Earnings Call: Q4 2019

Feb 18, 2020

Ladies and gentlemen, and welcome to the Instalco Q4 Report 2019. For the first part of this call, all participants will be in listen only mode and afterwards there will be a question and answer session. Today, I'm pleased to present CEO, Per Scholstad and CFO, Robin Bollingen. Speakers, please begin. Okay. Thank you very much. And I also want to welcome you to this presentation of our Q4 report for 2019. As you heard, my name is Per Sjostraan. I'm CEO at NISTALCO. And with me today, I have Robin Buehmermann, our newly appointed CFO. Robin is not new in the team. He has been here from almost from day 1. But I want him to present himself. Please, Robin. Hi, everyone. Yes, like I said, I've been part of the team since 2014 and the founding of Instalco. I then headed up the M and A and Business Development department. And since October, I changed over to the position of CFO. So really happy for that. I have a background from the industry, from Scania, a few years as a consultant as well as PwC before joining Falco in 2014. So really happy to be here, 3. Thank you. And now let's move to Slide 1. Hopefully, you know by now that we are a leading Pan Nordic installation group in heating and plumbing, electrical, ventilation and cooling. We have 68 individual strong local brands. We are 68 companies within the group. Our business model is highly decentralized structure. Also, we have delivered high margins over time since the beginning. We have now reached more than almost €5,700,000 in Swisscrowns, €5,700,000,000 of course, and adjusted EBITDA of €500,000,000 You're talking LTM now. And an adjusted EBITDA margin of 8.8%. We are almost 3,500 employees, and we did a very good acquired sales year at almost €1,500,000,000 We cannot directly go to Slide number 2, looking a little bit about the market. And the value of the total Nordic market is more than €200,000,000,000 Sweden, as you can see, it represents the largest component. We have some strong trends. Urbanization is one of those, and it goes throughout the Nordic region. And also is one of the main driving forces in the installation sector. Housing shortage is another one. More complex buildings is another. And over time, the Nordic installation markets has had a stable rate of growth, although it is now starting to level off, as you can see. It's important to emphasize that it's doing so at a relative high level. I think you can see the slide there and how we think the market will develop the next 2 years. If you go to Slide 3, and of course, I'm very proud to report that we have another quarter with good stable growth in sales and continued high profitability. We also have a net sales growth, 30 11%, organic growth, 6% and as you can see, a very strong cash flow. Also a stable order backlog, and we also did 6 acquisitions, we'll come back to that, of 6 high quality companies during the quarter. I mentioned that adjusted EBITDA overall was 8.8%. This quarter, it was 9.5 percent adjusted EBITDA margin. If you go to Slide number 4, here you can see that we have this stable growth in net sales and also organic growth. We have you can see also that profitability has improved, and our performance exceeds our targets for the profitability margin. I think it all reflects the result of our strategy of working when it where even many small companies and medium sized projects, which keeps risk at a low level and with a high profit margin. This year, as you can see, we also had a very strong quarter 3. Yes, I think we can go to Slide 5 then. Our order backlogs and overall situation remained stable. And thanks to the level of diversification we have as regards types of projects and markets. And our large order backlog also provides us with, I think, excellent opportunities for adapting our business if change occurs in the market. We can move to 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. In Norway, we won our largest multi company assignment to date. Anderson and Akznes and Tekkenskvendelashon have obtained a joint installation assignment for an apartment complex project in Oslo. They have been contracted for the heating and plumbing and ventilation work. And collaboration in this project is a good example of how the Instalco model is now really starting to take off in Norway. I think we have it already in Sweden. Another great example of how the Instalco Model works is a smaller project in Malmo, where 4 Instalco companies elaborated on construction of a new enlarged pharmacy. They were contracted for installation of the heating and plumbing, electricity, ventilation and sprinkler system. And with 4 of our own companies collaborating on the same project, we were able to deliver quickly with high quality and cost effectiveness. So going to Slide 7, starting with Sweden, segment Sweden. We think the market is stable. There is a high rate of construction for schools and preschools and hospitals. We have talked about that before. A good net sales growth, also a good organic growth. And as you can see, a very, very high EBITA margin, 10.7%. Our order backlog group of 6.8%, 16.8% and 2.1% in comparable June, which I think that's also a good sign. If we go to next slide and look at rest of Moody's and our other segments, there also is a net sales growth, high demand and the net sales grew 30% in this case. Organic grew 3.7%, and our order backlog is also growing. The EBITDA margin, 7.6%, I think it's good. I'm satisfied with that. We are now reaching our targets of 8%. So I think we will see that. We had a very good quarter, 3 in this case, and EBITDA margin of 7.6%. But on a yearly basis, even the rest of the Nordics now have reached 8%. I think it's 8 point 2% or 8.4%. I'm satisfied with