Ladies and gentlemen, welcome to the Instalco Q1 Report 2020. For the first part of the call, all participants will be in a listen-only mode, and afterwards there'll be a question-and-answer session. Today, I'm pleased to present CEO Per Sjöstrand and Fredrik Trahn, Head of IR. Please begin.
Thank you. Thank you very much. First of all, of course, very welcome, everyone, to this presentation of Instalco's Quarter 1 Report for 2020. My name is, as you heard, Per Sjöstrand, and I'm CEO at Instalco. I hope you can hear me well despite the fact that I'm sitting at home on the second floor. It's very hot in here, but I hope you can follow us. Starting, of course, with slide number one. As you can see here, we have now reached sales of more than SEK 6 billion on a 12-month rolling basis. We have more than 70 companies, and in total more than 3,000 employees. You can see that we have a strong order backlog, and we also have an adjusted EBITDA margin 8.8%, which is very high. We can go on to slide number two with the Quarter 1 highlights.
Of course, I'm very happy to report that for this quarter, we have had a stable growth in sales and with continued high profitability. You can see that net sales growth 37% and with a very strong organic growth, 11%. I think I'm very satisfied with the strong cash flow, with the stable order backlog, and last but not least, we launched our new sustainability program during the quarter. I will come back to all this. That's the highlights of the quarter, I think. Next slide three. We had a strong quarter, yes, despite the difficult situation we face throughout the world from the COVID-19 pandemic. The corona crisis has not hit the construction and installation sector quite as hard yet, I would say, as it has other sectors. Far, we have been able to keep our workplace open.
We have also been able to deliver materials to our various ongoing projects and assignments as usual. For Instalco, the corona pandemic has not resulted in any significant or any major disturbance at group level. There have, however, been some minor disturbance in some projects and service. Most projects have been able to proceed as planned and order intake has been strong. What you can see is during the period, there has been a bit more sick leave, especially in late March, than we have typically seen. We are nevertheless, of course, very concerned about the situation, and we are taking it very seriously. We expect that our contracts and service will, in some way, and maybe in the long term, be affected.
We are preparing for more flexibility in the future. In all likelihood, we are going to notice the effects, even though thus far, we have not noticed any significant impact, as I said before. It is very difficult, though, to assess the market. In all sectors, there is a very high level of uncertainty about the future. We have all of that because you can read, of course, all the papers talking about what's happening next. At Instalco, we are planning and preparing for the impact that is likely to occur in our sector. We have, though, a wide product portfolio and many subsidiaries with strong local ties. The Instalco model provide us with a very flexible structure, I think.
What we have to do now, we must now increase our flexibility even further. We will be focusing even more on collaboration between our subsidiaries. We are also going to need to be more responsive and flexible so that together with our customers, we can solve problems and cope with all kinds of situations that could rise. As I said, it is currently difficult to assess how the coronavirus will impact the long-term market conditions in the global economy. Of course, like all other companies, Instalco is impacted by downturn in the economy. Hard to assess the market. If you go to slide number four, of course, as I said before, I am very proud to report that we have a stable growth in net sales and also a very strong organic growth.
You can see that that's the situation. Also, you can see to the right there about the quarter has been before. I think we have said that before quarter one usually is the weakest quarter of the year for installation companies or in the construction industry. Leaving that and going to slide number five. Mentioning that the order backlog or backlog of orders and overall situations remain stable. I think it's thanks to the level of diversification we have as regards types of projects and markets. Of course, the large backlog of orders provides us with a good level of flexibility to carry out operations in our sector as well. That's the order backlog. If you go to slide number six for a moment. There, I like to highlight great examples of how we work, and this is two of our projects from the quarter.
The first one I'd like to emphasize is Instalco's collaboration with NCC, with the construction company NCC and Region Sörmland in a major hospital project. In this, we have six Instalco companies participating under the leadership of Rörgruppen and Ohmegi. It is our largest project to date, where hospitals in Eskilstuna, Katrineholm, and Nyköping will be expanded and modernized. The project will be ongoing from today to 2026, with an order value of approximately SEK 700 million, and the majority of which will be reported in order intake for the second quarter of 2020. I will also add that the project is taken with what we call partnering. That means open books and, I would say, zero risk. The other project is a much smaller project, but I think it exemplifies, however, many of the smaller, well-managed projects going on in our subsidiaries throughout the Nordic region look like.
