Earnings Call: Q2 2020

Aug 19, 2020

Okay. Thank you very much, and welcome to this presentation of our Q2 report for 2020. As you heard, my name is Per Sjostra, CEO at Instalco, and the project is with me. Robin Buevenmann, our CFO, is also available. He became father a couple of days ago, so I gave him a couple of days for free. So but he can join in if there is any tricky questions about the figures. We can start with Slide number 2 and a short brief presentation of Instalco. We call ourselves a leading installation group in the markets of Sweden, Norway and Finland, a pan Nordic group. Our main area of operation is installation and service of heating and plumbing, electrical, ventilation and cooling systems. It also includes consulting in these areas. We also work in partnering with our customers, sharing best practices and know how. The group now consists of 77 subsidiaries and just over 3,300 NPGs. We have a highly decentralized structure supported by a small central organization. And we also come back to that, but we have a strong profitability with high margins over time. So if we go to Slide 3. And for the last 12 months rolling, our sales are nearly 6,500,000 with an adjusted EBITDA of SEK565 1,000,000 and adjusted EBITDA margin of 8.7%. We also have a strong order backlog. You can see SEK 6,000,000,000. And you can also see here that our pace when it comes to acquisitions is high. Moving to Slide 4, some highlights from the on the quarter. Of course, I'm happy or glad to report that we this quarter has and we had stable growth in sales. We have continued high profitability, and we have a strong quarter despite the ongoing pandemic. We've been relatively unaffected by it, but of course, we have made adjustments to so that we can wrap around the business much the same as before. Very good net sales growth, very strong cash flow, as you can see. 5 acquisitions made, I will come back to that. Moving to Slide number 5. As I said, we had yet another strong quarter despite the difficult situation we face throughout the world from the COVID-nineteen pandemic. I think one reason is maybe that the corona crisis has still not hit the construction and installation sector quite as hard as it has other sectors. I think also another reason is that we have the skill and the ability and experience to change our focus and adapt to a new situation. Action has been taken. I will go back to that. We're carefully monitoring the situation, of course. After 14 days, the coronavirus charges of our adaptations to it had not resulted, as I said, in any significant disturbances at the group level. There have, however, been some minor disturbances in some projects and with service activities. Most projects have been able to continue essentially as usual even with adaptations to the prevailing situation, and order intake has been robust. We have handled the situation by making certain adjustments in staffing. We also put much higher requirements on collaboration between our subsidiaries. Also, due to the ongoing pandemic, the future market outlook remains uncertain, however, and it's still difficult to assess the long term effects, and we are actively monitoring developments. We are also monitoring operations in our business areas and our subsidiaries so that we can take whatever measures necessary to limit any negative consequences. But again, I will point out, it's very difficult to assess the future markets. We can go to Slide 6. Net sales increased by 22.7%. So we are now over SEK1.1 billion. Organic growth was 2.3%. And during the quarter, we made 5 acquisitions, but the combined annual sales is assessed at about 3.26 1,000,000 dollars corresponding to acquired growth of 22.6%. Slide 7. Adjusted EBITDA for the group amounted to €150,000,000 for the quarter and a margin of 8.7%. And that is on par with previous quarters, as you can see on the slide there. So go to Slide 8. And for the first time, I would say, in our rather short history, our backlog of orders, SEK 6,000,000,000, which is nearly at the same level as our total annual sales. And one of the reasons for the rising order backlog is the hospital project in Sodomalland, Sweden, which we announced in the Q1. Most of that project has now been included in the order backlog during the Q2. So with this, our thinking starts to stand strong, thanks to the stability from our sizable order backlog and the diversification we have across different types of projects and markets. It also gives us flexibility in the sector where we operate. If we go move to Slide 9, I will give you some examples from projects from the quarter, and I would like to highlight these as great examples of how we work. The first of all, statutory LBC Contracting, which won a contract for the heating and plumbing installation in 650 Apartment that's under construction in the new city, the 6 of Hotlands Brew near Stockholm. The assignment also includes system design and installation of a unique and customized new thermal heating system. The order value is approximately €60,000,000 Another thing that I want to point out and underlying our healthy margins is the