acquisitions, our cash flow and the balance sheet. Sorry for that. And finally, the Board has proposed a dividend in line with the policy and decision will be taken at the AGM tomorrow.So by that, Robin, over to you.

[Robin Boheman, executive]

Thank you, Christina. So going into some acquisitions; as I said, the acquisition in Q1 started off with a flying start. We have acquired six companies so far or in Q1 with around NOK970 million in annual turnover. The majority of this was related to three major acquisitions, Lysteknikk, Enter Stallningar and Processus. We also acquired three smaller companies, Telepatrol, RP Montage and SMT. All of the acquisition -- acquired companies are very successful and specialized making them a good fit within Instalco business model and culture. We have had a dialogue underway for several years with a few of these companies.So we're happy that they could join now in Q1, and we're looking forward to integrating them within the Instalco culture and together with the network that we have. We can also go into some examples, for instance -- the first one here being Processus. So we strive to expand our industrial area, and we made three acquisitions in this area during this quarter. One of them being Processus, a company that we have had a long dialogue with, and they are also previously prior to the acquisition, they're already collaborating a lot with the existing subsidiaries within the group, for instance, Teampipe, Liab that we have owned for a few years.Processus is an engineering firm, which is specializing in project management, process design, automation, industrial IT. They also have a strong platform within the pharmaceutical industry, which is also opening up new opportunities for us to expand in this area. So very excited to have them join the group as well. One other acquisition which is also a good example of an industrial acquisition was the acquisition of Enter Stallningar, which was completed in the first quarter. Enter Stallningar is a full-service offering for Industrial Scaffolding business, servicing customers mainly in Southwest region of Sweden, and they have their head office in Gothenburg.By this acquisition, we also take the leading position in the scaffolding business for the industry in Sweden, which is also an exciting place to be. The acquisition of Enter Stallningar is in line with the strategy of growing stronger in the industrial segment, and it is also a great opportunity for synergies not only with our existing industrial companies, but also with our existing scaffolding business, Highcon, which we see a lot of synergies and collaboration possibilities since they are in different geographical areas, but they are also able to spread best practice to these companies.And once again, we position ourselves as a leader in the scaffolding business as well. Just to go into an example of a project that we took during the quarter, just to give you some understanding. Instalco is always working lot with energy-efficient project. And this is one example of an assignment that was won in the last quarter by our subsidiary, Calmarsunds VVS, which will work together with Elovent for this client. The client is [indiscernible], HSB, Sweden's largest Cooperative House Association. This is a partnering project where Calmarsunds VVS has been elected and assigned as general contractor for the renovation of basically two floors, floored apartments building in Kalmar.This householding complex is around 230 apartments and is part of what we in Sweden call Miljonprogrammet, million project, which was basically a lot of apartments was billed in 1965 to '74. And these buildings are now in great need of renovation. And this is a good example where Instalco can come in as a general contractor and help the customer to generate a lot of energy-efficient and lower energy bills in the future as well. So the theme for this quarter is a start-up, which is a theme that has been -- we have gotten a lot of questions in the last years on our start-up business and how we do it.So we'll give you a little bit of an insight on how this is done and what type of companies we have. So basically to start off, this is [ not the ] way of growing. This is more of an organical way of growing. When it comes to M&A, we have strategic acquisitions, meaning that we acquire companies that we -- for instance, we want to go into a segment. For instance, a typical example of this would be Processus or Enter Stallningar, which was a strategic acquisition. Then we have the more opportunistic acquisition where we see that, okay, there is a company that we like. We like the management team. It was maybe not on 100% on the map, but we see a good opportunity here to do good acquisitions within the installation market.So we go for it. We also have the add-on, meaning that, for instance, a typical or a subsidiary finds a smaller company to acquire themselves and integrate to their company. And then last but not least, we have the start-up concept, which I will go into now. So the start-up concept was basically founded in 2016 when we were negotiating with an acquisition opportunity, and we wanted to get into a specific market, but couldn't kind of come to terms with the acquisition. But instead, we then started our own company. And since 2016, we have now started companies in Sweden, Norway and Finland.So this is all about finding the right entrepreneurs, making them join the team. And together, we will then co-own that company for a few years. So basically, where we are interested in setting up operations but couldn't find basically suitable acquisition candidates we will go for the start-up concept. And a good example is on the right-hand side here, we have Ravcon for instance, that also actually is a start-up company, and they also two days ago, did an add-on acquisition as well. So that's quite unique.Looking into the major start-ups that we have done, we did during 2022, we did nine start-ups. Most of them were technical consultants, which is basically INTEC, which is our technical consultancy brand. INTEC has now, I think, around 25 subsidiaries around Sweden and Norway. So basically, INTEC is Instalco within Instalco but they run on the one brand INTEC and consists of a lot of start-ups. On top of that, we have done start-ups now, as I mentioned, two in Finland, one in Norway and a few in Sweden as well, as you can see spread out along the map here. So it's a very exciting way to grow the business as well, finding good entrepreneurs and building upon that.And this is an example of the life cycle of a start-up. So basically, you could say that year one is a start-up year, which we, at the moment, have four companies within one to two years is like production. So meaning in the first year, you try to find projects, you might only be a few employees trying to establish yourself offices and so forth and then trying to find projects. Year one to two, you start production, you start to execute on the projects you've taken during the first year. Two to three years, we start talking about maturity, meaning that you've done a few projects. You can -- you have a track record, you can start to show customers that -- what type of projects you have done. And so the three to five years, you start to become sort of say, ready in that sense. And at the moment, we have around two companies there.And the total turnover for these startups is around SEK650 million. So this is basically generated through organic growth where we find people within the market. We co-own these companies together, and it's a very exciting model, I think, for the future as well. Going into the summary for the quarter; we have a really strong quarter. I'm very proud of what we have achieved in this quarter compared to last year Q1. I think we have once again proved ourselves. We have some normal seasonality effects, but profitability is improving for the quarter. And I'm very proud of the achievement of the team. We have really high M&A activities and organic growth has also been great during the quarter. As I said, 6 acquisitions contributing to around SEK970 million. So growth for this year is looking very promising.So with that, I think I will leave it to you and open up for questions.