Here, our Finnish companies, LVI-Urakointi , Paavola Oy, and Twinputki Oy, were awarded contracts for installation work that is a part of a major sustainability project in Espoo Municipality outside of Helsinki. The project involves construction of a new daycare center, entirely, in fact, in solid wood, where our companies will be working with the heating and plumbing installation, ventilation, automation, and sprinkler system. Two good examples. If we turn to slide number seven, there we have a segment development in Sweden. You can see that we continue to be delivering high margins, 10.2%, and is still a high rate of construction for schools, preschools, and hospitals, a very good net sales growth as well as organic growth, and also, I think, a very stable and good order backlog. Going to next slide, and slide number eight, and Rest of Nordics segment development.
Rest of Nordics has been a slower start of the year. It's been a shutdown of society due to COVID-19 situation in Norway and Finland, and that has slowed down the rate of production somewhat. A good net sales growth, a good organic growth, and a good order backlog, I'm not totally satisfied with the EBITDA margin. I think we can see an increase in that further on. Slide number nine, a little bit about our acquisitions. We are continuing to sign new contracts, new installation jobs, both larger and small. We are also still engaged with several acquisitions candidates as planned, and our acquisitions pipeline, how do we say, is unchanged, and we hold on to our expected annual acquired sales in the range of SEK 600 million-SEK 800 million, which we feel rather certain of achieving. Two examples from the quarter is on next slide 10.
As I said, we have started off the year in accordance with our acquisition plan. In Sweden, geographic expansion has continued with the acquisition of the electrical installation company ELUB in Växjö, which means that Instalco is now, and for the first time, represented in Kronoberg County. In Norway, we strengthen our position in Innlandet County with the acquisition of Haug og Ruud in Lillehammer. It offers installation of heating and plumbing and ventilation system. Haug og Ruud is also a natural partner for collaboration with our prior acquisition in Innlandet Medby AS. It brings us one step closer to becoming multidisciplinary in the county of Innlandet. We have also acquired a smaller company, Östersjö Elektriska in Norrtälje during the quarter, with the intention of merging it with Rodens Värme & Sanitet in the same town. Moving to slide number 11.
Providing safe, sustainable installations that help generate benefits to society is a high priority for us. I have talked about this many times. We also put much emphasis on having a safe, stimulating work environment, of course. We aim to, every single day, generate benefits to society with our climate smart, energy efficient installations that lead to lower consumption of resources. During this first quarter, we started rolling out our new sustainability program. We call it Sustainable Installations. It enables us to expand our approach and take even greater responsibility in the area of sustainability. The sustainability program focus on three main areas that should permeate all areas of Instalco's sustainability work. First one is safe and modern work environment. The second one is sustainable installations, and the third one is mature leadership.
Within these three main areas, there are eight sustainability targets that will be measured and monitored with the goal of achieving improvements each year in all these areas. Going to slide 12. Say that one key component of the new sustainability program is our classification system. We call it Sustainable Instalco Project, which we have developed ourselves. In order for a project to become classified as a Sustainable Instalco Project, it must meet six specific sustainability indicators. For example, it must meet the requirements on occupational health and safety by going through the safe employee program when the project starts up. Furthermore, all suppliers involved in the project must sign Instalco's code of conduct. The project must also demonstrate qualities making it climate smart.
We think that the sustainability classification will serve as a stamp of quality for both the project, our customers, Instalco, and our subsidiaries involved in the project. Leaving that and going to the financials and financial situations, financial targets on slide number 13. As you can see, and if you have followed us, you can see this slide every time we have a quarter report. We have green dots, I will say all over, both in growth I would say, almost in margin, absolutely in the capital structure. Our cash conversion is very high, and we still hang on to our dividend policy. I don't think it is so much more to mention about that. We are doing well. Slide number 14, a summary. I have talked about all these bullet points. Strong quarter despite Corona situation.
