Instalco AB

STO:INSTAL

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to Instalco's Q3 Presentation 2022. [Operator Instructions] I will now handover the word to CEO, Robin Boheman. Please begin your meeting.

[Robin Boheman, executive]

Hello. Welcome, everyone, to Instalco's Q3 Presentation 2022. My name is Robin Boheman, and I'm the CEO of Instalco. And with me today, I have my CFO, Christina Kassberg; and also my Head of IR, Fredrik Trahn, that will present today.

Just to start off real quickly, Instalco, most of you know us, but we're a leading installation company within heating and plumbing, electricity, ventilation, cooling, and we also have a segment regarding industry and technical consultants. We are a highly decentralized structure, supported by a smaller central organization. We run this company through our 120 subsidiaries that are highly specialized local companies. We have roughly 5,500 employees in the Nordics. Our motto is strong profitability with high margins over time. So that was a brief of what Instalco is.

Looking at some key financials for the last 12 months, we have a net sales of around SEK 11 billion, an order backlog at the moment of SEK 8.1 billion. EBITA wise, we were at SEK 850 million, which interprets over to an EBITA margin of 7.6%. We have a cash flow of SEK 760 million. And we have, in the last 12 months, been able to acquire annual sales of SEK 1.75 billion in turnover. So that's basically Instalco in short.

Going into Q3 highlights, we had net sales of almost SEK 2.8 billion, which is very high sales growth of almost -- a little bit above 40%, which I think is the highest number we have delivered. This is also fueled by the organic growth of 7.8%. We managed, EBITA wise, to deliver SEK 201 million in EBITA with an EBITA margin of 7.2%.

And despite somewhat challenging market situation, we deliver strong profitability and a solid EBITA level. We are seeing some slight lower margins than maybe what was hoped for, primarily due to somewhat higher material prices and the challenging market situation in Finland. However, we are able to deliver 7.2%, which is also the highest margin in Q3 compared to all our competitors.

We were able to deliver a new credit agreement. We'll come back to that a little bit later on. We had a strong performance in Sweden. Christina will touch upon that a little bit later. I will come back -- also managed to also increase our presence in Norway with some strong acquisitions. And we can see that demand for energy efficient solutions is still high.

So that was basically the highlights of Q3. And now I'll handover to you, Christina, to go through the numbers a little bit more in detail.

[Christina Kassberg, executive]

Thank you, Robin. Net sales development. In this slide, we see the growth in net sales with the comparison of Q3 present and prior year. Net sales were high during the quarter. They increased by 40.2% compared to last year and amounted to SEK 2.8 billion. Our growth is driven by the dedicated entrepreneurship in our subsidiaries and our high rate of acquisitions. We are satisfied with our organic growth rate, which was 7.8%. Acquired growth is impressive at just over 30%, thanks to our successful M&A efforts.

In this slide, we see the quarterly trend of EBITA in both millions and margin. We continue to deliver a high and stable profitability despite the market situation of rising inflation and high material prices. EBITA increased in absolute numbers by 17.6% and amounted to SEK 201 million, which corresponds to a margin of 7.2%. Historically, the third quarter is weaker, which has proven true this year as well. The main reason is the effect from summer vacation period.

This slide shows the quarterly progression of the order backlog. There is a strong underlying demand for industry services, and there is a growing interest and demand for energy-efficient and resource-saving installation services. Our order backlog grew by 25.6% and is at a record high level in absolute numbers once again this quarter. In total, SEK 8.2 billion, which corresponds to more than 70% of annual sales.

This is a level we are quite comfortable with, and it offers us a good degree of flexibility when entering into new agreements. Our companies, they continue winning new business with both individually and in partnering projects, where several Instalco companies collaborate. Organically, the order backlog grew by 3.3%, and the order backlog of acquired companies contributed with growth of 20.9%, which is a clear confirmation of our strong acquisition growth.

