Instalco AB

STO:INSTAL

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to the Instalco Q3 2018 report. Today, I am pleased to present CEO, Per Sjöstrand; and CFO, Lotta Sjögren. [Operator Instructions]Speakers, please begin your meeting.

[Per Sjöstrand, Chief Executive Officer]

Thank you very much. And of course, I will first welcome you to this presentation of Instalco's quarter 3 report for 2018. My name is Per Sjöstrand, CEO of Instalco. And during this presentation, I will be assisted by our CFO, Lotta Sjögren.So start with Slide #2, over to Slide #2, which shows an overview of Instalco and just a short update, Instalco is one of the leading Nordic companies for heating, plumbing, electricity, ventilation, cooling and industrial solution. Our main business is installation, service and maintenance of building same facilities in Sweden and Norway and Finland. So we are a pan-Nordic company.We operate in the Instalco model, which is a very decentralized organization, where our subsidiaries strong local ties and specialty expertise. We collaborated to provide attractive solutions that cover our -- all our customers' needs.So if you look at Slide #2, I'm pleased to report that we have now surpassed sales of SEK 4 billion on a 12-month growing basis, and we see that more than 50 companies and in total more than 2,000 employees.We can go to Slide 3, that means next slide. For the third quarter, we have had both high growth and profitability, with an increase in net sales of 40.8% to SEK 998 million. Organic growth was 8.6%, and adjusted EBITA was SEK 74 million, and that gives us a margin of 7.5%.On the whole, we see a continued stability in the installation sector. We have also noticed the higher demand for energy efficient solutions and higher demands on sustainability. Our sector is still growing steadily, even though housing construction has slowed down, as you probably are well aware of. In the public sector, particularly the rate of construction of the school, pre-schools and hospitals remains high.Next slide please, that means Slide #4. Here you can see 2 diagrams. The first diagram shows a bridge of net sales growth from quarter 3 2017 to quarter 3 2018. Here you can see that 8.6% organic growth, by the way. The second diagram shows the quarterly variation of adjusted EBITA for 2017 and 2018. Seasonal variations and summer vacation always impact the third quarter as we can see.Slide 5, next slide, please. When we started Instalco in 2014, that means almost 5 years ago, we put a very high target for 2019 and onwards. And as the figure shows, we are on track for achieving that. Let's move that slide first.And then over to Slide 6, next slide. This slide gives an overview of order backlog. Historically, order backlog has been lower than it is at present. And right now, we're just under 100% for the yearly net sales. We won several significant orders during the quarter. For example, Ohmegi was contracted for electrical installations at the Glashuset property at Slussen in Stockholm. And also, [ here in Legalhem ] again, comprehensive project installation work at the new hospital area in Malmö.And clearly, it is continuing its electrical installation work at the major housing construction sites at [ Linghallen and ] Stockholm.Okay. Slide 7, next slide, please. And here, we have a few other examples of projects we were involved in during the quarter, and that I would like to highlight. We have several projects, where our focus has been on energy, efficiency improvements and the higher level of sustainability. One is Scania ice hockey rink facility area. JN El and OTK won a contract for comprehensive ventilation and electricity installation at the conserve energy facility.Another energy-saving project is ORAB's pipe installation work that is part of the conversion project at Stora Enso’s newspaper print mill, Hylte mill. The installation of new condensing stream turbine increases the mills level of self-sufficiency and lowers its electricity consumption.Then we change to Slide 8, that means next slide, please. And we are also proud of the positive contribution we are making to public health in many of our projects. And look at that nice picture to your left. For example, Tofta Plåt & Ventilation is involved in project planning efforts and development of [ here is an example ], which is the central meeting point through building and recreation areas in Skövde.I'm also very proud that we are participating in the major renovation and modernization of the blocks surrounding Sergels torg, which is the most central public square in Stockholm. The main area of Rörgruppen been contracted by NCC for electrical installation and plumbing works at Sergelhuset.So we will move to Slide #9. Next slide, please. Moving to Sweden, our segment Sweden. If you look more closely at operations in Sweden, we see continued trend of high demand for installation services in all our areas, and I will say the most important disciplines are electricity and heating and plumbing. Our EBITA margin for the quarter was 10%, organic growth of 6% and net sales increased by 35.7%.The latest economic outlook reported just by -- issued by [ Installations Target ], which is our trade organization confirms that the industry is growing at the rate of construction for schools and hospitals remains high and that the demand for energy efficient solutions is rising.So on the whole, the reports shows that we now are at the mature stage of the business cycle. There has been a dip in housing construction, as we talked earlier. And that difficulties persists in trooping the right expertise in installation sector, that's what the report shows.Going to Slide 10, means rest of Nordic. And for our segment and rest of Nordic, Norwegian, we think the Norwegian and Finnish markets are rather stable. For the first time in quite a while, investments are increasing in the construction market in Southwestern Norway, and that's very dependent on the -- of course, on the oil price.Net sales increased by 55.9% in the segment to SEK 279 million, with organic growth of 16.1%. And however, the EBITA margin is still low for the rest of the Nordic segment, especially in comparison with Instalco's company.Moving to Slide 11. Next slide, please. During the quarter, we pursued acquisition discussions with several skilled entrepreneurs in the installation sector. The acquisition climate is favorable and there are many attractive, well-run companies that we are in contact with and interested in acquiring. However, we are only interested in profitable companies that fit the group's strategy and can contribute to our growth.Subsequent to the end of the reporting period, we acquired Rörman. Rörman has an estimated annual sales of SEK 33 million, and MSI-EI with estimated annual sales of SEK 100 million. So with that, we have already achieved our target of SEK 600 million to SEK 800 million in acquired sales this year and several interesting company acquisitions are in the works for the fourth quarter.So going to Slide 12, next slide. As you can see, we are exceeding or on track with all our financial goals. Growth and profitability although at high levels. We will continue guiding the company towards our stated goals, and we are definitely on the right track.So you should see on Slide 13. So looking at, as we mentioned previously, the demands from clients on sustainability are increasing. And for heating and plumbing installations, energy efficiency is an area with significant market opportunities. It's gone an even more pressure issue given the abnormally warm summer we had in the Nordic countries this summer, which has caused higher environmental awareness and rising energy prices.And another interesting area is the growing demand for solar energy. Product availability, simplification of regulations and more customized products are factors that are purely and just from commercial property owners.Next slide, Slide 14. So in the summary, I can proudly conclude that Instalco has another strong quarter in high growth, high profitability and a very strong order backlog. We can see higher demand for energy efficient solutions, and we are definitely prepared for future acquisitions.And just to the last footnote please, next slide, please. It's Slide 15. On the last quarterly report, I referenced that classic Rolling Stones hit, Time Is On My Side. And now like that another one, I Can't Get No Satisfaction because that's how it is. We won't be satisfied until we reach our goal of a run rate EBITA target of SEK 450 million by 2019.And with that, I'd like to thank you all for getting in on this call. And now I'd like to take your questions.

