Earnings Call: Q1 2020

May 7, 2020

Ladies and gentlemen, welcome to the Instelco Q1 Report 20. For the first part of the call, all participants will be in a listen only mode and afterwards there will be a question and answer session. Today, I'm pleased to present CEO, Pierre Schussmann and Frederic Trond, Head of IR. Please begin. Thank you. Thank you very much. And 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 Sjesran, and I'm CEO at Instalco. I hope you can hear me well despite the fact that I'm sitting at home on the 2nd floor. It's very hot in here, but I hope you can follow us. Starting, of course, with Slide number 1. And as you can see here, we now reach sales or we have now reached sales of more than SEK 6,000,000,000 on a 12 month rolling basis. We have more than 70 companies and in total more than 3,000 and produced. We also you can see we have a strong order backlog and we also have an adjusted EBITDA margin, 8.8%, which is very high. So we can go on to Slide number 2 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 we were very strong organic growth, 11%. Also, I think I'm very satisfied with the strong cash flow with a stable order backlog. And last but not least, we launched our new sustainability program during the quarter. I will come back to all this. So that's the highlight of the quarter, I think. Next slide, Slide 3. We had a strong quarter, yes, despite the difficult situation we faced throughout the world from the COVID-nineteen pandemic. And the corona crisis has not hit the construction and installation sector quite as hard yet, I would say, as it has other sectors. So far, we have been able to keep up keep our workplace open. We have also been able deliver materials to our various ongoing projects and assignments as usual. So for Instacor, the corona pandemic has not resulted in any significant or any major disturbance at group level. But there have, however, been some minor disturbance in some projects and service. And but 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 typical 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 effective. Accordingly, we are preparing for more flexibility in the future. And 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. And 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. So the Instacom model provide us with a very flexible structure, I think. What we have to do now that we must now increase our flexibility even further, and 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 arise. As I said, it's currently difficult to assess how the coronavirus will impact the long term market conditions in the global economy. But of course, like all other companies, Instalko is impacted by downturn in the economy. So hard to assess the market. If you go to Slide number 4, of course, as I said before, I'm very proud to report that we have a stable growth in net sales and also a very strong organic growth. And you can see that, that's the situation. Also, you can see to the right there about the quarter has been the 4 year. I think we have said that before quarter 1 usually is the weakest quarter of the year for installation companies or even in the construction industry. So leaving that and going to Slide number 5. Mentioning that the order backlog or back of the 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. And then of course, the large backlog of orders provides us with a good level of flexibility to carry out operations in our sector as well. So that's the order backlog. If you go to Slide 6 for a moment. And I like to highlight great examples of how we work, and this is 2 of our projects from the quarter. And the first one I'd like to emphasize is Instalco's collaboration with NCC, with a construction company NCC and Regent Sermla in a very in a major hospital project. In this, we have 6 Instalco companies participating under the leadership of Ruhr Gruffner and Omega. It is our largest project to date, where hospitals in Eskilstuna, Catherine, on the new shipping, will be expanded and modernized. And the project will be going ongoing during from today to 2026 with an order value of approximately SEK 700,000,000 and the majority which we'll be reporting order intake for the Q2 of 2020. I will also add that the project is taking in what we call partnering. That means open books and I would say 0 risk. The other project is a much smaller project. But I think it exemplifies, however, that many of the many smaller, well managed projects going on in our subsidiaries throughout the Nordic region and look like. Here are Finnish companies, Elbe Uerkornpi, Paola Oil and Twin Putki Oil were awarded contracts for installation work that is a part of a major sustainability project in Espoo municipality outside of Helsinki. And 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. 2 good examples. So if we turn to Slide number 7, there we have a segment in Sweden, segment development in Sweden. And you can see that we continue to deliver in high margins, 10.2%. This still high rate of construction for schools, preschools and hospitals, a very good net sales growth and as well as organic growth and also, I think, a very stable and good order backlog. Going to next slide, on Slide number 8, and rest of Nordics segment development, rest of Nordics. Has been a slower start of the year. It's a bit of a shutdown of society due to corona situation in Norway and Finland. That has slowed down the rate of production somewhat. A good net sales growth, a good organic growth and a good order backlog, but I'm not totally satisfied with the EBITDA margin. I think we will we can see an increase in that further on. Slide number 9, a little bit about our acquisitions. We are continuing to sign new contracts for new installation jobs, both larger and small. We are also still engaged with several acquisitions