large quantity of well managed small and medium sized projects. One example of such is a medium sized project in Finland with the sustainability focus. And there, Elvira Paola, one of our companies, have been connected to the heating and plumbing and ventilation systems at Krasim's biogas plant at Loya, West of Helsinki. This plant will process a total of 60,000 tonnes of biowaste annually. We have heard it before, but creating synergies and cross selling between our companies are fundamental cornerstones in our business model. We frequently have situations where 2 or more 2, 3, 4 type of companies are working on the same project, which simplify things for the customer and provides value added. So the 3rd example here is BEDA and Sprinklr Blage, which have been contracted by Skanska for installation of the ventilation and sprinkler system for E. ON's new Nordic head office team in Malene. Okay. Shall we go to Slide number 10 and look into our segments? As you can see on this slide, segment Sweden continues delivering high margins. Our Swedish operations have coped with the corona pandemic very well. The year started out strong for Sweden, and our projects have continued to progress successfully, which is reflected in our results over the last two quarters. In this quarter, you can see there is net sales growth of 25.8%, organic growth, 5.5% and EBITA margin, 9.6%, which is very good. If we then go to Slide 11 and looking into the rest of the Nordics, I can say I'm rather disappointed that the rest of the Nordics business area has been very weaker than we would have liked to have seen. It got off to a slow start in the New Year, which has persisted in the Q2. In Norway, there has been more of a lockdown during the pandemic compared to Sweden, for example. Accordingly, the rate of production has there been lower, and we have struggled a bit with some projects, while the contribution margin hasn't been high enough. 5.7% in margin, We say it's in line with our or even higher than our main competitors like Brazil and Kaverio. We still are not satisfied with it. We shall, we will and we can do better than that. So we can move them to Slide level. As I said before, the corona pandemic has not impacted our rate of acquisitions. I would say something back to Slide number 11 first because, of course, we have launched an action plan for the rest of Nordics, especially in Norway, to raise the margins of some specific companies there, especially in Norway. Finland is a little bit better. And that means more focus on risk analyzed, better planning, which gives us better productivity and so on. And we will launch this during this fall. So when done to Slide 12. The kroner pandemic has not impacted our rate of acquisitions, as you can see. During the Q2, we acquired 5 high quality companies, all of which have contributed to our strong results. 4 of the acquisitions were in Sweden and one was in Finland. We are a little bit more cautious in Norway. But when we have a more robust situation there, we will also continue to acquire companies in Norway, of course. We are continuing to pursue our acquisitions plan and have an exciting pipeline and dialogue with many interesting acquisitions candidates as we always have, I would say. And last but not least on that slide, we have noticed that interest in the coming part of the Instalco Group has increased, in fact. So if we then move to Slide number 13, I'd like to highlight two examples of companies that we have acquired during the quarter. And the first one is Evertgrupp located in Kalmar, Sweden. They specialize in ventilation system, and the acquisitions of Avent strengthens our position and brings us a step closer to becoming multidisciplinary in the Kalmar and coastal small land area. 2nd example is Millivantelaru in Sonzval, also in Sweden. These acquisitions gave us a wider geographic coverage, which within Stalco now represented for the first time along the northernmost coast of Sweden. And the acquisition of this company gives us a foothold in this exciting market and geographically important area. Here, there's a lot of larger industrial companies like pulp and paper and others, and we want to be there. Other companies that we acquired during the Q2 are Nortek in Umea, Team Pipe in Uppsala, both in Sweden and Saeko Altega in Helsinki. So going to Slide number 4 after that Q14, sorry, 14 after that. We can conclude that our performance is in line with or exceeding all our financial targets. It's also worth mentioning that we have set targets that we can maintain over time and which enable us to cope with any fluctuations in the market. To summarize that, we want to keep our promises. Okay. Slide number 15 after that, the summary. And to summarize, we have a strong performance yet again in the second quarter. Even though society at large and the entire world economy has been struggling with the effects of the COVID-nineteen pandemic. The overall impact of the pandemic has had several times on our operation has thus far, I would say, been surprisingly low. You can also see that the demand for technical installation has remained strong and