Instalco AB

STO:INSTAL

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, welcome to the Instalco Q4 2017 Report. Today, I'm pleased to present our host, Adrian Westman, Investor Relations; and our 2 main speakers, who will be CEO, Per Sjöstrand; and CFO, Lotta Sjögren. [Operator Instructions] Speakers, please begin.

[Per Sjöstrand, Chief Executive Officer]

Hi, everyone. Welcome to our presentation of Instalco's Year-end Report for 2017. Apart from myself, as you heard, I also have our CFO, Lotta Sjögren with me. Starting with Slide 2. As you, hopefully, know by now, Instalco is a leading multidisciplinary technical installation company active in the Nordic region. We started the business in 2014 by merging 5 companies, and today, 4 year later, we are more than 40 companies working together in the group. 2017 was a successful year for us, as you can see in the numbers, we are well on the way towards our long-term targets. Net sales have surpassed the SEK 3 billion and over the year, we have acquired more than SEK 1 billion in sales. So let's move to Slide 3 to get some more flavor of the year. We have had a high acquisition pace both before and after the IPO, which took place in May. We used to say that we make 3 types of acquisitions: strategic acquisitions by targeting geographical growth areas, optimistic ones by selecting well-managed companies in interesting regions, and also companies that are great add-on to our existing operations.During every year, we have focused on acquiring companies that are active in the electrical discipline, where we see a somewhat higher profitability right now. The EBITA levels for a full year exceeds our long-term target of 8%, and the increase in the order backlog is something that I'm very, very happy with. Turning to Slide 4 and some highlights from the fourth quarter. During the period, we have focused on profitability over volume, as you can see. We believe it's important to make all companies in the group part of this drive to increase margins. And we are also being successful in carrying out risk-minimizing measures.And we build this primarily by only accepting project types that we are familiar with, with well-known customers and comprehensive follow-up activities. Our model, and our focus on midsize projects support us in this work. So Lotta Sjögren, take over.

[Lotta Sjögren, Chief Financial Officer]

Moving to Slide 5 on the group net sale and EBITA development. As you can see in the right-hand chart, we are following the normal trend with the quarter 4, but it's the strongest of the year followed by the second quarter. However, we have improved the margin significantly. To understand the net sales development, let's move to Slide 6, where you can see an overview of the organic growth in different companies for the full year. As we mentioned the organic growth, the comparison suffers from the fact that we only mentioned 16 of our 8 -- 38 units in the basis of calculation. As we are now moving into 2018, the number of units will increase. That provide more stability over time. Extraordinary project in Q4 2016 was our assignment of the new headquarters of SEB outside of Stockholm. And if you exclude the -- organic growth would have been 1.4% for the group as a whole for the full year. Back to Per.

[Per Sjöstrand, Chief Executive Officer]

Okay. Moving to Slide #7, where you can see the development for the order backlog, which was very strong in the quarter. The growth indicates a favorable market environment and increased internal efficiency at the units. At Slide 8, you can see 2 examples of new projects won during the fourth quarter. The first one -- both, as I said, both projects are good examples of the Instalco model, where several companies from the group can complement each other and work together to simplify for the customers. The first project is -- shown is ESS in Lund, which is a multidisciplinary research facility based on the world's most powerful pulsed neutron source. Our companies Rörläggaren and ORAB participated already in the first installation phase. And they now have been -- they are interested to continue their works during the second phase, which is expected to be completed in 2020.The second project that I would like to highlight is the long-awaited police station in Rinkeby outside Stockholm, where Rörgruppen and Ohmegi will work together. This project is of high importance for the people and society of Rinkeby and adds to the already large number of projects where various Instalco companies participate to create value to the benefit of the general public. Then we are more and more involved in that type of projects as also did say. Moving on to Slide 9 and the segment development in the quarter. In Sweden, you can see how the organic growth is impact by the quite low number of competitive units. This is, however, not to concern, and I'm very satisfied with the strong margin and order backlog development. As we mentioned already in the last report, Instalco has limited exposure to the housing market. We have so far not seen any significant change in demand related to new construction in Stockholm or Oslo during the quarter. Slide 10, the same for the rest of the Nordics, with a low number of comparable units, but with highly encouraging EBITA margin. Nordics remained stable, and we are happy with the order backlog increase, of course. Slide 11. You can see an overview of all acquisition slide during 2017 divided in before and after the IPO. And I will add that, if there were any concerns, if it would be possible to continue our acquisition strategy in a public environment, I think the chart speaks for itself. Moving to Slide 12 and 2 examples of companies acquired during the quarter. First, we have Elkontakt, a highly successful company founded in 1999, which operates -- and we operations to 3 of our 4 business area in Sweden. The acquisition follows the strategy to grow with highly specialized units. And I think that Elkontakt's expertise in logistics centers is very exciting. And we have the Kannosto companies, which are 2 companies with operations in the surrounding area. Tampere in Finland, which is the new Lund facility Instalco. And the companies have been in business since 1954 and 1991. These acquisitions are in line with our growth ambitions in Finland as well as our strategy to buy companies with solid financials and strong local connections.As for all our acquisitions, the local companies with mature leadership and service, they're going to continue developing their business. Hence the founders of both Elkontakt and Kannosto will remain in the companies. Lotta, you have...