that. But I think we have it was a bit behind us. So that is that. And now, Robin, shall we talk a little bit about how we create value? Yes. I think many of you have seen this slide before, but I'll briefly run through it. So it's Slide 9, how we create value. And as you see, they're divided into 3 different areas. You have the M and A, the subsidiaries improvement, the organizational development. And looking at M and A, you can see that we acquired the best in class companies with strong brands, good history. We can do that at an attractive multiple. We mainly focus on 3 different acquisition strategies. So the strategic one being new location or a new segment. The opportunistic one would be, for instance, where we have the possibility to buy a company at a reasonable price or with a management that we really like. An add on would be that when one of our subsidiaries, thus, an own acquisition and kind of add ons to already existing companies. Something that came up in 2018 was start ups. So we've done a few start ups as well. That will be kind of a greenfield start. So where we have a management team, but we start a company together with them. And in this M and A activities that we do, we also see that we are able to generate multiple arbitrage. Going into the subseries and the improvement there, we have a way of creating value to lean effectiveness, the cooperations between the units, mainly due to spreading of best practice and confidence throughout our network. We also have very flat and decentralized decision and organization, which also improves the entrepreneurial spirit that comes into the organization. And we kind of focus on the demand driven functions and then keeping our overhead costs extremely low with a focus on our best practice methodology called the Efukus, which is a kind of go see, and we also added on the Falcore Academy to teach our employees. So if we're moving to the next slide and talk a little bit about the acquisitions for 2019, you can see that we had a record breaking year. Like Per mentioned, almost €1,500,000,000 in sales. Just to highlight a few that I think during the year, we had, for instance, Instamate, which was a Lille specific acquisition where we bought the installation part of Scania, the truck manufacturers, called Dynamate. So we bought them over, renamed it, rebranded as Instamate. And if we look at the quarter, we did 6 acquisitions in the quarter, 4 of them in Sweden and 2 in Nordic. So if you go to next slide, I'll give you a few examples. So Slide number 11 then. We did the acquisition in Q4 of Bemtek, which is a company in Kristiansand, specialized in ventilation. There was a natural collaboration with our company, Moiroor, that we acquired earlier this year last year in 2019. So this also helps us to become more and more multidisciplinary within Kristiansand, which is a new area for us. Going over to another acquisition that we're really happy with is Henningtons Elektiska, which is a Falun and Dahlone based company that we've been looking at for many years, and they decided to join Instalco. They have a very long history with very good track record, and we're very happy that they joined as well and strengthening our team in Holland and Dalla. Okay. Thank you, Robin. Shall we move to next slide, talk a little bit about sustainable installations? And we 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 stimulating safe stimulating work environment. And we aim to, every single day, in fact, generate benefits to society through our climate smart, energy efficient installations that lead to lower consumption of resources. And for example, OlinSouthco contributes to sustainability and achieve higher energy efficiency through its installation of solar cells, heat pumps, thermal heat heating, heat exchangers, LED lighting, charging stations, energy savings program and so on and so on. We also installed a more energy efficient and environmentally friendly refrigerator system in, for example, grocery stores. Another example is the ventilation system we installed to improve indoor climate, and we are involved in several water purification projects in the Nordic region. So if you go to the next slide, I'm very extremely, I would say, proud of a major achievement, which is a recent launch of our sustainability program, Sustainable Installations. It enabled us to expand our approach and take even greater responsibility in the area of sustainability. The sustainability program focuses on 3 main areas that should or make all areas of Stavco's sustainability work. 1st, safe and modern work environment. The second is sustainable installations. And third is mature leadership. And with these three main areas, there are 8 sustainability targets that we would have measured and monitored with the goal of achieving improvements each year in all areas. Okay. Slide 14. And the one key component of the new sustainability program is sustainable Instalco project, which is a classification system that we have developed ourselves. And in order for a project to become classified as a sustainable Instelco 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 our projects must sign Constancas' rule of conduct. The project must also demonstrate qualities, making it climate smart. Sustainability classification serves as a stamp, I think, of quality for the project, for our customer, in Stalco and all our subsidiaries involving in the project. Next slide, on Slide 15. We also take another step, and we are now expanding our service offering with a goal that service should account for a larger share of our business. We aim to take it from 15 around 15% to 20%. And to achieve that, we are now building an organization. We serve with service department at our