stable. We've also been able to pursue a high rate of acquisition at FSN, having added those 5 new companies to the group during the Q2. And to our last slide, Slide number 16. As you well know by now, I'd like to wrap up these meetings with reference to a song title. This title is fulfilled Carlsen against all odds. So besides being a classic favorite, it's also a title that actually describes South Korea, and that's what we have been able to achieve, I think. And at the start of our journey, there were some doubts, of course, some doubts given the market outlook about our ability to deliver and achieve our goals. And nevertheless, 3 years after becoming listed, we have reported strong results in each of the 14 quarters since then with good profitability and strong margins. And now I will say for the first time, we have now been tested in tough times and have proved to perform also there. So with that, I'd like to thank you all for joining in on this call, and I'd like to take your questions. Please go ahead. Our first question comes from Stefan Anderson from SEB. Please go ahead. Apologies, seems that Safran has disconnected. Okay. There appears to be a question from Robin Nyberg from Carnegie. Please go ahead. Hello. It's Robin from Carnegie. Hello, Robin. Hello. Hello. And congrats to Robin Booherman. A few questions from me. First, related to margins. Do you now see larger variation in the performance of individual companies than normally? And you mentioned that margins in Norway were somewhat lower than you expected. So could you still give some details why those margins were lower? 1st of all, I think that strong companies still perform strong figures and strong margins. So that's something that we have learned. And then they do, I mean, Sweden has the competence in Sweden has performed very, very well. In Norway, I would say that those it's about 2 companies. We have they have been a little bit too large. They have a lot of projects, larger projects that they are not I don't think they have the right maybe the right product leaders or skills to manage such amount of larger projects. So what we do is try to slow down and there and give them in the action plan, we will include more planning, as I said, more risk analyze for each project and so on. So I think we know what to do, and we can handle it. And it's not like a red figure, but it's they don't leave so much margins that we want them to do. So that's the problem. They sort of get weight there, but we will hope in that. But I don't see I have the MSD presence from now from the during this quarter and then this pandemic situation from before, I think it's the same type of challenges and the margins is almost the same. Okay. And then second question related to acquisitions. You have already achieved your target for this year. So do you expect to close even more acquisitions this year? Absolutely, we will close more acquisitions this year. We will close a lot of acquisitions next year and the year So all the years. So our strategy is still to we are to buy a build case, not only buy a build case, but also have start ups and other. But we will have acquired companies all the time and all the way, and we will not slow down our pace for that. So definitely, we will acquire companies during this sort of Thank you. Our next question comes from Stefan Andersen from SEB. Please go ahead. Thank you. Can you hear me now? Yes. Okay, good. There's something wrong with the call there. Okay, well, I had 4 questions. Maybe one of them was answered. I'll speak a little bit. So the first question is really on the I mean, the very dramatic drop in organic growth. You see it being very volatile over the quarter, 6% and 11% last quarter and then down to 2% now, especially in the other Nordic operations. So maybe if you could I hear you saying some of the impact is COVID, some of the impact is projects going poorly, but in my world, that would be more of a cost issue and more of a margin issue. So if you just look at the growth and disregard the margin question, would that be primarily COVID affected? Or is there something else affecting the -seven percent organic growth in other Nordic? I think it's mainly due to the pandemic. But I will also say that when you have margins, when you're not satisfied with the margins, then you get a little bit cautious taking on a project. And I think still, we have a healthy project intake into our order backlog. And we will not try to increase that just because due to there is a lot of there is more, I would say, risks today than a year ago or half a year ago. So I think I'm not worried about the organic growth. I mean overall, we're at 2.3% during the pandemic going on, and I think that's good enough. Of course, you can look into the segments and say that, that is a poor or weaker intake in Norway and in Finland. But still, I'm not concerned about that. We will come back. And the pace is lower and the debt activity is a little bit lower. And the price maybe go down a little bit, and we will not. We're in a difficult situation where we take on projects with no profitability. That's good to hear