[Operator]

[Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

So my first question is just on that, it seems like -- well, as you say that margins are improving, but it seems like there's an underlying improvement as well. So regarding the fixed price contract pressure that you have highlighted for a couple of quarters, is this starting to improve? And how long do you think it will persist both maybe the cost inflation part and also some contracts you highlighted, I think, 2 quarters ago where there was perhaps a bit of a miscalculation, if we call it that?

[Robin Boheman, executive]

Yes, I think the issue with this fixed price product is, as I mentioned before, I mean the big hit was maybe taken a few quarters ago. I wouldn't call it miscalculations, I would rather call it a little bit unexpected increase of prices to continue in that rate. I think that the market wasn't prepared for that type of increases. However, that said, I mean, if we continue to see increases in this same level, it will be hard for everybody to cope with that fast increases of prices. However, we do see that the volatility in price increases are somewhat lower, and we're seeing some positive trends that we are at levels that stay at these levels. So in that sense, we are a little bit positive, but it all comes down to the market at the end of the day, and you have to cope with it. I think we're better prepared than we were last year. I think the market overall as a construction market and installation market, especially is more prepared now than 1 year, 1.5 years ago.

[Karl Bokvist, analyst]

Understood. And then on just the seasonality. If we just take the seasonality impact itself, it should have -- it's historically at least implied a lower or, let's call it, a bigger decline in margins for Q1 versus Q4, and yet your margins, sorry, in Q1 are very strong. So just looking ahead, seasonality should be a positive, and then you also started the year in a strong fashion. So how should we think about the coming quarters, given the strong margin start to the year?

[Robin Boheman, executive]

As you know, Karl, we're not guiding for the future. However, I mean, we started the year good. I think you should continue to expect the seasonality to continue in the sense that -- we are -- even if industry showed a good result in Q1, it is somewhat more seasonality within the industrial market, they start a little bit slower in the beginning of the year and so forth. So I think seasonality-wise, I can only look at the history, and I don't see any reason for the history not to repeat itself in that sense.

[Karl Bokvist, analyst]

Understood. And then my final one is just a bit more of a technicality, but when you disclosed the acquired companies, you highlighted that there was a one-off effect, and if I understand it correctly, a negative one-off effect of SEK24 million impacting the acquisitions on a kind of run rate level. So did this have any impact on the Q1 earnings or the past quarter earnings?

