Instalco AB

STO:INSTAL

Earnings Call Analysis

Navigating a Challenging Market Landscape

Instalco, a leading installation group operating across Sweden, Norway, and Finland, recently reported its third-quarter results for 2024. The company operates with a decentralized model, emphasizing local service and collaboration among its 161 subsidiaries. Over the past year, Instalco has achieved a net sales figure of approximately SEK 14 billion with an order backlog of SEK 8.5 billion. However, the current market conditions have further deteriorated, particularly affecting the projects undertaken during the latter half of 2023. Despite these challenges, the company remains committed to prudent cost management and selective project engagements to ensure profitable growth.

Financial Performance Overview

In Q3, Instalco reported net sales of SEK 3.1 billion, marking a 5% decline compared to the prior year, driven largely by organic growth setbacks. Acquisitions contributed positively, accounting for a 1.5% increase. The order backlog also saw a decrease of 7.3%. The company's EBITDA for the quarter reached SEK 188 million, correlating to a margin of 6%, down from previous benchmarks, indicating the impact of a cautious approach in project selection amid unfavorable pricing dynamics.

Market Segmentation Insights

Instalco's operations in Sweden experienced a decline in net sales to SEK 2.7 billion, alongside an organic growth drop of 3%. The EBITDA margin in this segment fell to 5.5%, attributed to market weaknesses and unfavorable project completions. However, the service segment exhibited resilience, growing by 17% year-over-year, thus stabilizing overall group performance. The 'Rest of Nordic' segment also faced challenges, with net sales down to SEK 978 million, yet managing to maintain its EBITDA margin at 6.9%.

Strategic Mitigations and Forward Guidance

Instalco is currently focused on mitigating impacts from challenging market conditions through its 'Go Great' program, which supports subsidiaries in achieving greater profitability. The company anticipates that market conditions will eventually improve. Although data points are still emerging, signs of potential recovery in the construction sector in Finland are becoming evident for the first half of 2025. Instalco's proactive approach ensures that the company remains well-positioned to capture growth opportunities when the market rebounds.

Long-term Growth Outlook

Overall, Instalco is demonstrating a pragmatic approach to the current downturn, stressing the importance of adapting to local market changes while fostering a culture of profitability within its subsidiaries. CEO Robin Boheman emphasized that while the current margins may not satisfy expectations, this is not viewed as a permanent condition. The commitment to collaboration within the group and a diversified project portfolio aligns with their strategy to capitalize on future growth cycles. Instalco maintains an EBITDA margin of 7.1% over the last 12 months, despite recent pressures, and aims to sustain a stable cash conversion rate of 87%. The company’s leverages stands at 2.7x EBITDA after the quarter, but Boheman highlighted that they have significant headroom within bank covenants.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Instalco Q3 Presentation for 2024. [Operator Instructions]



Now I will hand the conference over to CEO, Robin Boheman; and CFO, Christina Kassberg. Please go ahead.

[Robin Boheman, executive]

Welcome, everyone, to this presentation of Instalco's report for the Third Quarter 2024. My name is Robin Boheman. I'm the CEO of Instalco and with me today, I have our CFO, Christina Kassberg.



Let's kick off it as usual and look into a summary of the company today. Instalco is one of the leading installation groups in the market, Sweden, Norway and Finland. As you all know, we operate in a very decentralized model, but with strict control mechanisms in place. In total, we are about 6,200 employees working every day to help facilitate the green transformation. Demand and services that we offer is supported by several strong underlying market drivers.



Some key financials for the last 12 months. We have a net sale of almost SEK 14 billion, an order backlog of roughly SEK 8.5 billion and EBITDA of SEK 993 million, meaning an EBITDA margin of 7.1% of a strong cash flow from operations of SEK 907 million, and we consist of 161 companies in the group.



Going into the quarter, some highlights from the quarter. First of all, in our numbers, you are seeing the result of how the market gradually worsened during 2023. The projects we are now delivering on were for the most part, taken during the later part of last year or beginning of this one. Although we are unable to impact the market situation, we are working proactively with profitability and mitigating efforts, such as, for example, tailored support for some specific subsidiaries.



One of the key values within Instalco is collaboration. We have, during the quarter, seen some exciting orders where several subsidiaries work together. This confirms that the multidisciplinary comprehensive solutions we offer is a winning concept.