It hasn't hit us in the construction and installation sector quite as hard as it has in other sectors. We have a good profitability. We have a strong growth, high cash conversion, and high cash flow. I'm satisfied with the quarter. We launched our new sustainability program. Also continuing with our new strategy for increasing service offering. We have a very high level of uncertainty about the future. As I've mentioned several times, it's very difficult to assess the market. I think that's a summary. As you know, I like to wrap up these meetings with reference to a song title. This time, it's the new Rolling Stones song, "Living in a Ghost Town." I think it symbolizes the world situation that we are all trying so hard to cope with right now.
With that, I would like to thank you for all joining in on this call, and I now like to take your questions.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero and then one on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing zero and two to cancel. First question is from the line of Stefan Andersson from SEB. Please go ahead. Your line is open.
Thank you. A couple of questions. I guess I'll start with the more difficult, I guess, to answer, but you mentioned the other Nordics and the bigger impact on that business due to the COVID-19. Just to understand, you said on one hand that you expect that division to perform better when it comes to margins. Just trying to understand what kind of time frame are you talking about then, because I guess that COVID-19 will have a bigger impact in Q2 than it had in Q1, since there was only one month really impacting, I guess. If you could elaborate a little bit more on how steep was the decline in March versus January, February, and what you mean by expecting higher margins. Is that next year, or do you expect that already in the coming quarter?
The reason I would say for the more moderate margin shown in the Rest of Nordics is not just the COVID-19 situation. We had some projects that we now ending during the quarter, I would say, and especially in March, that didn't perform so well. Going through the order backlog now, I can see that we have a more healthy situation in the future. I think also that the societies, especially in our industry, installation industry, are opening up. They're also easier. The difference between Sweden and Norway, for example, and maybe Finland as well, they have more employees or I would say blue collars, at least from the Baltic, the countries, and have been a problem to handle that. That's a different situation from Sweden. It's not just the COVID-19 situation that had affected us in Norway. We're talking about Norway now, not Finland.
Finland is going very well. What I can see is that we will recover and we will increase the margin due to the better order backlog that will have the higher margin in the projects.
Okay. Thank you. second question is relating to a little bit detail, but I think you have one-offs, which normally is transaction costs. It's high again. Was it SEK 11 million? Yeah, SEK 11 million. While on the page in the report where you talk about transaction costs, it seems like they are SEK 2 million-SEK 3 million. What is the difference there? Why are they on that high level, and what's the difference between what you stipulate on the transaction side page on your report there?
Yeah. That number, I think it is almost 200% the earn-out. We have earn-outs in all. When we acquire companies, we have an earn-out. We have still not, I would say, leveled out the earn-outs totally, but we are heading to that. We thought we had that last quarter, but there was still some effects of leveling out the earn-outs. I think that 100% of those SEK 12 million is affected by earn-outs or due to the fact that we haven't 100% control, I would say, on that. I think we are doing a lot to see that that won't happen in the future. I think we can also, after this year, just, how do you say, skip the adjusted EBITDA and call it just EBITDA from now.
Still we have some effects of what we have done before.
Just so I understand correctly, normally the earn out is booked in the balance sheet and taken against that booking. What you're saying is that your acquired companies, some of them have done so well that they performed better than you thought when you.
Exactly.
Yeah. Okay. Last question is financial net. The interest rate, I guess, is not as high as it looks in the financial net with SEK 11 million. Is that large negative there, is that relating to currency changes, Norway, or possibly, or is there something else impacting that number?
I have not quite the figures, but I think I have to address that to Robin, so I don't say something that is wrong.
We can come back to you with an answer on that question, Stefan.
Thank you.
Thank you, Robin. Thank you.
Okay, that's all for me.
Just as a reminder, if you do wish to ask a question, please press zero and then one on your telephone keypad now. Next question is from Jon Hildur from Industrifonden. Please go ahead. Your line is open.