[Robin Boheman, executive]

No, I think you -- yes, I know what I mean you're referring to, like, I think, a table on -- was it Page 8 in our report on the last page there. So basically, that's a guidance for you guys to understand how much they have earned prior to joining Instalco. And the reason for the note there is that you see that operating profit is quite low compared to the turnover. And that's -- so it's a guiding to helping you guys say that SEK24 million roughly is one-offs taken. Largest part of that around 15 -- I think 15.5% or something like that is due to that one of the companies that we acquired in Q1 had a management team that was entitled to exiting bonus, so to say, what do you call it in English, I think you call it exit bonus if they sell the company of around SEK15 million to the management team. So that affects the result of that company that year. But that is, of course, we knew that. And so it was no strange things, but that is one thing that shows that profitability for that company prior joining Instalco is very low because they have to pay that out due to exit. And then one other acquisition had a write-off in 1 project prior to joining Instalco in the beginning of the year of roughly SEK10 million. So that was also already known to us. But that's why we wanted to guide you guys with and say that there are SEK24 million in one-offs. So I think you need to kind of add that back to the 5%, if you see where those companies are typically at.

[Karl Bokvist, analyst]

Yes. Understood. So then if I may. I mean, also the kind of acquired contribution this quarter from those units should, in essence, if we look at an adjusted earnings level, have been higher as well then -- prior to joining?

[Robin Boheman, executive]

Prior to joining, I would argue that you should maybe look at that they should a typical be at around SEK30 million so meaning around 10%, basically.

[Operator]

The next question comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl from Nordea. A few questions. Firstly, I mean, if you look on the Swedish business, to what extent is the margin uplift driven by sort of improved utilization of the technical consultants and also if you could maybe -- I mean -- and also on raw material pricing normalizing EBITDA, you also sound pretty content with activity level for the technical consultants. So what profitability level are you aiming for full year 2023 for that segment?

[Robin Boheman, executive]

Okay. We start with the technical consultants. So full year, once again, maybe the political answer here, Carl, it depends on the type of growth that we will see in the technical result. And once again, if we start growing FTEs in the rate that we did in 2021, then we won't see much profitability. We'll see, but we see a lot of growth. However, if we see that FTEs are not growing as fast, we see a positive trend, as I mentioned many times before, that I mean once you sort of say, worked for -- within Instalco for as a technical consultant for maybe a year, you start to turn profitable. But of course, day 1, you have 0 projects, you need to, so to say, start from scratch, then you typically lose money. So it all comes back to kind of the growth rate we see. However, we are very happy with the technical consultants this quarter because they were able to show profitability for the first time. However, I think it is a little bit early to say that, so to say, we will continue to show profitability. But we had a really good start with technical consultants this quarter. That was very positive, showing that the model works, which I've been very confident that it will, but it showed in the numbers this quarter as well. And then it's a little bit early to say that this will continue for all quarters because it also has a lot to do with the growth rate.Then please repeat because...

[Carl Ragnerstam, analyst]

No, that's fine. It answered the question. And what would you say is your base case balancing growth with profitability for 2023? I mean we are maybe entering a bit more challenging macro situation. I mean is it the right time to grow FTEs? Or is it better to sort of turn into profitability and take it organically slowly? Or what's your strategy?

[Robin Boheman, executive]

Maybe a little bit leading question there, Carl. But no, as I mentioned before, I think that it is important to also consolidate the business. We had the opportunity to grow very fast in 2021, and I think it was a smart move to take that opportunity. As I think I said on last Q call or it was 2 quarters ago, I mentioned also that we have taken some FTEs away. I mean when you recruit that many people that fast, you get people that are not maybe fit for the culture and fit for the way that we want to do business. And a few of them have left the companies, and we have also made a few leave the company. However, I think that it will depend a little bit on if we can establish ourselves in new regions. We are long term on this investment. It is a solid investment. So also if the market starts to tremble a little bit, I think it's also a good opportunity for people to join Intec, because we are long term. We are investing in this. And long term, we see a good profitability, and we also see good growth and good synergies within Instalco almost sounding like an ad to join Intec, but I think it is a good place to work. And so at the end of the day, I mean, it will come down to what kind of competence we can recruit. And if we can recruit them, we should, if they're good.

[Carl Ragnerstam, analyst]

Okay. Sounds fair. On the back of the strike in Norway, would you see that the wage inflation might hinder your margin trajectory in the near term in away? Or would you say that you may be taken the higher wage inflation into consideration into your projects taken during the latter part of [ 2023 ]?

[Robin Boheman, executive]

I think that we were, of course, hoping for maybe a little bit less wage increases. However, we were expecting roughly around this target or whatever you call the mark or whatever you want to call it. So not too unexpected that we ended at these levels. However, we would have hoped for maybe a little bit lower, but yes. I think we can -- I think the market has to cope and as I mentioned before, like with wage inflation, it's easier because it's the same for everybody. And it's also very -- the number is very known. So it's also an easier discussion to have with your end customer because everybody knows the sort of say, wage inflation. So having that discussion it might be easier than having the material discussion, which is also more volatile.