[Operator]

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

[Stefan E. Andersson, Analyst]

A few questions. First, looking at Q4 in 2017, could you possibly maybe remind us, if there were any exceptional items in that quarter? I mean, the margin was rather high and it could obviously be some good ending of some projects we saw on that helps, so to speak. So just wondering how we should view that margin in perspective to what's upcoming in '18?

[Per Sjöstrand, Chief Executive Officer]

Do you mean a comparison between quarter 4 2017 and now?

[Stefan E. Andersson, Analyst]

Yes, exactly. If quarter 4 '17 was a normal Q4, you showed a seasonality pattern there before, and we know Q4 was very strong. So just curious, if Q4 '17 had some excellent projects where you took some profits that might not be repeated every quarter, so to speak? Or if you can see that as a normal quarter?

[Per Sjöstrand, Chief Executive Officer]

Quarter 4 is normally the best quarter when it comes to total revenue and profit and margin. So I think it's rather normal that quarter 4 is -- it has the highest figures.

[Stefan E. Andersson, Analyst]

Okay. And then when it comes to this project in just Nordics or in Norway, I guess it was, which is loss making, it's suppose to end in 2018. What do you mean by that? Do you mean has it already ended? Or is it ending by the 31st of December?

[Lotta Sjögren, Chief Financial Officer]

I can take that question. If we speak about the rest of Nordic segment, so we are not satisfied with margins as you know. And the reason was this project that you were talking about. That project is still going. But they are bad margin for the rest of the year. It was like, we don't have any margin left, but we are still going and making the end soon. And we signed those -- these projects, when we acquired the company and we had not performed as we expected. But we have a grip on it now, and we love the sectors after 2018. And by the way, we don't really had those contracts in this company in Norway. The margin for the rest of the Nordic would have been 7.9% for the whole year.

[Stefan E. Andersson, Analyst]

Perfect. That was my next question, perfect. Tax rate, maybe you've already written this in the report. I'm just curious that the tax rate is very low in the quarter, I think. What is the reason for that? Maybe it's already written somewhere, but...

[Lotta Sjögren, Chief Financial Officer]

Yes, it's -- where I'm reading about it, it's deferred tax for early years, that we have taking up in the books now a higher cost for SEK 11 million.

[Stefan E. Andersson, Analyst]

Do you have anything else -- do you still have anything else outside of the balance sheet after booking that one?

[Lotta Sjögren, Chief Financial Officer]

No, we don't.

[Stefan E. Andersson, Analyst]

Okay. Good. What else? I think that was it. I mean, unless you want to maybe elaborate a little bit more on the M&A prognosis. I mean, it was very quiet in Q3 as it normally is. And you started Q4 in a normal way, I guess. Is there hope for more deals to be closed before the year-end? Or well, you have to be...

[Lotta Sjögren, Chief Financial Officer]

Yes, there is.

[Per Sjöstrand, Chief Executive Officer]

And the situation is good we think and we have several interesting discussions going on. So definitely, we'll see more of those acquisitions in more normal way that we have in the future.

[Stefan E. Andersson, Analyst]

If you -- if I had expected some more coming in Norway and Finland, given that you might need some more scale in those countries, but I mean, this year, it's been less non-Swedish than I thought in the mix so to speak. Is -- what do you think about that? Is it easier to find deals in Sweden? Or are you already happy with the scale you have in the other regions?

[Per Sjöstrand, Chief Executive Officer]

I mean, we have been cautious in Norway, as you understand. And we always look into how to spend our money on the best way. So yes, it depends, I will say. We have no certain strategy for Finland, Norway, Sweden and say that 50% in Sweden or something like that. We see it for each company and each -- not -- a little bit up, but which region we should be in, but how to spend the money best. And there's golden opportunities in Norway and Finland as well, absolutely. Some take some longer discussions, and sometimes it goes quicker.

[Operator]

[Operator Instructions] And there are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.

[Adrian Westman]

We have received just a question from the webcast. And the first one is about the order backlog. We can see that you have gone down for the first time in 8 quarters, if this is the new trend or not?

[Lotta Sjögren, Chief Financial Officer]

We have a strong backlog of just under 100% of the group's annual sales for quite some time now. And there are some seasonal variations. And during the summer vacations as in the July and beginning of August, we don't sell many projects. So it's quite normal for our business, as a good practice and we are not worried about it.

[Adrian Westman]

And the other question was, we're seeing that for 6 quarters Instalco has increased its net sales and EBITA. What is the prognosis for future quarters?

[Lotta Sjögren, Chief Financial Officer]

Well, as you've seen in one of the slides that Per presented, we are right on track towards our run rate EBITA target of SEK 450 million by 2019. And with the current pace, I believe, we are in good shape to reach that target. And as Per also mentioned, we already achieved our target of SEK 600 million to SEK 800 million in acquired sales this year, and still we have one quarter of the year remaining. And we also have some interesting acquires in the pipe this year, as we also talked about.

[Per Sjöstrand, Chief Executive Officer]

Okay. That's all for us. Operator, do you have any other questions coming in?

[Operator]

No questions registered on the telephone lines.

[Per Sjöstrand, Chief Executive Officer]

Okay. Thank you very much. And see you next quarter. Thank you very much.

[Operator]

This now concludes the conference call. Thank you all for attending.