And finally, we are seeing good progress in our start-up concepts. Our technical consultants at Intec further improve their performance compared to last year. And our newly founded automation brand Inmatiq delivers good progress with new hires, good discussions only a few months in. They have already started taking on a few new projects and also including some projects together with Instalco companies.



But now I would like to hand over to you, Christina, to take us through our financial development more in detail.

[Christina Kassberg, executive]

Thank you, Robin. I will start with a slide where we can see the development in net sales with a comparison of Q3 present and prior year as well as the development of the order backlog. On net sales, acquired growth represented 1.5% with the biggest percentage increase within rest of Nordics. Organically, the top line for the group was down 5%, a reflection of our prudent order taken given the price situation of the market. In total, net sales declined by 5% and amounted to slightly above SEK 3.1 billion.



During the quarter, the backlog decreased by 7.3% and in the end amounted to SEK 8.5 billion. We have maintained our cautious approach to order taking, prioritizing the right projects for the right customers. There is noticeable price pressure on the market, and we want to avoid getting locked into long-term, less profitable projects because of the pricing situation that we are currently facing. We want to have available capacity for when market conditions improve so that we can ensure sustainable profitable growth.



During the quarter, we have press released a few somewhat larger orders. There are still some good projects out there, and a lot of them are also taken via partnering with a set profitability and lower risk.



The service area remains an important stabilizing factor for the group. Instalco's decentralized business model and strategy of proximity to our customers has enabled us to adapt to local market changes.



For the quarter, service, which is not included in the order backlog, grew 17% when comparing the SEK 1.1 billion this Q3 with SEK 920 million last year. This means it made up 34% of sales in the quarter.



This slide shows the quarterly trend of EBITDA in both millions and margin. As usual, in Q3, we see a significant seasonality effect as the quarter is impacted by the summer vacation period and lower level of activity. This time, our EBITDA amounted to SEK 188 million, corresponding to a margin of 6%. This is lower in both margin and absolute numbers compared to the same period last year due to a number of factors. The projects we deliver on today were taken in a weaker market than the comparison period. We have talked a lot about our careful project selection given the circumstances, but we are not completely immune.



In addition to the general market weakness, we have had a number of project completions that did not go our way entirely with a few write-downs, for example, in mid and Southern Sweden. The entire industry and our customers are going through challenging times and change orders are few and far between at the moment.



Although we are unable to impact the market situation, we are working proactively with our profitability and mitigation efforts. We are keeping the focus on fostering our unique culture and promoting profitability within the group. We also provide tailored coaching and support to selected subsidiaries to help them achieve long-term success.



Now over to a slide that summarizes segment Sweden in Q3. Geographical differences in demand and pricing remain. The market is still strongest in the northern parts of the country and somewhat weaker in major metropolitan regions and Southern Sweden with significant price pressure. But for our technical consulting services, demand is improving. This is a good indication since they are early in the same cycle as our installation offering. They delivered a strong improvement compared to Q3 last year and have a high planned utilization also going forward.



Overall, in Sweden, net sales were down to SEK 2.7 billion, while organic growth was down by 3%, which is a lesser decline than in previous quarters. Acquisitions contributed with a growth of 1%. EBITDA amounted to SEK 119 million, corresponding to a margin of 5.5%. The decrease is primarily a result of the weaker market, which has a negative impact on sales and margins as well as some less favorable project completions. The order backlog decreased by 3.8%, which is a reflection of our cautious approach to order-taking in the current market environment.



And a summary for Rest of Nordic segment. The development of the market in Finland has been stable at a low level in recent quarters. Following the interest rate trajectory, there are signs that the construction industry is slowly starting the recovery phase, which should be seen during the first half of 2025.



The market in Norway remains at a relatively high level, especially around the major metropolitan regions without -- with some caution being exhibited when it comes to decisions about project starts without much change from previous quarters, though we can notice more positive signs for the future.



Segment Rest of Nordic is much smaller than segment Sweden. So even small changes have a bigger impact, causing more noticeable fluctuations from quarter to quarter. This was visible in Q3, where net sales were down to SEK 978 million, where organic growth was down by 9% and acquired growth contributed at a positive 2.6%. EBITDA was flat despite the lower top line and came in at SEK 68 million, which corresponds to an improved margin of 6.9%.



