Ladies and gentlemen, welcome to the Instalco Q4 report 2019. For the first part of this call, all participants will be in listen-only mode. Afterwards there'll be a que stion and answer session. Today, I'm pleased to present CEO Per Sjöstrand and CFO Robin Boheman. Speakers, please begin.
Okay. Thank you very much. I also want to welcome you to this presentation of our Q4 report for 2019. As you heard, my name is Per Sjöstrand. I'm CEO at Instalco, and with me today I have Robin Boheman, our newly appointed CFO. Robin is not new in the team. He has been here almost from day one, but I want him to present himself. Please, Robin.
Hi, everyone. Like Per said, I've been part of the team since 2014 and the founding of Instalco. I headed up the M&A and business development department. Since October I changed over to the position of CFO. Really happy for that. I have a background from the industry, from Scania, a few years as a consultant as well at PwC before joining Instalco in 2014. Really happy to be here today.
Thank you. Now let's move to slide one. 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. We have delivered high margins over time since the beginning. We have now reached almost SEK 5.7 million. SEK 5.7 billion, of course and adjus ted EBITDA of SEK 500 million. We're talking LTM now and adjusted EBITDA margin of 8.8%. We are almost 3,100 employees and we did a very good acquired annual sales year at almost SEK 1.5 billion. We can directly go to slide number two. Talk a little bit about the market and the value of the total Nordic market is more than SEK 200 billion.
Sweden, as you can see, it represents the largest component. We have some strong trends. Urbanization is one of them, of course, and it go throughout the Nordic region and also is one of the main driving forces in the installation sector. Housing shortage issue is another one. More complex buildings is another. 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 two years. If you go to slide three, 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%, organic growth 6%. As you can see, a very strong cash flow. Also a stable order backlog. We also did six acquisitions, we'll come back to that, of six high quality companies during the quarter. I mentioned that adjusted EBITDA overall was 8.8%; this quarter, it was 9.5% adjusted EBITDA margin. If you go to slide number four, here you can see that we have this stable growth in net sales and also organic growth. 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 with 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 have a very strong quarter three.
Yeah, I think we can go to slide number five then. Our order backlogs or an overall situation remains stable thanks to the level of diversification we have as regards types of projects and markets. Our large order backlog also provides us with, I think, excellent opportunities for adapting our business if change occurs in the market. We come in to slide six. Here are two 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. Andersen og Aksnes and Teknisk Ventilasjon 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. 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 Malmö, where four Instalco companies collaborated on construction of a new large pharmacy. They were contracted for installation of the heating and plumbing, electricity, ventilation, and sprinkler system. With four of our own companies collaborating on the same project, we were able to deliver it quickly with high quality and cost-effectiveness. Going to slide number seven, 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 EBITDA margin, 10.7%. Our order backlog growth of 16.8% and 2.1% in comparable units. I think that's also a good sign.
If we go to next slide and look at the Rest of Nordics as our other segments, there also is a net sales growth, a high demand and a net sales growth, 30% in this case, organic growth 3.7%, and our order backlog is also growing. The EBITDA margin, 7.6%, I think is good. I'm satisfied with that. We are now reaching our targets of 8% sooner as I think we will see that. We had a very good quarter three in this case, and an EBITDA margin of 7.6%. On yearly basis, even the Rest of Nordics now have reached 8%. I think it's 8.2% or 8.4%. I'm satisfied with that. But I think we have the worst behind us. 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. It's slide number nine, how we create value. As you see, they're divided into three different areas. We have the M&A, the subsidiaries improvement, the organizational development. Looking at M&A, you can see that we acquire the best-in-class companies with strong brands, good history. We can do that at an attractive multiple. We mainly focus on three different acquisition strategies. The strategic one being a new location or a new segment. The opportunistic one would be, for instance, when 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 does an own acquisition and then kind of add-ons to already existing companies.
Something that came up in 2018 was startups. We've done a few startups as well. That will be kind of a greenfield start. Where we have a management team, but we start a company together with them. In these M&A activities that we do, we also see that we are able to generate multiple arbitrage. Going into the subsidiaries and the improvements there, we have a way of creating value through lean effectiveness, cooperations between the units, mainly due to spreading of best practice and competence throughout our network. We also have very flat and decentralized decision and organization, which also improves the entrepreneurial spirit that comes into the organization.