that. I guess we're talking to you guys outperforming the EBITDA on organic growth. And in this quarter, you were in line. So that was a little bit unusual. But then going to you have reversed some earn out. I don't know if the reversal is €4,000,000 or if that's the net figure on your one offs in the quarter. So if you could maybe give us the gross reversed earnout And also maybe a slight a short comment on what's happening with that acquisition. Is that an acquisition going sour? And how bad is it? Stefan, you are hopeless. It will be tricky questions. But just by the second, and I will bring in Robin here. He will explain it to you or to all of us because I have not that type of detailed figures in my hand. So just a second, we will be here. And then you can maybe you can repeat your question. Should I take another question while we wait? Yes. If you have one with, that I can answer. Yes, please? Yes, I think so. I mean, it's going to the M and A. I actually was a bit curious on the M and A side. I mean, you already acquired revenues for SEK 871,000,000 euros this year. You have a couple of years behind you where you have been significantly above the target of 6 100,000,000 to 800,000,000. And I asked if the floor, store, why don't you raise the target? And you mentioned that you don't want to be too aggressive. You don't want people to, I mean, to be pushed into doing acquisitions. But I also just heard you say that you will do more business this year. You will definitely not take down the pace. So I'll ask you, Ken, why the SEK 600,000,000 to SEK 800,000,000 because you're actually clearly saying that you will be above SEK 1,000,000,000 every year going forward. Yes. That's right, Stefan. Absolutely. And also that we want to keep our promises. So something between yours. But I think that we could maybe when we put our goals or targets 1 year ago, maybe 2 years ago, we couldn't almost, we couldn't imagine that we would come out 2 years in a row with almost maybe above SEK 1,000,000,000 in acquired sales. So maybe we take what you say and we will try to discuss with the Board how to express the next time we're doing a business plan. But Robin is here now. Robin Bullebrand is here now. Can I answer your other question? Stefan, you asked about our announce, right? Yes, the reversal in the quarter. The gross figure and congratulations, by the way. But the gross figure and then also maybe some words on the reason, because I guess the reason would be some under performance versus what you thought when you did the acquisitions that booked the payout. Yes, that is correct. So overall, you could say there is a mix, but this quarter, it was a little bit larger than usual due to a few older companies kind of closing the book on them and paying the last earn out to them. So there was more of those in Q2 than usual. So on that side, we had to say a positive effect of SEK 13,000,000 but a negative effect of roughly SEK 6,000,000. So in net, it was roughly like SEK 6,500,000, somewhere around there. And those 13 that came in positive on our side, let's say, but actually negative due to the fact that they didn't reach the target. And those were a bit also older companies. They kind of closed we closed the books on them so that we don't have to save anything for coming years or anything like that. So I don't think there was any grammatical things happening that we needed to kind of take this down and that anyone is underperforming especially. I mean, Har mentioned to you earlier in the call that we might not think that Norway has performed accordingly fully. So there was a little bit of that in these earnout as well. And I guess, so what you're saying, if I can interpret you also that, if you have a little bit of a deviation on the company, you wouldn't immediately do the adjustment. You would save a little bit as you've done now. And then when you close, I think, your company's to the last date, then you do the final calculations, so to speak. You're not in every quarter doing small changes. Yes. We no, we don't do the small changes every quarter. That's correct. We do the larger because as you understand, typical deal for us is a 2 to 3 year earnout and then doing like 10, 20 acquisitions. We have 30, 40 companies every quarter that we have to reevaluate. And so it's our use of writing up and down too much. Yes. Good. Thank you. And the last question then, just the comment made there on efficiency measures that you I think you talked about Norway and maybe Finland as well. But to improve efficiency, you were taking actions. Could you maybe elaborate a little bit about the potential cost for such activity? I don't think that there will be any higher costs. It has to be more close to management. We have I will say also we have switched management in those two companies or we have switched to the CEO. I think we have B2B closer, and our area manager there has to be closer to those companies. So I don't think that we'll have any extra costs for it, but we have to be we have to be have a strategic plan for them, and we want to be we have to risk minimize. We have to follow-up closer