Then on to the cash generation in the quarter. In Q3, cash flow from operations amounted to SEK 119 million, same number as last year despite the lower earnings. Change in net working capital was also in line with the same period last year. Adjustment for noncash item was, however, higher, primarily due to the higher leasing depreciation. This affected earnings but does not impact cash flow.



As a result of our lower acquisition pace over the last few quarters, we have a lower outflow from those activities. In August, however, we did make one interesting smaller acquisition in Finland of company

IT-line Service Oy, which primarily serves customers in the mechanical industry. This is in line with our strategy of growing the industrial segment and expanding on the Finnish market.



Cash flow from financing activities amounted to SEK 84 million, of which the net change in loans amounted to SEK 263 million. The acquisition of non-controlling interest to SEK 92 million and amortization of lease liabilities to SEK 87 million. In operational performance, it is reassuring to see that despite the challenging market, we are reporting stable cash conversion at 87%.



Then look at our performance in relation to our financial targets. For the duration of the 10 years Instalco has existed, we have constantly performed well beyond our growth target, which is set over a business cycle. This quarter, the growth is not at 10%. And this is no surprise given the market climate and our cautious acquisition pace during the last year, but we are well positioned to capture opportunities for profitable growth when the market turns.



Our EBITDA margin came in at 6% or 7.1% for the last 12 months. The decrease is primarily attributable to the current market situation. We are not satisfied and are increasing our mitigation efforts. Cash conversion remained stable at 87% due to the high focus on working capital.



After the third quarter, our leverage came in somewhat above our target at 2.7x EBITDA. This is primarily attributable to the lower growth in earnings. During the last year, we have slowed down the acquisition tempo, which was the case during the third quarter as well. This both due to even more selective approach to M&A as well as fewer attractive targets for sale as well as the current leverage.



All in all, we continue to navigate a challenging market in the third quarter. We want to have available capacity for when market conditions improve so that we can ensure sustainable profitable growth. While many leading indicators are showing positive trends, it is still too early to say precisely when the market will shift.



By that, over to you, Robin.

[Robin Boheman, executive]

Thank you, Christina. Now going into the project highlight of the quarter. The Instalco model, as I said before, encourages collaboration with customers and among our subsidiaries. Through our close ties and broad solutions, we offer a wide variety of services. We're able to generate successful projects for our customers.



One example of that is our joint assignment for all installations at the new Gothenburg Central Station, where 8 Instalco companies are collaborating to deliver design, installation of electrical heating and plumbing, ventilation, sprinkler, and automation solutions. One of the deciding factor for winning this assignment was being able to offer an overall solution to the end customer that we also have a long and successful relationship with.



Our package of installations is very much aligned with their needs of lowering energy consumption and focus on sustainability. The order also confirms what I said before with the multidisciplinary solutions that we offer that is a winning concept.



This quarter, the theme will be a small deep dive into the units that together make up the whole of Instalco. I hope to give some flavor to the subsidiaries and the people that are being, so to say, behind the large company of Instalco that we have built over the last 10 years.



This slide, you're already probably very familiar with by now, the inverted triangle. It has been with us since the start 10 years ago. The local units are the heroes of Instalco. Synergies and best practice are achieved when subsidiaries collaborate with each other. The whole organization is supported by a small central function.



When acquiring or starting a new subsidiaries, we focus largely on the large- and medium-sized cities in Sweden, Norway, and Finland, where market is stable. The typical installation company has a small office, usually, so to say, in the outskirts or in the industrial estates on the outskirts of the community where a few administrators and project managers are based. The installers are out on projects, services almost all the time and occasionally might come by the office. The uptake area of work is usually within 1 to 2 hours away from the office. As I've stated many times before, installation is a hyper-local business in that sense.



We always have the ambition to be multidisciplinary in each location to maximize synergies and to be able to offer a good solution for the end customer as the examples I just read with Central Station, for instance.