Now here, over to the slide that summarize Segment Sweden in Q3. Segment Sweden has managed the challenging market very successfully with a high profitability and strong growth in absolute numbers during the quarter. The overall market situation is good even if the supply of installation project decreased somewhat. New construction and renovation in the private and public sector remains high and at a high level.

For new production, we have noticed somewhat of a dampening effect due to uncertainty about the interest rate situation. Construction investments in the industry remain at a high level, particularly in Northern Sweden, where major investment will be made in the years ahead. Overall, net sales increased by 35.4% to SEK 2.1 billion. Organic growth amounted to 10.3% and acquired growth amounted to 25.1%. EBITA was SEK 172 million and the margin was 8.2%.

And now for a summary of the rest of Nordics segment. Rest of Nordic is overall delivering a strong trend in rising sales, EBITA and order backlog. The market in Norway remains stable in terms of both construction and renovation, and the demand for energy efficient installations is increasing in line with rising energy prices. The market in Finland fell during the pandemic and has still not fully recovered.

In rest of Nordic, EBITA margin is still below the side level, but we have a positive trend, primarily explained by a stabilized market in Norway and the positive earnings effect from acquired companies. Overall, net sales increased by 57.3% to SEK 686 million. Organic growth fell by 0.9%, and the decline is primarily attributable to some of our Finnish companies. Acquired growth amounted to 49.2%. EBITA was SEK 29 million, and the margin was 4.3%.

In this slide, we summarized our performance in relation to our financial targets. First, a comment on capital structure. It is at a higher level compared with historical numbers, but well in line with our acquisition strategy. The pace of acquisitions is strong, which is reflected in the growth we are delivering. Over the short term, the increasing pace of acquisitions results in a somewhat higher level of indebtedness, together with the decision of not using equity as payment method for our recent acquisitions.

We are comfortable with the rate, and we are maintaining both a sound level of indebtedness and a strong balance sheet. All in all, over a business cycle, we are confident that we are delivering in line with our financial targets and the Instalco model offers us the flexibility we need to cope with changing market conditions. So by that, Robin, I hand it back over to you again.

[Robin Boheman, executive]

Thank you. So if we look into -- as I mentioned before, we entered into new credit agreement together with Danske Bank, SEB and Svensk Exportkredit, totaling an amount of SEK 3.4 billion. As mentioned by Christina, this is also to help out with the increasing M&A activities that we have. So this also gives us the opportunity to continue our growth strategy by acquiring the best-in-class companies. And it also gives us some flexibility that we now have 3 banks instead of 1. So we're happy to be able to announce this to the market as well.

If we go in a little bit and talk about our projects during the quarter, I think it is a nice example to take. This quarter is, for instance, the new assignment for LKAB. 2 Instalco companies, MRM Mining and EPS Sweden, engaged in by the mining company, LKAB, for new construction of 2 properties in the industrial area where the work is also on plummeting but also on the construction and also in the connection of heating and plumbing, industry heating in their existing system. So this is just increasing our partnership together with LKAB, so we're happy to continue to work with them in the future as well. Project is roughly about SEK 70 million to SEK 80 million.

During the quarter, we, of course, also made some acquisitions. Very pleased to see that we have been able to clear some white spots on the map and are now represented in Ornskoldsvik and also Western Varmland. In Norway, we're finally able to become multidisciplinary in Bergen, which is something we're working on for quite a while and also in -- opened also in Lillehammer, which is nice that we now can deliver a multidisciplinary offer to our customers in those regions.

And that's also one of the reasons. Instalco never acquires a company solely for the sake of acquisition. We rather see ourselves as kind of a safe harbor for quality companies, and we are selective on which one we choose, and we choose them carefully. We want new companies to join the group and thrive and develop together with our existing companies.

So the companies that we acquire are led by entrepreneurs who generally decide to be part of Instalco and not just wanting to sell their company. They want to become a part of something larger. And we can also look forward to some new acquisitions in the coming quarter because the pipeline continues to look strong.