from productivity and we have maybe to do some more management changes, but we have done it now. So I don't think there is no more costs involved just because we are trying to launch this action. Thank you. One moment please as I capture the next question for name and details. We have 2 questions from the webcast. The first one is that in Stalke now consists of 77 entities, how scalable is your business model structure? How many entities can you grow to? And how are you adapting the structure if you grow even more than 100 companies? Yes. We have a structure. That means that we have business areas. And I think a business area is consists between well, I think, I know, of course, that it consists between 15 20 companies. And I think that's a suitable size of companies. And also that we can scale up that just to start a new or divide some area that has been too large. And we can also start up new business areas all over, both in Sweden and Finland and Norway. In Finland and Norway, in fact, we have just 1 business area, 1 for Norway and 1 for Finland. We have 4 in Sweden. So it's scalable, definitely. I don't see any limit there. Thank you. The second question, I think, is partly answered already, but it is it goes like this. In Q1, you mentioned that profitability for Finland and Norway was affected by finishing contracts and that should rebound in Q2. And the question is, what has impacted EBIT margins for Finland and Norway in Q2? We can leave, I can take, we can leave. We don't divide the other Nordics in Finland and Norway. We talk about other Nordics. But we if I understand the question right, we had some projects that didn't turn out so well in quarter 1. And now, as I think I mentioned, we have some, of course, deadweight, meaning that, that projects are still there, not we're not losing money on them, but they don't contribute so much to our margins. And we have to be rid of those projects, and we are almost rid of them, but they are affecting our margins in Q2. Of course, I can add that, of course, the corona situation is also tricky because we have sickly the percentage of sickly is up to 20%, 25% at the beginning of the pandemic in March April. And of course, that slows down the productivity and so on. Yes. That's it, I think. Any more questions? Yes. We have our next question from Nathan, who is a private investor. Please go ahead. Hi, everyone. Just a few questions on the M and A. Apologize if I missed this earlier. The first one is on the pipeline. Could you share how many companies do you typically track on your pipeline? And how does it compare to maybe a year ago? Nathan, sorry, but we can't say how many, but we have several. We start with a long list, cutting down to a short list, and we have 4 types of doing this, strategic acquisitions that we point out, we want to be Helsinki, we want to be in Tampere, we want to be in Bergen or whatever. We have opportunistic ones. There is one company coming and knocking on our door. We like the company and we do the acquisition. We also have start ups and we had add ons. But and we still have a dialogue with several companies. But as you can understand, we can't say exactly how many because there are also different stages. We are talking with some. We have LVs with others and so on. So we will say just that we have a long list and we have a short list. We have interesting dialogues with a couple of companies right now. Sure. Fair enough. Maybe I move on to valuation. Could you just share based on what you are seeing in the current challenging market environment, have you seen seller expectations change? And how does it compare to some of the acquisitions that you have done in the past? Hi there. Robin here. I can jump in. I think we've discussed this before, and we don't see any valuation changes because the type of companies we are buying are entrepreneurial companies, and the entrepreneur is usually the one running the company and founding the company as well. And they have a certain expectation and belief of what their company is worth. And I wouldn't say that, that has changed due to the, so to say, pandemic or the situation we are in now. However, there are more possibilities to negotiate different setup. The overall price will be roughly the same, but you can kind of share the risks. People are more willing to share the risks. So you can use more part of earn outs. Okay. And in terms of integration process for an average acquisition, could you share how long does it take to bring in a target company and improve the level of operating performance to the rest of the group given that you guys have probably the highest margins in the industry? I would say that the integration is very light in Stalco. When it comes to financial side, we do an immediate integration and kind of take control over the books and that takes a few I mean, that is done the next day and we start taking control of the books and the financial situation. But the integration otherwise, I would say, takes a year. You need to go to a certain amount of meetings, get connected. And also the projects that you are in, you have to finish those before