We kind of focus on a demand-driven functions and then keeping our overhead costs extremely low with the focus on our best practice methodology called IFOKUS, which is a kind of go see, and we've also added on the Instalco Academy to teach our employees. If we move into 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 SEK 1.5 billion in sales. Just to highlight a few that I think during the year, we had, for instance, Instamate, which was a little specific acquisition where we bought the installation part of Scania, the truck manufacturers, called DynaMate. We bought them over, rebranded it to Instamate. If we look at the quarter, we did six acquisitions in the quarter, four of them in Sweden and two in Nordic.
If we go to next slide, I'll give a few examples. Slide number 11. We did the acquisition in Q4 of Ventec, which is a company in Kristiansand specialized in ventilation. They're also a natural collaboration with our company, Moi Rør, that we acquired earlier this year, last year in 2019. This also helps us to become more and more multidisciplinary within Kristiansand, which is a new area for us. Going on with another acquisition that we're really happy with is Henningsons Elektriska, which is a Falun and Dalarna-based company that we've been looking at for many years, and they decided to join Instalco. They have a very long history with a very good track record, and we're very happy that they joined as well and strengthen our team in Falun and Dalarna.
Okay. Thank you, Robin. Shall we move to the next slide? Talk a little bit about Sustainable Installations. Providing safe, Sustainable Installations that help generate benefits to society is a high priority for us. We also put much emphasis on having a safe, stimulating work environment. 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. For example, Instalco contributes to sustainability and achieve higher energy efficiency through its installation of solar cells, heat pumps, geothermal heat, heating, heat exchangers, LED lighting, charging stations, energy savings program, and so on. We also install a more energy efficient and environmentally friendly refrigerator system in, for example, grocery stores.
Other examples are the ventilation system we install to improve indoor climate, and we are involved in several water purification projects in the Nordic region. If we go to the next slide, I'm extremely, I would say, proud of our major achievement, which is the 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 three main areas that should permeate all areas of Instalco sustainability work. First, safe and modern work environment. The second is sustainable installations, and third is mature leadership. With these three main areas, there are eight sustainability targets that we will measure and monitor with the goal of achieving improvements each year in all areas. Slide number 14.
One key component of the new sustainability program is Sustainable Instalco Project, which is a classification system that 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 our projects must sign Instalco's Code 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, Instalco, and all our subsidiaries involved in the project. Next slide. On slide 15, we also take another step, 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 around 15%-20%. To achieve that, we are now building an organization 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. That's of course in order to achieve the mix of service and projects that Instalco would like to achieve. I think also that expanding our service operations will create customer value and generate organic growth, of course, and the market for service is stable, and we have identified many profitable service companies that are attractive acquisition candidates. Robin, shall you take the next slide, I think, 16?
Yes. Those of you who follow us remember this slide as well. This is probably the last time we will show this slide, it was just to emphasize that we reached the financial target of SEK 450 million in EBITDA and run rate for 2019. We just wanted to show that we reached that target. We changed the financial target in the beginning of 2019, this was just to show that we managed to reach the target, we actually reached it already in Q3 2019. We are ahead of schedule, actually. Let's look into next slide, Slide 17, talk about our financial target. As you all see, there is no changes from last time. We have an average sales growth of approximately 10% over a business cycle, both through organically and acquisitions.
As you heard Per mention before 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. We are above that target as well. When we come to capital structure, we have a ratio of 2.5, and we are at the debt level of 1.5 as of December 2019. 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 100% cash conversion. Coming into our dividend policy, we continue with a 30% dividend of net profit. That will calculate to a dividend of SEK 2.3 that we will suggest to be paid out in dividends this year.
Thank you, Robin. Moving to slide number 18, which is summary. As you have heard, I can conclude that Instalco 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 a strategy for service offering. We are very satisfied with this quarter and with the full year 2019 as well. Last slide now. This time I'd like to conclude with the song "Proud Mary," Creedence Clearwater Revival's hit from 1969. The lyrics is, "A big wheel keep on turning, Proud Mary keep on burning. Rolling, rolling on the river." That's how it is in Instalco. The wheel keep on rolling. 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 you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. Once again, that's zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Robin Nyberg of Carnegie. Please go ahead, your line is open.
Hello, Per and Robin. It's Robin Nyberg 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 you said. We are happy with the market outlook. We are satisfied with our margins. 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.
Yeah. Okay. You just wrote you expect equal or even greater success in 2020. Thank you. That clarifies it. I could ask on the service target, when do you think the share of service is 25% could be achievable, and do you expect initially maybe some small margin pressure? You are setting up service departments, or how should we think about this?