Then I will go over to the theme of this quarter and maybe not such shock that this is the theme for this quarter. The soaring energy prices has been hot topic during the quarter, and it feels very meaningful to be part of a company that can actually help us in this situation, and we can do it today. So we can offer a different -- we can make a difference already today.

Each day, Instalco suggests new installation design, saving -- energy savings solutions in all sorts of properties all around the Nordic region. And installing a modern system that is energy efficient is how we can contribute to a better society. And energy efficiency, I think, is the key to lowering your energy bill to be honest.

There is a large and growing demand for this energy efficient and resource savings installation. And Instalco is really well positioned in society to make this transformation to a greener economy. And I think it's also to our companies out there that are doing a tremendous job in helping to make this shift possible.

So just to give some examples, we're always striving to help our customers lowering their environmental impact and reducing the energy consumption. Not only do we install, but we also design new systems and help our customers with their needs. It's all the way from installing solar panels, changing to LED lights, charging stations, geothermical heating solutions, property automation, water and air cleaning systems and so forth. So we have a real big offering to our customers in this area.

I'm giving some examples of this. Here is some products. I myself actually have been visiting lately. For instance, in Stockholm, we did an FTX installation for 2 properties where we were able to reduce energy consumption by 50%. And this is just by utilizing the heat that we have in the buildings and reusing it basically. So there are a lot of things that you can do in apartments, in offices and so forth with not too big of an investment.

Another project is, for instance, the geothermical heating project that VVS Kraft installed in apartments in Stockholm, Central Stockholm, also reducing energy consumption by 40%. And last but not least, another example, solar panels where our company, Vallacom, in Linkoping installed solar panels for 650 apartments in Linkoping. So basically 5,200 square meters of roof that we now have been using to produce electricity for heating the apartments, but also for charging electrical cars and so forth.

And these are just some examples. This is what Instalco does every day. And we're running a lot of projects in this area at the moment. And as you can see, there is a wide spread of different things that we can do to help society and help our customers reduce the energy consumptions and by that, also reducing the energy bill. Because this is what we want to do. Instalco also stands for sustainable installation.

And I don't want to become too political here today. But the political environment at the moment, they're discussing like nuclear power plants or wind. And I think we can all agree on that. We will probably need more electricity going forward to make this change that we want to do. But all those initiatives that are discussed now, they are 10, 15 years ahead. We need action now. And I think we can deliver that. We can help our customers and society now. We can help them with energy saving systems. We can help them by reducing the use. We can help them by steering demand to times when energy supply is high, for instance, helping them with storage capacities and so forth. So we can even out the use -- the consumption during a day or a month, et cetera. So we can actually make a difference today, and that makes me very proud to be part of a company like that.

That sums up the theme for this quarter. And I will go back a little bit just to sum up the Q3 presentation. I think we made a solid performance in a somewhat uncertain macro environment. I mean, we are showing once again that we're dealing with higher prices on material and we can cope with that. We have a strong acquisition pipeline and we have done some really good acquisitions, and we have a really high order backlog. So I feel confident that the coming quarters, we can continue to do our work, and we can continue to grow our company and to make a better society as well.

So with that, I'd like to conclude this presentation, and I will open up for any questions.

[Operator]

[Operator Instructions] And our first question comes from Karl Bokvist from ABG.

[Karl Bokvist, analyst]

My first one is just on one of the topics you have on the summary slide, of course. But the price versus cost, a big topic the entire year given that it seems at least that this headwind maybe has intensified further. I would just want to understand or hear from you how you view it. Was it mainly that price increases made now in the early fall were not enough or is it now more perhaps of calculations on projects leading to cost overruns or how should one think about this prices versus cost?

[Robin Boheman, executive]

Yes. I think the overall things here that we're constantly coping with increased prices. A lot of projects are, of course, handled on a daily basis where projects are running out and then we can kind of quote for new projects. But of course, in the order book, we have some projects that have taken a year in advance and now are being produced. And those have a harder time delivering the margin that we want when you have a fixed price.