you can kind of start new projects together with our other subsidiaries. So it's been like a year process, I would think. Until you are fully integrated. I mean fully integrated, absolutely. But on certain steps, you will be integrated day 1, like on purchasing side, You will be able to use our purchasing agreements fairly quickly and so on. But of course, you are in what I mentioned, if you are already, when we acquire you, typically a good company. So you might even already have a sort of order book when we acquire it. And so you have to kind of first work that order book off and then kind of to start new projects with other subsidies and groups. Great. That's very helpful. Maybe just one last question from me, if I may. If you look longer term now, maybe 5 to 10 years out, what are your key bottlenecks to grow? If you could comment maybe on labor issues or on acquisition in terms of capacity to do more? I mean, you can go in many ways. You can broaden your offering. You can go to new business areas. You can go into new geographic areas. You can go into and I think it depends on new countries, of course, new countries, of course. But I think it also depends on which situation you are right there and what type of companies or the strategic decisions that you make during the way. And we are not locked up in a like one just one way to do business. And I think we will develop the way we do business in the future as well with new I mean, when it comes to new companies, new management and others. And so I think we can hardly answer that question that we want to do this way or that way. So it's a little bit depending on the situation and the market outlook and other things. Okay. Thanks so much. We have 2 more web questions. The first one relates to the last question. Could you see any other areas if you exemplify any? What could it be? You definitely, of course, there is a lot of areas that we can enter into. But also technical skills, we can also enter into consulting, more of consulting to help our customers. We can also broader offering by going into more like security or other things, surveillance and more technical skill. But mainly geographically, more on consulting, more integrated projects and more partnering. So we have a lot of opportunities. And I think that sooner or later, we will enter some of those areas that I mentioned now both geographically and technically. And the second question there relates to the M and A situation. How do you plan to organize the M and A in the future compared to today? Yes. I think, I mean, going ahead, I mean, as Tare mentioned, we have so they almost guarantee that we do acquisition SEK 600,000,000 to SEK 800,000,000. But as Stefan mentioned earlier, I mean, we have here those targets last year and the year before, and we have already exceeded now. Of course, we will continue to do M and A, and I don't see any changes here. Like Per mentioned, we can open up new areas and also open up new geographical areas and new business areas as well. So I think that we'll have a tremendous opportunity to continue to do M and A for a long time. And organized, I think, more like how we're working. Yes. And organization wise, I mean, as mentioned, I think, on last calls as well, I mean, we also see that the pipeline is growing mainly through that our area managers are also doing more of acquisition in terms of finding these companies and talking to a lot of entrepreneurs. So a lot of the acquisitions come from these channels, I would say, and those channels we didn't have when we started with Falco. Then it was kind of more or less the Empire chasing these M and A entrepreneurs. So in that sense, and organizational wise, they're taking more and more responsibility on, And we here at the head office is supporting and also teaching them the kind of skill and things you need to do M and A. Okay. And then one last question to Karl. During these years in the Construction and Installation business, can you elaborate a bit on price competition? How does it work? What is your business? I think that our customers, especially those in larger projects like hospitals and others, They are we are talking more and more. We have got collaboration early on in an early stage of the project. We are talking a lot about partnering. The price, of course, is always important, but I think what we call soft parameters become more and more important. And I think that Instacro is well suited to handle this. It also appears that, that will come to more and more in Norway and also in Finland. And I'm looking forward to that because I think that's form with partnering that is a very weak situation. So I think that's closer and closer to our customers and also adding, as I mentioned before, adding this consulting part to guide them for best solutions, cost effective projects and solutions, of course. And also, environmental considerations is very important in the future. We are launching, as I mentioned, I think before, a very strong environmental program. Yes, I think we round up there. So thank you for joining in. And thank you. Thank you, everyone. Thank you very much.