Within the 160 companies within the group, it is hard to say exactly what is the average, but we have given it a shot here. Most Instalco companies only offer services within one discipline as a standard. They have a turnover of approximately SEK 75 million with roughly around 30% revenue coming from service. Throughout the course, this obviously varies between companies. The average project size would be maybe SEK 3 million to SEK 10 million, not including service orders, obviously. And the company is made up by roughly 30 to 40 employees. And as you can see here on the right-hand side, so an example here of a company of 30 employees would mean 1 to 2 CEO, 1 to 2 finance/administrators, 3 to 6 project managers, and 20 to 25 installers. That will be a typical company.



Here is 2 examples of companies within the group that could sort of say, be a relative cases to show this. For instance, on the left-hand side, you have APC Elinstallatören Linköping joined Instalco in 2018. APC has been active since 1993 and has 31 employees. Apart from it offering electrical installation, service, and maintenance, the company also provides project planning in power and lighting, telecommunication, and data networks as well as automated systems with a normal project size of between SEK 5 million to SEK 10 million and a turnover of around SEK 80 million per year.



On the right-hand side, Moi Rør in Kristiansand was established in 1994 and has around 40 employees. The company joined Instalco 2019, and they specialize in turnkey contracts for heating and plumbing. It also has experience in heating and cooling systems, sprinklers, and sanitation. Projects include services normally around SEK 5 million to SEK 20 million and have a service revenue of 30%.



Over 160 of these local heroes combined what is the Instalco Group. Instalco is built by team players who strive to work together. As you can see on this slide, we are organized by segments, division, and business areas. Each business area usually consists of between 10 to 20 companies and the majority are grouped geographically.



Within the business areas, we are – that's probably where most of the collaboration take place. On a group level, we'll help organize 4 to 6 business area meetings per year. We'll have 1 to 2 conferences for CEOs of all subsidiaries within Instalco and 2 former Board meetings in all subsidiaries per year. We also facilitate functional meetups, for example, financial managers get together by region twice a year. Project managers and leading installers meet with counterparties from other Instalco companies when participating in Instalco Academy.



But I think best synergies are achieved when companies contact each other directly to share knowledge and best practice when needed -- when needed they could have weekly calls to coordinate joint proposals to customers and so forth.



On the next slide, we have a great example of that. Instalco South is the area around Malmö-Helsingborg, has historically been a strong multidisciplinary cluster for Instalco. Here, we have firm presence in most of the disciplines since the beginning of Instalco's journey. The Instalco companies have worked closely together on many levels. It's very much about cooperation, learning from each other, sharing resources, and joint offers to the customer.



A recent example was the example I took before, I think it was last quarter of 4 subsidiaries, El-Pågarna, Rörläggaren, Bi-Vent, Sprinklerbolaget were jointly commissioned to carry out the installation of the newly constructed 160 apartments in the harbor of Malmö.



But don't take my word for it. And the main benefit of being part of Instalco is the sense of community and network. On this slide, you can hear some comments from a few of our subsidiaries, CFO. I won't read the entire quotes, but the essence, I would say, is that they are not alone, they're part of a network. They can take bigger projects together and they have a strong collaboration. And if you want to read more, there is more on our website or in our annual report.



That sums up this quarter theme. And getting back to Q3 and summing it up. As you all know, installation is a late cyclical business. The long-term demand continues to build up and installation will be necessary to make the green transformation happen. But short term, we are facing challenging market conditions, although many leading indicators point upwards. It is, of course, still too early to say exactly when the market will turn.



While the share of revenues amount to 34%, service remains at a high level and is a stabilizing factor for the group in more challenging times. Instalco's decentralized business model and strategy for proximity to our customers has enabled us to adapt to the local market changes.



Our profitability culture is a cornerstone for Instalco. Although the market remains challenging, we have and we know that it is precisely in these times like this, we must lay the foundation for the future growth. We are keeping the focus on fostering this culture, this unique culture of profitability promotion within the group. Through our Go Great program, we have worked proactively to spread best practice and the culture of strong profitability while offering coaching and supporting to specific subsidiaries to encourage their success.



And as I said before, multidisciplinary orders like the one I showed and also the Central Station, where we can combine eight Instalco companies to collaborate, showcase the strength of our business model. And finally, we are continuing to building the strength in numbers. As you know, we do not only add companies through acquisitions, but also through our proven start-up concepts, where we see good development during the quarter. Intec continues its positive development and Inmatiq is showcasing good momentum.



