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Edited Transcript of INSTAL.ST earnings conference call or presentation 7-Nov-19 1:00pm GMT

Q3 2019 Instalco AB Earnings Call

STOCKHOLM Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Instalco AB earnings conference call or presentation Thursday, November 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Per Sjöstrand

Instalco AB (publ) - Founder, President & CEO

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Instalco Q3 Report 2019. Today, I'm pleased to present CEO, Per Sjöstrand. (Operator Instructions)

Please begin your meeting.

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Per Sjöstrand, Instalco AB (publ) - Founder, President & CEO [2]

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Thank you very much. And of course, I will welcome you to this presentation of Instalco's quarter 3 report for 2019. My name is, as you heard, Per Sjöstrand, and I'm CEO of Instalco. And I will say that, today, our CFO, Lotta Sjögren, is not here. So if you have a very detailed or tricky questions relating to figures, I would like you to -- just to e-mail the questions to our IR function, and we will come back to you, of course.

And if you hear some strange sounds, it's because they are changing the rooms above our studio here at the moment. So -- but I think I can -- we can handle that.

First slide, Slide #1. We used to show this slide, Instalco short overview. We are a leading Nordic installation group in heating and plumbing, electrical and ventilation and cooling with strong local brands, high decentralized structure and we have and still deliver high margins over time. And as you can see here, we have now reached sales of more than SEK 5 billion, and that is on a 12-month rolling basis. We have 65 companies; and in total, more than 2,500 employees.

So let's go to the next slide, just shortly about the Nordic installation market. The value of the total Nordic end market -- the installation market is more than SEK 200 billion. Sweden represents the largest component. Still, urbanization is a strong trend throughout the Nordic region and still also the main driving force in the installation sector. But also other factors fueling the market are shortage of housing, technology development, investment in infrastructure and aging property holdings. And then more recently, there has also been greater emphasis on environmental awareness generating benefits to society and sustainable entrepreneurship in the market.

I think also that over the time, the Nordic installation market has had a stable rate of growth, although it's now starting to level off, and important to emphasize that it is doing so at a relatively high level, as you can see from the slide.

And with that, I think we can go to Slide #3. Of course, I'm very proud to report that for this quarter, we have had stable growth in sales and continued good profitability. And during the period, we made 5 company acquisitions, all of which have contributed to our strong performance.

Net sales increased by almost 42% to SEK 1.4 billion with an organic growth rate of 14.6%. Adjusted EBITA for the second quarter was SEK 127 million and with a margin of 9%.

A comment on this organic growth. And I will say that at the high level, this quarter's organic growth stems in part from the high growth rate of several of our subsidiaries, which we previously reported as a component of acquired growth. However, because they have been part of Instalco for 12 months, they are now and, of course, henceforth, included in organic growth. So that's one reason.

Another reason for the current high rate of organic growth is that some of our subsidiaries had substantially lower sales during the same period last year, and they have made an excellent recovery this year. And also -- I must, however, also again point out that it is important to look at the full year figures rather than making conclusions based on quarterly comparisons where fluctuations are normal.

Our order backlog is stable, more than SEK 4.4 billion with an -- which is an increase of 19%.

So if we go to Slide #4, these diagrams show the trend for Instalco's net sales and adjusted EBITA compared to prior years. Our robust growth stems from our active acquisition strategy. Also, for several quarters, we have had an order backlog the size of the last 12-month sales. And these strong figures are now reflecting the result of our -- as I think, of our strategy of working with many small companies and medium-sized projects, which keeps risk at a low level with a high profit margin. Our business also has low exposure to the housing market, in fact, just 10% of our construction. Our largest area of operations is installation work at public buildings, such as schools, preschools, hospitals and other public facilities. And office and commercial facilities is our next largest area.

If you look to Slide 5. As I already mentioned, our backlog of orders and overall situation remains stable, thanks to the level of diversification we have across types of projects and markets. Our large order backlog also provides us with excellent opportunities for adapting our business if changes occurs in the market. I said that before and also I'll say that again.

Seasonal situations, like summer vacation, always affect us each year in the third quarter, and you can see it was the same situation last year in 2018.

So Slide #6. And here are 2 of our projects from the quarter that I'd like to highlight as great examples of how we work. We signed 2 very important large projects, contracts during the quarter. JN El has been contracted by Skanska for electrical installation in conjunction with the construction of Scania's new foundry in Södertälje. Work will be done as part of a collaboration contract where JN El will be responsible for the electrical installations, and the sum is approximately SEK 100 million.

And the other major project involves Rörläggaren in Malmö, which has been contracted to work associated with the new hospital area down there. Rörläggaren has been engaged by Skanska for extensive heating and plumbing installations with an order value of SEK 270 million. Two new buildings are being built as part of the major investment to expand Malmö's hospital care facilities, more than 2,200 rooms and 108,000 square meters that will be added.

If we go to the segments, Sweden and also the Nordics, which has Sweden, and that's Slide #7. So looking more closely at segment Sweden, we see that the market remains stable with electrical installation as the largest component. About 50% of the total market is electrical installations. In the public sector, construction and renovation of hospitals, schools and preschools remains at the higher rate. And the rate of construction for commercial property, and that means offices and business facilities, is also relatively high.

Net sales for Sweden increased by 44% -- 44.5%, in fact, with an organic growth of 15.2%. And we also have a very strong margin area, as you can see it, at 11%.

So if we go to rest of Nordics, the next slide, Slide #8, we'll say that net sales increased by slightly more than 35% with organic growth of 12.9%. And for the second quarter in a row now, profitability for rest of Nordics is good, and we have recovered from the prior loss project we had in Norway. I have mentioned that many times before. The market in Norway is stable with high-growth in all areas where Instalco is represented. The market in Finland is strong, and we have a large order backlog in major metropolitan areas. And industry clusters are the main engines in that market.