Thank you. I'd like to come back to the first question Stefan talked about foreign employees. I had a bad line, I didn't quite catch it. What did you say about some difficulties in some region with getting employees into the projects? Could you please repeat that?
It's more usual in Norway to have employees from other countries, and they have to be in quarantine, what you call that in English?
Quarantine.
Quarantine, yeah, for a couple of weeks when they got back to Norway. Of course, if it affects us, it also will affect the construction industry. The pace is slower in those projects that are depending on more blue collars from Estonia, Lithuania, and other countries. That means that it's a little slower pace in those projects.
Is that due to construction companies outside yourself are using foreign workers, or is it your own companies that use foreign workers?
I will say both. We have what we call POC, percentage of completion. When we have that, a slower pace or a slower tempo in a project means that we have more fixed costs to take care of. It affects us a little. Absolutely. I think they are returning now and the quarantine has started to It's not so usual anymore.
Okay. This hasn't been an issue for Sweden? I would assume that there are a lot of foreign workers in the construction industry as a whole in Sweden as well that might be affected.
You can't compare it with Norway, for example. We have managed that in Sweden well. We have a more open society, and we have not been closing down so much, and the workplaces at construction sites. We have another situation, I would say.
Okay. A final question on the big order of SEK 700 million that you talked about. You typically work with much smaller orders. Will this be a challenge for your company to work with such a large order? Will they be forced to turn down other orders because they are full on capacity? Do you think this will just be a very smooth, visible order to work with?
Yeah, we will have these projects ongoing for I think five or six years. On a yearly base, it is not a very large order. I'm very glad that I have it today because of the situation, of course, but we also involved six of our subsidiaries to participate in the project. I think it's a normal situation we have, and we will not say no thanks to other orders just because of this. You also built up a specific organization for this, taking care of such a large order, and they are rather independent from other subsidiaries or companies.
Okay. What will happen with that organization when the project is finished?
It's five or six years. I think we can manage that during that time. Hopefully they will go to another project, maybe not in the same size, but I think we will fix that during these five, six years that we have to the end of the project.
All right. Thank you.
There are currently no further questions registered, so I'll hand the call back to the speakers for any closing comments. Please go ahead.
Yes, it's Fredrik here. We have a few questions from the webcast. Per, if you can talk about the large driver behind the organic growth this quarter. What were the main drivers that helped the organic growth?
I think that we have the same situation that we often have. First of all, I would say organic growth is something that you have to see all the time. We have had a fantastic organic growth, both in quarter three 2019, quarter four 2019, and now in quarter one. The base for it is that when we acquire new companies, they start to collaborate with other companies in the group. We can see that we can take on larger projects as we mentioned earlier there, and what the question was about. We can see larger projects. We can also see more complex projects that we can take on. It's a natural thing that our organic growth is going so well.
I would also say it can depend on companies that we acquire for more than one year ago, that maybe they show a little bit less organic growth, and also that companies that we acquire within the year, that they count in that organic growth that they are growing faster. We have this organic growth, but for some different reasons. I think the main reason is that the new company starts to collaborate very closely.
Right. Thank you. The other question were, if you can comment on the acquisition market. How do you think there? Have the prices gone up or gone down, or has it been affected at all by the COVID-19 situation?
Not what we can see so far has the price been affected. Of course, in the long run, it will be. Companies that we acquired, the owners, they know what they want to have for the company. I guess that in the long term, maybe it will affect and that maybe we can see a decrease in prices. Not yet, I will say. In the acquisitions that we have made this year, I think that we had agreement long before the COVID-19. I think that the prices that we give just today, but in the long run, I think a little bit down, the price level will end. Maybe.
Okay, thank you. That was the questions from the webcast. I guess we can summarize that, Per.
Yeah. I have not so much more to say. I think as I said, we are very glad that we keep up the speed and our margins, and also all the backlogs are good. I'm certain that if we can hold on and stay focused on what we do, and also be as committed, everyone in the management team as we are, I think we can handle this situation as well. Thank you very much.
This concludes the conference call. Thank you all for attending. You may now disconnect your lines.