In short, we do not see the challenges of this market situation as permanent. We are preparing for the next growth cycle. When the turn comes, Instalco will be better positioned than ever to capitalize on the opportunities that lies ahead.



And with that, I would like to open up for questions.

[Operator]

[Operator Instructions] The next question comes from Karl Norén from SEB.

[Karl Norén, analyst]

Yes, good morning, Robin and Christina. A couple of questions from my side. If we start off here in Sweden and the margin, which I think surprised us a bit here. I was just wondering, sales seems to be quite okay, but we know pricing and it's quite tough out there. So just you mentioned some write-downs here in the quarter. Just wondering if you can specify approximately how big those were and if you expect similar amounts in the coming quarter as well? Or it was isolated to Q3?

[Robin Boheman, executive]

I think there were no write-downs that are of specific, so to say, dignity. Like Christina mentioned, there are some tougher environment at the moment, meaning that when we finalize a few of the projects, we're not able to get out the margin we anticipated fully. That especially comes from, so to say, not getting the additional work we typically expect and we are also not maybe getting fully paid for that additional work as well. So I don't think there are any specific items that we can sort of say, push on in that sense. It's across the board, small 100,000 here and there in a market like this. This unfortunately contributes to a not great margin in the quarter.

[Karl Norén, analyst]

Yes. Understood. So I guess then that in the near term, we should not expect margin maybe to bounce back in Sweden, given that, I guess, the orders you're taking in right now is also quite not low margin, but in a weaker market, so to say, as you mentioned in the results.

[Robin Boheman, executive]

Like Christina mentioned before -- and I said as well, we are trying to mitigate this. We are obviously working on this. I don't think that Sweden is satisfied with the market or the margin in this quarter. However, as I said, long term, we don't see this as a permanent situation. We see that we will bounce back, whether it's in the coming quarters or not, it's very hard to say for the sort of say near future where this will take us.

[Karl Norén, analyst]

Yes. Understood. Then just a question on the geographical presence of Instalco. Is it possible to confirm how much of Instalco is like in Stockholm and South? How much of sales in Sweden would you say are like the larger cities and in the Southern parts of Sweden?

[Robin Boheman, executive]

Just give me one second to think, and I will come back to a guesstimate later. I will take the next question, and I will write -- I'll try to calculate on paper here in the meanwhile.

[Karl Norén, analyst]

Yes. My last question was mainly on the Rest of the Nordics. I mean you're doing a quite good margin there, I would say, given the tough market environment. I'm just wondering if you, are you seeing like what -- maybe what I'm wondering is like what is driving the margin improvement given that the market seems so quite sour. I mean, organic sales, I think, was down 9%. So what would you say is the difference there to Sweden, if you get my question?

[Robin Boheman, executive]

Yes. I think the main reason is actually I mean, we have been talking about Rest of Nordics for quite some while, as you know, and many of you that have listened to our calls and followed us the last 2 or 3 years. Rest of Nordic has been somewhat challenging for us. And we have been working very strictly on cost in these countries. And I think that is what we're seeing at the moment that is paying out. So we have been more prudent with costs. That's what affects the margin in the sense.



So market is not -- definitely not better in Finland or Norway in that sense, but especially Finland has been very prudent on cost, and that is helping us.



And I will come back to your question. Top of my head, I would say that Stockholm is around 10% to 15% and South is about 8% to 12%.

[Operator]

The next question comes from Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

Just a question whether you can specify or highlight any particular mitigating actions that you're taking to offset what seems to be a price pressure here quite recently? And secondly, also, is there any particular reasons for the high depreciation of fixed assets in the quarter? I think it was up sequentially SEK 10 million, SEK 15 million or so. Just to understand that better.

[Robin Boheman, executive]

I'll take the first and you take the second, Christina. So mitigation action is basically, we have a focused -- so to say, most of our attention on the -- from the resources we have in the team on helping out the underperforming subsidiaries. Mitigation actions is the Go Great program, meaning that we help, so to say, in that sense, our companies with, so to say, combined efforts of trying to find why they're not profitable and also typical, so to say, margin improving actions.