When it comes to how this will spend -- how kind of this will look forward, we constantly roll out these projects out of the order backlog and fill on with new projects every day. And those new projects that we take, they are, of course, taken on the new price level. But of course, there is a problematic situation in the market today where you have fixed-price projects and you've taken them to a different price level. So, I mean, this is something that we will have to live with. And as I've said before in different Q presentations, this is something that we will be coping with for a while now. But as I said, we continue to deliver. We delivered 7.2% margin this quarter even with this happening to us, so.

[Karl Bokvist, analyst]

And then as you mentioned and also from looking at some of the larger competitors out there with reports, they all convey strong backlog development. So obviously positive for demand there, but it seems like all of you have a significant working capital buildup here in Q3. Could you just help us understand if it's regular seasonality in Q3 or if you think that it's maybe something particularly related to Q3 that it seems like all of your larger players in the industry have had to deal with?

[Robin Boheman, executive]

Yes, I think you've basically answered the question already. I think it is a little bit about the quarter. And as you looked at maybe our Q3 last year, we had the same situation. And looking at Q3 the year before that, we also had a similar buildup. On our side, the overall working capital is also building up a little bit slightly more. And if you look -- and the reason for that is basically also that we have moved into a little bit also working more and more for the industry, which we believe in the long run is a good move to also, so to say, be standing on more legs when it comes to your customer base. However, to be honest, the industry, they are not as good as paying and not as fast as paying as maybe construction companies in that sense. So you will see a little bit buildup in working capital due to the shift in project, what we call it, project mix.

[Karl Bokvist, analyst]

My final one is just on the M&A side. Very impressive margin of the acquired operations, it seems. So implicitly 20-plus percent EBIT and even higher for the quarter specifically. So I'm just wondering here, is there anything specific related to Q3 or is it -- should we extrapolate this high margin of acquired operations also for the remainder of the year?

[Robin Boheman, executive]

Yes, I think you have to look at it a little bit more in the sense that we have acquired a few really profitable companies. And the Instalco model works in the same. We will typically look at the company over a longer period of time. So I think if you just look at a specific year, the year that they sell the company, there is always the possibility that they will say, dress the bride a little bit, and you see a little bit higher margins coming into Instalco. The last year, that is very typical, and we've seen it in so many of our 130 acquisitions that we've done.

So we are not expecting -- of course, we're hoping to keep that margin. Otherwise -- of course, we hope for it. But to be realistic, a few of these are maybe on a too high level to be continuously on this level for longer period of time.

[Operator]

The next question comes from Markus Almerud from Erik Penser Bank.

[Markus Almerud, analyst]

Markus Almerud here from Penser Bank. I'd like to dig in a little bit more follow-up on the previous question about the price versus cost. So we have a fixed price contract which we have kind of taken in the previous cost environment. And I think it was a couple of quarters ago since we spoke about this and then you had a lot of rolling over. So if you could just explain how much of those are left? Is it the same project that were taken back then or is it a new kind of phase of projects which also needs to be phased out? So if you could just explain a little bit and then kind of bridge them for us.

[Robin Boheman, executive]

I think it's a little bit of a combination of both. You will start the project, then you see that the -- you take -- how it works is basically you calculate your projects according to the price that is today. You, of course, expect maybe some price increases so forth. So you have a little bit of a, maybe a little bit headroom depending on the competition. Then you go into the project, and then you see that, once I start the project, the price is not really the same. So you try to then purchase as much as you can to a cheaper price. Sometimes you succeed, sometimes you don't, and you have to pay the higher price.