candidates as planned. And our acquisitions pipeline, I believe, is unchanged. And we hold on to our expected annual acquired sales in the range of 600,000,000 to 800,000,000, which we feel rather certain of achieving. And two examples from the quarter is on next slide, 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, Eelog in Vekse, which means that Instalco is now and for the first time represented in Cronenberg County. In Norway, we strengthened our position in London County with the acquisition of Hauge and Rud in Lillehammer. It offers installation of heating and plumbing and ventilation system. And Hauge and Rud is also a natural partner for collaboration with our prior acquisition in Lillehammer, Niedbu OS. It brings us one step closer to becoming multidisciplinary in the country of Inland. We have also acquired a smaller company, Esterho Elekteskyn Nortelje, during the quarter with the intention of merging it with Rubens, Baim and Sanitya in the same town. Moving to Slide number Providing safe, sustainable installations that help generate benefits to society is a high priority for us. I've 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. We are climate smart, energy efficient installations that lead to lower consumption of resources. And during this Q1, 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 3 main areas that should permit 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. And within these three main areas, there are 8 sustainability targets that will be measured and monitored with the goal of achieving improvements each year in all of these areas. Going to Slide 12 then, and say that one key component of the new sustainability program is our classification system. We call it sustainable Instacro project, which we have developed ourselves. And in order for a project to become classified as a sustainable Instalko project, it must meet 6 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 finance Daleko's crude of conduct. The project must also demonstrate qualities making it climate smart. And we think that, that sustainability classification will serve as a stamp of quality for both the project, our customers, Instalco and our subsidiaries involved in the project. So leaving that and going to the financials and financial situations, financial targets on Slide 13. As you can see and you have 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, in the absolutely in the capital structure. Our cash conversion is very, very high, and we still hang on to our dividend policy. So I don't think it is so much more to mention about that. It is 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 high as it has seen in other sectors. We have a good profitability. We have a strong growth, high cash conversion and high cash flow. So I'm satisfied with the quarter. We launched our new sustainability program, also continuing with our new strategy for increasing service offering. We are, of course, very high 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'd like to wrap up these meetings with reference to a song title. This time, it's the Rolling Stones song Living in a Ghost Town. I think it symbolized the world situation that we are trying so hard to cope with right now. And with that, I would like to thank you for all joining in on this call. And I now like to take your questions. Thank First question is from the line of Stefan Andersen from SEB. A couple of questions. I guess I'll start with the more difficult I guess to answer. But you mentioned the Nordics and the bigger impact in that on that business due to the COVID-nineteen. 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-nineteen will have a bigger impact in Q2 than it had in Q1 since there was only 1 month really impacting, I guess. So if you could elaborate a little bit more on how steep was the decline in March versus January, February? And what do you mean by expecting higher margins? Is that next year? Or do you expect that already in the coming quarter? The reason, I will say, for the more moderate margin shown in the rest of Nordics is not purely or not just the COVID-nineteen situation. We had some projects that we're now ending during the quarter, I would say, and especially in March, that didn't perform so well. But going through the order backlog now, I can see that we have a more healthy situation in the future. And I think also that the societies are and especially in our industry, installation industry, are opening up. They are also easier. I mean, the difference between Sweden and Norway, for example, is and maybe Finland as well, we they have more employees from or I would say blue colors obviously from the Baltic countries. And there have been a problem to handle that. That's a different situation from Sweden. But so it's not just the COVID-nineteen situation that had affected us in Norway. We're talking about Norway now, not Finland. Finland is going very well. So what I can see is that we will recover and we will increase the margin due to the better order backlog that we have in the higher margin in the projects. Okay. And then 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 11,000,000 euros Yes, dollars 11,000,000 While on the page in the report where you talk about transaction costs, it seems like they are 2,000,000, 3,000,000 So what is the difference there? Why are they on the high level? And what's the difference between what you stipulate on the transaction side, Pedro, on your report there? Yes. That number is I think it is almost 200%. Earn out. We have earn outs in all when we acquired companies, we have an earn out. And we have still not, I will say, level out the earn outs in 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. So I think that 100% of those SEK 12,000,000 is affected by earn outs or due to the fact that we haven't 100% control, I