Then we go to Slide #9. As you have heard already, we have continued to actively pursue our acquisition agenda. And during the quarter, we have acquired 5 new interesting companies and operation. And those companies have broadened our geographic coverage and offering.

And 2 acquisitions that we are -- that we have made during the quarter, I would like to highlight. The first is the heating and plumbing company, Pohjanmaan Taloteknikka in Oulu, which is a city in the region of North Ostrobothnia in Finland. Our expansion into Northern Finland is particularly interesting since it's an area we have not been previously represented. And the acquisition of Pohjanmaan marks the first step in our geographic expansion in Finland beyond Helsinki and Tammerfors.

And the second I want to highlight -- second acquisition I want to highlight is in Sweden. We have widened our geographic scope with the acquisition of OVAB, which primarily serves the markets of Östersund and Åre. And I think both are good examples of strategic acquisitions we made to strengthen our position in a particular area within Finland and in Sweden. They are all companies -- and all our companies, I would say, companies have strong brands reputation in the local markets.

Other companies that we acquired during the third quarter are Rörtema i Nyköping, Milen Ventilation in Gävle and VIP-Sähkö in Helsinki.

So as you can see on Slide #10 that we have made 13 acquisitions during the first 3 quarters. We continue pursuing our agenda of making high-quality acquisitions. Already during the first 3 quarters of the year, we have acquired annual sales in excess of SEK 1 billion, which far exceeds our target of SEK 600 million to SEK 800 million. And subsequent to the end of the reporting period, we made an additional 3 acquisitions, which contribute another SEK 260 million in sales.

Okay. I will talk a little bit on Slide 11. You can see talking about how we create value. First off, we, as I mentioned, purchase high-margin companies, and we pay reasonable multiples for them. And furthermore, we have a high cash conversion rate and low level of investments, which enables us to acquire companies with our own generated profits. And then when a new company joins the Instalco Group, it gets to collaborate with other Instalco companies, which creates synergies on many levels. New customer contracts are created, and with that comes multiple cross-selling. New companies in the group also gain access to products they wouldn't have been able to manage on their own, and they may also use the central purchasing agreements we have created.

Another key success factor is that the entrepreneur spirit in our company is very high, along with the desire to continually develop and improve throughout the entire organization. And through it all, we keep our central costs at a very low level.

Okay. Next slide, Slide #12, looking ahead. Looking forward, our assessment is that the market remains stable with constantly rising demand for energy-efficient, sustainable solutions. And there has been a slight slowdown in the overall economy, as you're all aware of, but we have a wide portfolio and a large backlog of orders. And because of that, we have many ways of adapting to any changes that might occur in the market. And according to Installatörsföretagen, and that is the employers' association representing the plumbing and electrical industry, the outlook for next year is about a decline of 2% to 3% in the installation sector, and that is for 2020.

Okay. Slide #13, also looking ahead. Instalco's sustainability and providing benefits to society are key concepts. You have heard it before, and I will say it in the future as well. And also, notice that both our customers and subsidiaries are showing a higher level of awareness and interest in such matters. There is increased awareness of the importance of sustainable entrepreneurship and suitable development among both companies and consumers. Providing safe, sustainable installations that help generate benefits to society is a high priority for us. And we also put much emphasis on having a safe, stimulating work environment at all companies in the Instalco Group.

With this in mind, I'm very proud to report that we are about to take the next step with our sustainability efforts. We are working intensively to design our new sustainability program, and we will launch that early next year.

Service is another item that is high on our -- on the agenda. We are currently designing a plan for soon providing a wider scope of service with our -- via our subsidiaries. And going forward and in an effort to increase comparability, we also would clarify what we package in the service area.

Slide #14, one of my favorite slides, I will say. We have now reached where we have achieved our run rate EBITA target of SEK 450 million by 2019. It's a goal we formulated when Instalco was first established. And since it was founded, Instalco has had a stable profitability, and the graph here shows that we accomplished what we set out back in 2014. And we will continue pursuing our plan of acquiring profitable companies, creating synergies and developing companies together with others in Instalco Group.

If we go to Slide #15, financial targets and dividend policy. As you're well aware maybe as well, our target growth rate is at least 10% per year over a business cycle. Growth shall occur through a combination of organic growth and successful acquisitions. We have another goal for us to achieve on adjusted EBITA margin of 8.0%. And also, furthermore, Instalco's rate here on debt to adjusted EBITDA should not exceed 2.5. And as you can see, there are green dots there. And Instalco's cash conversion rate should be 100% on a rolling 12-month basis over 1 business cycle, with a green dot.

We can conclude that our performance is in line with or exceeding, I would say, all our financial targets. It is also worth mentioning that we have set targes that we can maintain over time and which enables us to cope with any fluctuations in the market.

Okay. Shall we go to Slide 16 and to summarize? So in summary, I can proudly conclude that Instalco has another strong quarter with strong growth, high profitability and a healthy cash flow. The acquisition climate remains favorable, and interest in becoming part of the Instalco Group is still high.

And at this time, I'll wrap up by mentioning The Heat is On by Glenn Frey. We have the same energy here at Instalco, and we have cranked up the temperature even further. We are continuing to deliver high margins and strong growth in sales via our high-quality subsidiaries.

And with that, I would like to thank you for all joining on this call. And I'd now like to take your questions. So please go ahead.

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Operator [3]

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[Operator Instructions] And as there are no questions, I will hand the floor back to the speakers for any final comments.

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Per Sjöstrand, Instalco AB (publ) - Founder, President & CEO [4]

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I think that's all from us. I think it's -- thank you very much for joining in, and I'll see you next time in -- we'll hear you next time in January or February, I think, on the next call. Thank you very much, everyone.