subsidiaries. And when projects are completed, the task will be to offer customers service agreements. We will also start looking at acquisitions of companies that focus purely on service, and that's, of course, in order to achieve the mix of service and projects that Instaeco would like to achieve. I think also that expanding our service operations will create customer value and generate organic growth, of course. The market for service is stable, and we have identified many profitable service companies that are attractive acquisition candidates. Rogin, shall we take the next slide, I think, 16? Yes. So those of you who follow us remember this slide as well. This is probably the last time we will show this slide, but it was just to emphasize that we reached the financial target of €450,000,000 in EBITDA and run rate for 2019. And we just wanted to show that we reached that target. We changed the financial target in the beginning of 2019. But this was just to show that we managed to reach the target, and we actually reached it already in Q3 2019. So we are ahead of schedule actually. But let's look into next slide, so Slide 17 and talk about our financial target. And as you all see, there is no changes from last time. So we have an average sales growth of approximately 10% over a business cycle, both through organically and acquisitions. And as you heard Pare mentioned before and me as well, we are well above that plan as well. Looking at the margin, we're very happy to report today 8.8% year to date. So we are above that target as well. When we come to capital structure, we have a ratio of 2.5 percent, and we are at a debt level of 1.5 percent as of December 2019. So we have some headroom here as well to continue our acquisition journey. Looking at the cash conversion, we are also very happy to report that we are year to date at 102%, so also above our target here for a 100% cash conversion. And coming into our dividend policy, we continue with a 30% dividend of net profit that will calculate to a dividend of SEK2.3 that we will suggest for to be paid out in dividends this year. Thank you, Robin. Moving to Slide 18, which is summary. And yes, you can as you have heard, I can conclude that Instapla has another strong quarter, strong growth, high profitability. I think also we have a healthy cash flow. We are launching a new sustainability program as well as service offering, a strategy for service offering. So we are very satisfied with this quarter and with the full year 2019 as well. And last slide now. This time, I'd like to conclude with some Proud Mary, you know, creating Clearwater Revivals hit from 1969. And the lyrics is, A big wheel keep on turning, drum air keep on burning, rolling, rolling, rolling on the river. And that's how this in Stalco, the wheel keep on rolling. And with that, I'd like to thank you all for joining in on this call. And now we'd like to take your questions. Thank Our first question comes from the line of Robin Newberry of Carnegie. Please go ahead. Your line is open. Hello, Pat and Robin. It's Robin Newberry from Carnegie. Couple of questions. First, I could ask about the outlook comment. You wrote in the report that you expect equal or even greater success in 2020. Could you please specify what you mean by that? Are you referring to profitability, acquisitions or what? I don't know if we wrote more success. We are very happy with our order backlog, as we said. We are happy with the market outlook. We are satisfied with our margins. So I think that we have a good possibility to achieve good results in 2020. But I don't know if you said it should increase or Yes, okay. I mean, you just wrote you expect equal or even greater success in 2020, but thank you. That clarifies it. Then I could ask on the service target. When do you think the share of services 25% could be achievable? And do you expect initially maybe some small margin pressure? I mean, you are setting up service departments? Or how should we think about this? Yes. Good question, of course. I think we it takes a year, I think, to achieve what we want going from about 15% to 25%. And of course, there can be some costs in this, but we think that we are in very, very many projects. It's easy to just hand over a service contract or to the customer in those projects. So I think it's we can handle this right, and we will have this right. I think we can have the same margin or even higher margin in the service sector. And I think that also that we can but we have it takes us a year, I think, to achieve those 10% increase. And that is on top of, I think, of the growth that we will see. Okay. And maybe lastly also in the long term, let's say, 2 to 4 year perspective, do you see the potential in services increasing to 30%, maybe 40%? Into 30%, maybe 40%? Maybe. But still, we are a lot. We have a focus on projects. We are partnering and partnering and also fixed price, of course, but also partnering. So I think it's 35% maybe 25% to 30% is reasonable. Also, it's a matter of definition. You have to define what service is. And our way to define it is maybe a little bit different from other companies, but we should be very satisfied we can reach 25% to 30% over time. But there, I think it can stay be stable, and I think we can achieve that. That. Thank you. Our next question comes from the line of Peter Anderson of SEB. Please go ahead. Your line is open. A few questions. If we start with your M and A pipeline. Going back, you've been guiding a little bit, saying that you're aiming at €600,000,000 to €800,000,000 in acquisitions annually. You're well above that now, of course. Are you willing to maybe indicate what kind of levels you aim to be on nowadays? Stefan, Robin here. I think our guidance