[Lotta Sjögren, Chief Financial Officer]

Moving to Slide 5 and the group's net sales and -- oh Slide 13, sorry.You can see the description of our financial targets and how we are progressing towards them. As you can see, despite this year's outcome of organic growth of negative 1.7%, we have had an average annual organic growth of 16% since inception. This is above our long-term target of 5%. We have surpassed the margin target, and we have -- despite our many acquisitions, our capital structure looks very satisfying. We also have the -- with the cash conversion of 93% for 2017, which is close to the target of 100%. Our dividend policy is 30% of net profit and the board has proposed a dividend in line with it. All in all, we are well on track towards targets, and the margin is particularly encouraging.Per, you can give some more background on that.

[Per Sjöstrand, Chief Executive Officer]

Yes. Thank you, Lotta. I often get the question what the reason is behind Instalco's high profitability. I try to summarize it in Slide 14. I think this unique vision Instalco and what makes us profitable among industry average is our business model. Apart from what you can see in the picture, we can also add a high degree of entrepreneurship and business understanding. We only acquire companies where the management members possess such qualities. Moving to Slide 15 and our market outlook, which is overall positive. In all 3 Nordic markets, we can note a high activity in the construction of hospitals, schools, public premises. There are also still many constructions starts in housing. The industry is also investing at a high pace and as we can see in the paper industry and the car industry, for example. So summarizing on Slide 16. We are very happy with the EBITA level as well as the order backlog development. We have made several attractive acquisitions, and our pipeline remains strong, proven by the already numbers of acquisitions made after year-end. Looking ahead, we also believe that the organic growth number will stabilize as more of the companies will be included in the comparison figures. So all in all, a strong quarter and a good year. And now I think we can take some questions.

[Operator]

[Operator Instructions] Our first question comes from Robin Nyberg of Carnegie.

[Robin Nyberg, Financial Analyst]

I have 3 questions. Starting from organic growth. Organic growth was a bit weak in Q4. Could you explain the reasons behind this development? And why you expect improvement in 2018? And do you think the 5% organic growth target is achievable in 2018?

[Lotta Sjögren, Chief Financial Officer]

As you know, our target is 5% at the time, but we have a negative growth of 1.7% in 2017. Given the positive market environment and our strong order backlog. We believe this rate should be back in positive territory in 2018. However, it will vary from quarter-to-quarter. And as you know, Q1 last year was very strong.

[Per Sjöstrand, Chief Executive Officer]

And as Lotto said, we have a strong order backlog and so we think we'll be on track.

[Robin Nyberg, Financial Analyst]

All right. Then the second question relates to the profitability, looking at the divisions. Norway and Finland improved quite a bit. Should we expect that the division of the Nordics continues to perform better and more in line with the division of Sweden? Or was there something extraordinary in Q4 that support the margins?

[Per Sjöstrand, Chief Executive Officer]

We said it, and I can pronounce it again. We have focused on margin. We have focused on profitability during the quarter, during the last half year. So I think you'll find the explanation there. I think we have also a good order backlog. We have orders -- we have tried to minimize risk. And we have, I think, the progress today and that we have had the last couple of months is very good and with -- we got strong margins and low risk. So -- and we have no other idea than going forward with that type of projects. So I think they still remain.

[Robin Nyberg, Financial Analyst]

Okay. And then last question regarding M&A, could you just confirm that -- I think you wrote in the report that you have good M&A pipeline and also comment on where the multiples are currently? Have they moved up or down?

[Per Sjöstrand, Chief Executive Officer]

We have a strong pipe. And I think that the multiples will remain as they have. I think we can, again, today see that we haven't -- they haven't gone up, they haven't gone down either since the IPO. So I think we have the same type of environment that we had before. So 4 -- between 4 and 5x EBITA, I think, we'll see in the future as well.

[Operator]

Our next question comes from Stefan Andersson of SEB.

[Stefan E. Andersson, Analyst]

Just one additional question on that. On the M&A side, you've been very active in the fourth quarter on the M&A side, at least compared to the full year. The companies that you have acquired, could you maybe elaborate on those? Are they on par already on margin, or will they dilute, or will they even enhance margins? Where are they in relation to the operation you have already?

[Per Sjöstrand, Chief Executive Officer]

I think they sooner really enhance the margins. They are strong companies. We -- and -- some higher margins than the average.

[Stefan E. Andersson, Analyst]

Okay. And also, well, since I have you, it's always hard to predict, I guess, but is the full year -- did the activity over the full year of '17 the normal level of activity for you on M&A, or is the fourth quarter activity more in line with the normal situation? You did 11 acquisitions in Q4. You did 18 in the full year, and 50% of the revenues that came over the year comes from the fourth quarter, so that's why I'm wondering.

[Per Sjöstrand, Chief Executive Officer]

Yes, I understand. Maybe it was a little bit high during December and also, what we have seen now, in January than usual. But we also have slowed down after the IPO process and our target or I think what we can achieve is, what we have said before, also 10 acquisitions a year, one a month. I think the figures will be SEK 600 million to SEK 800 million in revenue yearly. I think we stick to that what we have said before.

[Operator]

[Operator Instructions] There are no further questions at this time. So I'll hand back to our speakers for the closing comments.

[Adrian Westman, Head of Investor Relations]

Thank you. We actually received one question from the webcast here. So that is what areas are we looking for, we're -- sorry, what areas are we looking at for acquisitions to possess from a geographic point of view or technical point of view?

[Per Sjöstrand, Chief Executive Officer]

Okay. I can take that one. I think we will continue to acquire good companies in attractive regions. But we will also aim to broadening our offering. As you know, we acquired a sprinkler company in January. I think we can continue with that. And that is also a good example of new technical areas. So that's an answer.

[Adrian Westman, Head of Investor Relations]

Okay. I think we will sum it up there. Thanks, everyone, for listening in and speak to you soon, again.