Yeah, good question, of course. It takes a year, I think, to achieve what we want, going from about 15% to 25%. Of course, there can be some costs in this, but we think that we are in many projects, and it's easy to just hand over a service contract to the customer in those projects. I think if we can handle this right, and we will handle this right, I think we can have the same margin or even higher margin in the service sector. It takes up a year, I think, to achieve those 10% increase. That is on top of the growth that we'll see.
Okay. Thank you. Maybe lastly also, in the long term, let's say two to four-year perspective, do you see the potential in services increasing to 30%, maybe 40%?
Maybe, still we have a focus on projects with partnering and also fixed price, of course, but also partnering. I think 25%-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%-30% over time. There, I think it can stay stable, and I think we can achieve that.
All right. Thank you. That's all from me. Have a nice rest of the week.
Thank you very much.
Thank you, Robin. Take care.
Thank you. Our next question comes from the line of Peter Anderson of SEB. Please go ahead. Your line is open.
Thank you. Stefan, I'm sure here. A few questions. We start with your M&A pipeline. Going back, you've been guiding a little bit, saying that you're aiming at SEK 600 million-SEK 800 million 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?
Hi, Stefan. Robin here. I think our guidance will still be SEK 600 million- SEK 800 million. I think what we saw last year was an all-time high. I think we will stick with our SEK 600 million- SEK 800 million over a business cycle.
Okay, good.
Here is also with the discussion of matter of buying companies. The key here is the integration and to do the integration as well. A lot of focus will be put on integration, and we have also increased the team a little bit to take care of integration as well.
Yeah. Maybe I missed that. I was looking for the number of outstanding shares at the end of the quarter. I see the average, but it doesn't really work when I look at your calculation of EPS. I don't get that to do the slide. 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 a bad connection.
Sorry.
You said something about shares at the end of the quarter.
Yeah. Exactly. Number of shares outstanding at the end of the quarter. I have the average in the report, but it seems to differ from the end of the report. 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.
Check it out and come back to you, and we'll make s ure that the website is updated so people can find it on the website.
You can find the correct number on the website also for everyone.
I probably can find it there. I didn't find it in your report. Okay.
Okay.
Looking for, think about the margins. For three 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 stick at the 8% while you are actually performing higher than that year in and year out?
First of all, we have said 8% over time. That's a little bit over time. What is that? We mean a business cycle, of course. I think maybe when we put that goal or the choice to go for 8%, we had a little lower than 8%. We now have, I don't say a peak maybe in the business cycle, but we have good years, and I think that maybe we can stabilize our margin at higher than 8%, and when we feel safe and secure about that, then I think we can increase or have another target, maybe it's a higher target. So far, I think we will stay and say that 8% is our target. I think with that, you know that we are best in class with that, and so far, I think we will hold that target.
Yeah. 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 write it in 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, you're on a good level this quarter again, but are you seeing a softer demand out there? 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 NCC and Bravida. They are talking about the market leveling out, but on a high level. I just agree with them. We can't feel some downturn. We have larger projects that have been in what we call Phase 1, now moving over to P hase 2. That means that the construction part takes part. 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. Maybe leveling out slightly downturn, but not something that keeps me awake at night, I would say.
Yeah. Your performance in that, you've been outgrowing the market organically recently. Is that something that you can continue to do, you think?
Yeah. I 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.
Cross-selling
Cross-selling. Yeah, sorry. Cross-selling. 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. Especially when they come the first year when they join us. Maybe it's a little bit natural that we have a little bit higher organic growth than others, maybe. I hope so. I hope that our business model, we will proceed to that.
Okay, thank you. That's all from me.
Thank you.
We have got a coup le of questions from the webcast, if we can t ake that.
Yeah. Of course we can.
The first one is, how big can you grow in the Nordics, do you think? The second one, which is the next countries you're looking at? Any comment on that, Per?
Yeah. We have several white dots on our map here in all three Nordic countries. I think to fill that, I think we can go up to a maybe revenue of about SEK 10 billion-SEK 12 billion. After that, also, we can broaden our offering to other sectors like surveillance and safety and other things. The market is still there, and I think we have a good opportunity to grow, maybe not double, but almost 50% at least in these countries. That is, of course, it's natural that we look into Denmark and maybe further down in Europe. Denmark is close to us, and we have a lot of connections. Society, I think the societies, for example, Switzerland and Austria and Benelux, they're very similar to ours. I think business works the same way, and we do our business in the same matters.
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, thank you very much.
Thanks for joining in.
Thank you for listening in.