will still be €600,000,000 to €800,000,000 And I think what we have what we saw last year was an all time high. So I think we will stick with our 600000000 to 800000000 over a business cycle. Okay, good. And then here is also the here is also always the discussion of matter of buying companies, but the key here is the integration and to do the integration as well. So a lot of focus will be put on integration, and we have also increased team a little bit to kind of take care of integration as well. Yes. Then I was maybe I missed that. I was looking for a number of outstanding shares. At the end of the quarter. I see the average, but doesn't really work when I look at your calculation of EPS. I don't get that too be the fly. So could you maybe give me the number of outstanding shares at the end of the quarter? Can you repeat that question? You have to speak up a little bit. Sorry, we have about something for you. You said something about shares at the end of the quarter. Yes. Exactly. Number of shares outstanding at the end of the quarter. I have the average in the quarter, but seems to differ from the at the end of the quarter, at the end of the quarter. Okay. Sorry, we don't have the computer with us at this call, but we will check it out and come back to you. And we'll make sure that the website is updated so people can find it on the website. So you can find the correct number on the website also very well. I probably can find it. I didn't find it there before. Okay. Then the I'm looking for figure out the margins, you for 3 years now, you've been well above your target of 8%. And you have not changed your target yet. Could you maybe elaborate on why you speak as 8% while you're actually performing higher in that year in and year out? Yes. First of all, we have said 8% over time. That's a little bit I mean, over time, what is that? But we mean a business cycle, of course. And I think maybe when we put that goal or the target goal for 8%, We had a little lower than 8%. We have now have a, I don't say, a peak maybe in the business cycle that we have good years. And I think that maybe we can stabilize our margin at higher than 8%. And while we feel safe and secure about that, then I think we can increase or have another target, maybe a higher target. But so far, I think we will say that 8% is our target. And with that, I mean, you know that we are best in class with that. And so far, I think we will held that target. And then the final question. Sorry, I missed the beginning of the call. Unfortunately, you might have touched on this. But I know that referring to some industry organizations, I think you're right into the presentation as well that the market might be a little bit softer going forward and we see some competitors of yours having negative organic growth currently already. Just a little bit curious, I mean, you're on a good level this quarter again. But are you seeing a softer demand out there? And what's is it your view that you will grow with the market? Or do you have the ability to actually outgrow the market also going forward? I think I have to agree with LCC and BRAVIT. They are talking about leveling out the market leveling out but on a high level. And I just agree with them. We can't feel some downturn or it's and another thing, we have larger projects that have been in what we call Phase 1 now moving over to Phase 2. That means that the construction part takes part. And I think we were moving a little bit in those projects as well to Phase 2, and that means that we have a lot to do. So maybe leveling out a slightly, slightly downturn, but not something that keeps me awake at night, I would say. And then your performance in that, would you I mean, you've outgrowing the market organically recently. Is that something that you could continue to do with it? Yes. We think our model just works well. We had a tremendous organic growth from the beginning. What we do is what we have talked a lot about with cross selling. Yes, sorry, cross selling. And when we bring in new companies, they start just to cross sell between and collaborate between the companies that gives a higher organic growth on average at least, and especially when they come in the 1st year when they joined us. So maybe it's a little bit natural that we have a little bit higher organic growth than others, maybe. And I hope so. And I hope that our business model, we will see the We have got a couple of questions from the webcast, if we can take that. Yes. The first one is, how big can you grow in the Nordics, do you think? And the second one, which is the next countries you're looking at? Can you comment on that, Piyush? Yes. We can also we have several white dots on our map here in all three Nordic countries. So I think to fill that, I think we can work to maybe revenue of about SEK 10,000,000,000 to SEK 12,000,000,000. After that, also we can broaden our offering to other sectors like surveillance and safety and other things. So the market is still there, and I think we have a good opportunity to grow maybe not double, but almost 50% at least in this country. And that is, of course, a snapshot that we look into Denmark and maybe further down in Europe. But Denmark is, I mean, is close to us and we have a lot of connections. Society, I think, the societies for in, for example, Switzerland and Austria and Benelux, they're very similar to ours. And I think business works the same way and we're doing business in the same manner. So maybe there is a future for that also, but that's a couple of years ahead. All right. No further questions? There are no further questions from the phone at this time. Okay. That makes sense. Thank you very much. Thank you for joining in. Thank you for listening in.