And what you're seeing now is also that we constantly are rolling out these projects. And depending on where they are, if it's 25% of the project is already done, of course, if we know that we're going to make a loss, we take the loss immediately and calculate for it. But it's also according to once the projects, the further it goes, the more you know about the projects. So in some projects, we will take the write-off immediately if we can see it. But for some projects, it's hard to see what's going to happen a year from now. And I think a few of these are projects that we already had taken a little bit of a hit on, that we continue to take a little bit of hit on in the sense. And there's also some projects that have been taken a year ago, for instance, at that price and now we're starting. And now that they're starting, we're seeing that the calculation or the estimates that we had, we cannot kind of calculate with the same profit in these projects. And then we have to accordingly take down the profit in that sense. So it's a combination of both.

[Markus Almerud, analyst]

And because -- if you look at pricing and when you see a big movement, there's been a couple of ways. There's continuous price increases, but -- in prices for you. But there's been a couple of big moves and then you compensate for those. If you look at your order backlog, how much is left of these projects which you were taking at lower prices? And when should we expect for this kind of effect to fade out?

[Robin Boheman, executive]

A tough question there, Markus. Sorry, but we don't have an exact. We're running 6,000 projects at the moment. And to recalculate 6,000 projects is too much work, to be honest. And so we can only estimate and that is what I tried to do. I mean, we are in those projects that we are, so we cannot kind of skip them. I mean, for us to kind of recalculate all those projects, it's not worthwhile to be honest.

We need to focus on instead trying to do better purchasing. We need to look at timetables. We need to work on how many hours we use for projects. We need to focus on the operations instead. So it's very hard for me to comment on how many percentage or how much it is and how much this will affect in going forward. The only thing that I can say is that we still have a few projects left. It will affect us. Unfortunately, due to inflation, we haven't seen the kind of price drop in material that we were hoping for. We were hoping for that -- now, that raw materials start to come down that also prices would come down. Instead, price have kept on this higher level and also even in some cases, increased a little bit more due to that transportation has gone up, electricity has gone up. So unfortunately, we haven't seen the price drop that I think the whole industry, installation industry were hoping for.

[Markus Almerud, analyst]

But you would still characterize your -- the price movement, the in price movement that you have for the cost to be stable rather than slightly up overall on average?

[Robin Boheman, executive]

Sorry, Markus, I didn't get that question. Once again.

[Markus Almerud, analyst]

So are prices -- so your cost or your input cost prices, are they stable or would you say that they're a little up, a little down overall on average?

[Robin Boheman, executive]

They're a little up, I would say.

[Markus Almerud, analyst]

Would you characterize them as stable? A little up? Okay?

[Robin Boheman, executive]

Yes. But it's still not -- so the fluctuation that we saw a year ago where prices was fluctuating very much. Now we see a more stable in that sense. We see a more stable -- it's easier to calculate, but they are still not kind of flat as they used to be.

[Markus Almerud, analyst]

So easier to manage?

[Robin Boheman, executive]

It's easier to manage now than a year ago, yes.

[Markus Almerud, analyst]

My second question is on the market. So you said that the market overall is fairly okay, but you see less supply of projects. And then you see a bit of weakness in the consumer market. I lost the word, but you see what I mean, in the [Foreign Language].

[Robin Boheman, executive]

Yes. Okay. I understand. Housing?

[Markus Almerud, analyst]

Yes, housing. But at the same time, your organic growth is pretty good. So are you still not affected by this or you're gaining market share? Or just give us some color on the market and what you're seeing and what you're seeing for your -- for the installation project overall coming in?

[Robin Boheman, executive]

I think, yes. I'll just try to break down the questions a little bit, so. I think the one thing that -- I think the biggest effect has been on the housing side that we have seen in short term. Like, we see some projects stopping -- not stopping, but not starting basically. Luckily, in the Nordics, it is the way that if a project has started, we will finalize it. It's not like in some parts of Europe where you kind of start the project and then you don't finish it. That's not the case in Nordics at least.

So once we have started the projects and the builder has started building, they will finalize it and they need our help. So in that sense, we are late cycled. And when it comes to kind of houses and the new builds, that's a very small part of our overall portfolio of offerings. So we have been able to kind of move that over to energy efficiency projects and so forth instead.