It can be cutting costs, looking into contracts, looking into product efficiency, et cetera, et cetera, within the group. In short term, we can obviously try to cut some cost. That is the quickest way. But overall, we're also trying to improve these subsidiaries for the next, so to say, business cycle where we see growth. So it's a combination of trying to make them ready for what's coming, but also trying to mitigate costs in the short term. And that could be everything from, so to say, downsizing the offices, making sure we don't have unutilized cars, looking into all types of costs within, so to say, the local offices as well.

[Christina Kassberg, executive]

Yes. And then you also had the question about the difference in the higher depreciation. So maybe you asked for the delta between EBITDA versus EBITA. And depreciation and amortization of property plants and equipment and also intangible assets amounted to SEK 413 million and of that SEK 293 million was depreciation of PPE. And the higher depreciation is, I would say, more or less attributable to accounting routines of PPE or lease contracts, which have been a bigger focus for us this year.

[Johan Dahl, analyst]

Okay. So it's a step-up in lease contract depreciation in Q3 versus previous quarters?

[Christina Kassberg, executive]

Yes.

[Robin Boheman, executive]

Correct.

[Johan Dahl, analyst]

All right. Just finally, is there any -- as you look at the delta in profitability in Sweden, is the delta, i.e., the deterioration, is it similar for the service in contracting business? Or is it more focused on the contracting business?

[Robin Boheman, executive]

Sorry, take that one more time.

[Johan Dahl, analyst]

The deterioration in profitability in Sweden, which we see recently, is that equally distributed for service business and contracting? Or is it more contracting?

[Robin Boheman, executive]

It's more on the contracting side. As I mentioned and Christina also mentioned that the depreciation that we see is more or less that we have finalized a few projects that didn't go according to plan, and we're not seeing as much additional work as we typically see in a normal project.

[Operator]

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

[Unknown Executive]

We do have some written questions or one written question, and that is how much business do you have with Northvolt? And have you seen any effects from the bankruptcy of expansion?

[Robin Boheman, executive]

I mean we have had quite a substantial business volume at Northvolt. However, we don't have it at the moment. I think you have to remember that Northvolt consists of quite a lot of different subsidiaries and companies on different locations. And as you said about the bankruptcy regarding Northvolt expansion, that also part where we had very limited business. We had hoped to get some business in that, but it hasn't really started. So I think it was not sufficient. But yes, we lost maybe a few million SEK there. However, it was not a substantial amount. Obviously, it's never fun to not get paid. However, so to say, the exposure at the moment is very limited at the time.

[Unknown Executive]

Okay. And then we have one more question from the call.

[Operator]

The next question comes from Elvin Rolder from Carnegie.

[Johan Sundén, analyst]

Elvin here from Carnegie, covering a bit for Johan. I just have a couple of follow-up questions. You mentioned the project write-downs and that they were a bit here and there. Could you give some flavor if there's any specific like regions or sectors where you're writing down more? Or is it pretty broad-based, so to say?

[Robin Boheman, executive]

I would say its -- it is quite broad. However, it is mainly, I would say focusing maybe a wrong word, but maybe there, so to say, more in the South and mid of Sweden. Yes. And obviously, what I just mentioned with Northvolt, a smaller part was in this expansion part of the business. But otherwise, I would say it's more in the Southern parts of Sweden and mid where we see that a few projects we were hoping to do better on did not fully go all the way for us now that we're starting to close them and finalizing them, so to say.

[Johan Sundén, analyst]

Perfect. And then just 2 questions more. I mean, considering that the net debt to EBITDA was like 2.7x here by the end of the quarter. May I ask where is your covenant levels with your banks? Is it the standard like 3.5 or how much headroom do you have there?

[Robin Boheman, executive]

No, we have significant headroom still on the bank covenants.

[Johan Sundén, analyst]

Okay. Perfect. And then just a final question regarding the contingent considerations you have left. Could you give some flavor or comments about what terms you have in order for those to be paid out?

[Robin Boheman, executive]

It is obviously company to company on this. So we will probably pay out a few, but also overall, the whole group does not perform, so to say, according to the plan maybe on when they sold their company. So we try to estimate as good as we can. However, we see that, so to say, the total amount is most likely to become less. However, we try to estimate and our best guess is what is in the report.

[Operator]

We have no further questions.

[Robin Boheman, executive]

Okay. Thank you, everyone, for listening in, and thank you for the questions. And I hope you have a nice day, everyone, and we are getting back to work now. Thank you very much.