[Carl Ragnerstam, analyst]

And in last year, you had what is it, 46% of sales from fixed price contracts. I mean are you satisfied with that level? Or are you willing to increase the level of fixed-price contracts this year now that raw material prices are at least seemingly flattening out? Or I guess, over time, in a normalized environment, you could get quite good leverage on margins from fixed price contracts.

[Robin Boheman, executive]

Yes, that's -- once again, sorry Carl, but it will become a little bit of a political answer, meaning that at the end of the day, it's also what comes out in the market. I mean, if the end customer wants fixed price, they will at the end of a get fixed price, then we can always argue that we should have done it in partnering or so. So I mean we stick to our model that if it is larger, so to say, projects, we will take them in partnering. And if there are small midsized project, we are comfortable in taking them in a fixed price environment, and we are good at the midsize segment. So I think that the 46% we have now, it's a good mix. If it changes up or down a little bit, it will depend on what type of projects come out. If it is larger projects, you will see the fixed price go down. If it's smaller projects are coming out or midsized, you will see the percentage of fixed price going up. So I say we stay true to our model, and we'll continue to do that.

[Operator]

The next question comes from Karl Noren from SEB.

[Karl Norén, analyst]

Third Karl in line here. One question on the price competition here that was mentioned by one of your peers here yesterday. Just curious about if you could comment anything if you've seen any more or any increase in the competition on price in some projects when some market segments are weaker?

[Robin Boheman, executive]

I mean, we haven't fully seen the whole effect. I think that there's always price pressure in the market in the sense that they are -- we have good competition. It is a market where competition is so to say, on a decent or whether you want to call it level all the time. There are no free launches. However, of course, we see in some areas, maybe sort of say more tenders on the same project. Let's say, for instance, you tend to -- you get a tender and a few people will reply. Now we see more people replying on the same tenders, so to say. That's maybe what we see. We haven't seen so much yet on kind of price going down in a larger extent, but that could be the risk in the future, yes.

[Karl Norén, analyst]

Yes. Sounds good. And then just one follow-up on the -- then, you paid one acquisition with shares for SEK50 million of worth. So I was wondering what acquisition and at what price would the share issues issue that? Because I can't see that in your report that the number of shares has increased.

[Robin Boheman, executive]

So basically, it was -- for the acquisition, it was the Processus acquisition. And the reason for using the shares this time was that the entrepreneurs wanted, if I remember correctly, SEK50 million in shares, and we thought that, that was a little bit hard to make them acquire that on the open market for 3 entrepreneurs. So that was the reason. The share was issued at market price, I think, was 10 rolling average 10 rolling -- what do you say, 10 days average and it was issued in -- at the day we announced the acquisition. So I don't have the price exactly that date, but it was at market price.

[Operator]

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

[Robin Boheman, executive]

Okay. Thank you. We don't have any questions either from the public and from the webcast. So I guess you summarize it. Yes. So we thank everybody for listening, and thank you for the questions. And once again, we come back to a good quarter, solid order backlog, strong organic growth and an improved profitability compared to Q1. Sorry, one question coming in a little bit later, sorry.

[Operator]

The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

Sorry, I didn't want to steal your concluding remarks here. But if I just may with some more boring technicality questions here, but 2 of them very simple ones. The net financial expenses down a bit versus the prior quarters. Anything in particular worth mentioning there given the debt level and the assumption of rising interest costs?

[Christina Kassberg, executive]

Yes. On the higher cost side, we have a higher cost for interest rates, obviously. But on the plus side, we have value chains connected with the Norwegian kroner that has decreased at the end of the first quarter.

[Karl Bokvist, analyst]

Okay. And then it was just another smaller remark. But on the backlog growth in rest of Nordics, you say that it grew strongly organically by roughly 9% and then structure contributed SEK45 million. So then it seems like the FX contribution was a very high negative number. I was just curious if there was something to highlight there.

[Christina Kassberg, executive]

Yes. And then we have a combination here that the euro has increased in the first quarter, and the Norwegian krone decreased. So it's a mix of these effects.

[Robin Boheman, executive]

Thank you, Karl. Then we try again. So once again, thank you for listening in. Thanks for the questions. And we summarize a good quarter, strong M&A, strong organic growth and strengthened profitability as well. So summarize a good quarter. So thank you, everybody, and have a nice day. Bye-bye.