So I think that we have not been such affected on top line. But like I said, margin-wise, we have been a little bit affected on, kind of say these fixed-price projects and that we also see that the prices overall due to inflation and so forth. And there is some price pressure in that sense. But this is something that we are used to coping with. And as I said, this is just a proof. This 7.2% that we deliver is just the proof that we still are best-in-class when it comes to this, and we will continue to be that.

[Markus Almerud, analyst]

Do you think you're gaining market share? Or do you feel that you're gaining market share?

[Robin Boheman, executive]

We are absolutely gaining market share. We can just look at the number of employees that we have that is increasing.

[Operator]

The next question comes from Karl Bokvist from ABG.

[Karl Bokvist, analyst]

Just the first one on more technical, perhaps more directed towards the financial side. The revaluations within the net financial line, is that related to interest bank or how we would call it earn-out considerations? And if they are, shouldn't they be included in above the EBIT line? Or do they relate to other financial instruments?

[Christina Kassberg, executive]

Actually, it's a combination. First of all, mainly, it's an outcome from the weaker Swedish krona compared with euro and the Norwegian krone. And it's mainly from our debt actually. But of course, we'll also have effect from earn-outs that not has been paid out then, of course, because it's a valuation when it comes to the closing of the books at the end of the period.

[Karl Bokvist, analyst]

And then more on operational one. You mentioned that technical consulting sees strong demand. Correct me if I'm wrong here, but it seems like TC is now on a kind of SEK 200 million rolling. It would be interesting to hear roughly what kind of run rate you are in terms of employees and how this is progressing. We've talked about this before, but profitability and cost.

[Robin Boheman, executive]

Sure. So like we said before, we had a really high growth in this segment the last, I would say, last year, basically, we had a really big increase and also in the beginning of this year. We are now consolidating that a little bit. We are roughly around 300 technical consultants. Today, I think we reached 300 recently. And as I've said before, the companies that have run 12, 15 months, they are profitable and the ones that have shorter, so to say -- that has not existed longer or shorter periods, they are not making money. And this is all about utilization. So once you get utilization up and you kind of get your base up, they turn profitable quite quickly. But there is a lot of costs involved in starting a company and also there's a lot of cost in paying salaries for someone that has very low utilization rate.

So this is a little bit like a hotel or a consultancy business in that sense. Like, if you can fill your occupancy to a certain percentage, then everything above that is profitability. And that's a little bit the same where we are with the technical consultants that we don't have enough occupancy at the moment to be really profitable. But we're getting there. Small steps. Every month, we're coming closer to where we want to be, but we're -- it's still costing us a bit of money on the last row, so to say.

[Karl Bokvist, analyst]

So yes, that was just a follow-up really. You feel that the comments you've made before and also now with if they exist -- if they have existed or been within the firm for more than 12 months, they are now at the utilization where they contribute to profits?

[Robin Boheman, executive]

Yes. But they're not able to contribute so much so that they pay for the ones that are, so to say, new.

[Operator]

There are no more questions from the telephone conference. I hand over the word back to the speakers.

[Fredrik Trahn, executive]

We have one question from the webcast. Is it possible to comment on how large the price effect is on organic growth? Can you -- is it possible to comment on that or...

[Robin Boheman, executive]

No. Like I said, we have 6,000 projects running at the moment. So I think recalculating all that to calculate how much is price increase is, to be honest, I don't think it is valuable time to spend on doing that. What we can say is that we see that, as I mentioned before, number of employees in existing companies have risen a little bit. So that should mean that it's not only 100% price increases. That is actually some real organic growth in it as well. But how much is unfortunately impossible to calculate.

Okay. If there was no additional questions...

[Fredrik Trahn, executive]

No further questions from what I can see.

[Robin Boheman, executive]

Okay. Then we say thank you very much for listening to us today, and wish you great day, and see you out there. Thank you very much.

[Fredrik Trahn, executive]

Thank you.

[Christina Kassberg, executive]

Thank you.