would say, on that. But I think we have now taken we are doing a lot to see that, that won't happen in the future. And we have also, I think we can also, after this year, just, let me say, skip the adjusted EBITDA and then call it just EBITDA from now. But still, we have some effects of what we have done before. Just so I understand correctly, normally, the earnout is booked in the balance sheet and taken against that booking. So 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. Yes, okay. Then last question is financial net. The interest rate, I guess, is not as high as it looks in the financial net with €11,000,000 Is that large negative there? Is that relating to currency changes, Norway or possibly? Or is there something else impacting that number? I don't I have not quite the figures, but I think I have addressed that. I think I have addressed that to Robin to be so I don't say something that is wrong. I think I will We can come back to you with that with an answer on that question, Stefan. Thank you. Thank you, Robin. Thank you. Okay. That's all for me. Next question is from Jon Hultner from Nterfontein. I'd like to come back to the first question. Stefan talked about foreign employees. If I had a bad line, so I don't quite catch it. What did you say that about some difficulties in some region with getting employees into the projects? Could you please repeat that? I mean, 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, yes, for a couple of weeks when they got back Norway. And of course, that will affect us, it also will affect the construction industry. So the pace is slower in those projects that are depending on more blue colors from Esla, Lettla, Lettla, Lettla and other countries. And that means that it's a little slower pace in those projects. So is that due to construction companies outside yourself are using foreign workers? Or is it your own companies that use foreign workers? Both. I will say both. And we have what we call POC, percentage of completion that and when we have that slower pace or slower tempo in a project means that we have more fixed costs to take care of. So it affects us a little, absolutely. But I think they are returning now and the currency has started to it's not so usual anymore. Okay. But 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. But you can't compare it with Norway, for example. And we have managed that in Sweden well. I mean, we have a more open society. We have not been closing down so much. And the workplaces at the construction sites has been more, I mean, yes, we have another situation also. Okay. Then a final question on the big order of SEK 700,000,000 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? Or will do you think this will just be a very smooth and visible order to work with? Yes. I mean, we will have this progress ongoing for, I think, 5 or 6 years. So on a yearly basis, it's not a very, very large order. I'm very glad that I have it today because of the situation, of course. But we also involve 6 of our subsidiaries to participate in the project. So I think it's just a normal situation we have, and we don't 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. But when then what will happen with that organization when the project is finished? Yes. It's 5 or 6 years. I think we can manage that during that time. And hopefully, they will go to another project, maybe not in the same size, but I think we will fix that during these 5, 6 years that we have today on the project. All right. Thank you. And 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. So Per, if you can talk about the large driver behind the organic growth this quarter? What are 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 3 2019, quarter 4 2019 and now in quarter 1. The base for it is that we start when we acquire new companies, they start to collaborate with other companies in the group. And we can see that we can take on larger projects, as we mentioned earlier there, and what the question was talked about. We can see larger projects. We can also see more complex, I would say, projects that we can take on. So it's a natural thing that our organic growth is going so well. I would also say it can depend some companies that we acquire for more than 1 year or 2 ago that maybe they can they show a little bit less organic growth and also that companies that will acquire within the year that they count in that organic growth, that they are growing faster. So 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. And the other question were, if you can comment on the acquisition market. How do you think there price has gone up or gone down? Or has it been affected at all by the COVID-nineteen situation? Not what we can see so far has the price been affected. Of course, in the long run, it will be. But also, companies that we acquired, the owners, they know what they want to have for the company. And so I guess that in the long term, maybe it will affect that and that maybe we can maybe see a decrease in prices. But not yet, I will say. And then in the acquisitions that we have made this year, I think that they were we had an agreement before long before the corona-nineteen. And I think the prices that we did just today, but in the low run, I think a little bit down, I think, the price level will end, maybe. Okay. Thank you. That was the questions from the webcast. So I guess we can summarize that, Thad? Yes. 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 also our order backlogs are good. And I'm certain that if we can hold on and, yes, stay focused on what we do and also be as committed, everyone in management, the management team as we are, I think we can handle this situation as well. So thank you very much. And this concludes the conference call. Thank you all for attending. You may now disconnect your lines.