Earnings Call: Q3 2019

Nov 7, 2019

Ladies and gentlemen, welcome to the Enstelco Q3 Report 2019. Today, I am pleased to present CEO, Paragraphstad. Paul Kraftwerkstrom. Please begin your meeting. Thank you very much. And of course, I will welcome you to this presentation of Instalko as a quarter 3 report for 2019. My name is that you heard, Per Sjesjan, and I'm CEO of Instalco. And I will say that today, our CFO, Doctor. Sjorgen, is not here. So if you have a very detailed or tricky questions relating to figures, I would like you to just to e mail the questions to our IR function, and we will come back to you, of course. And if you hear some strange sounds, it's because they are changing the roof above our studio here at the moment. So but I think I can we can handle that. First slide, Slide 1. We used to show this slide. Gestalco, a short overview. We are a leading Nordic installation group in heating and plumbing, electrical and ventilation and cooling with strong local brands, high decentralized structure, and we have and still deliver high margins over time. And as you can see here, we have now reached sales of more than SEK 5,000,000,000, and that is on a 12 month rolling basis. We have 65 companies and in total, more than 2,500 employees. So let's go to the next slide, just shortly about the Nordic installation market. The value of the total Nordic market, the installation market is more than SEK 200,000,000,000. Sweden represents the largest component. Steel urbanization is a strong trend throughout the Nordic region, and still also met the main driving force in the installation sector. But also other factors fueling the market are a shortage of housing, technology development, investment in infrastructure and aging property holdings. And more recently, there has also been greater emphasis on environmental awareness, generating benefits to society and sustainable entrepreneurship in the market. I think also that over the time, the Nordic installation market has had a stable rate of growth, although it's now starting to level up. And important to emphasize that it is doing so at a relatively high level, as you can see from the slide. With that, I think we can go to Slide 3. And of course, I'm very proud to report that for this quarter, we have had a stable growth in sales and continued good profitability. And during the period, we made 5 company acquisitions, all of which have contributed to our strong performance. Net sales increased by almost 42 percent to SEK 1,400,000,000 with an organic growth rate of 14.6 percent. Adjusted EBITDA for the 2nd quarter was SEK127 billion and with a margin of 9%. The comment on this organic growth, And I will say that the high level of this quarter's organic growth stems in part from the high growth rate of several of our subsidiaries, which we previously reported as a component of acquired growth. However, because they have been part of Stalco for 12 months, they are now, and of course, henceforth, included in organic growth. So that's one reason. Another reason for the current high rate of organic growth is that some of our subsidiaries had substantially lower sales during the same period last year, and they have made an excellent recovery this year. And also, I must, however, also again point out that it is important to look at the full year figures rather than making conclusions based on quarterly comparisons, so where fluctuations are normal. Our order backlog is stable, more than SEK 4,400,000,000 with an which is an increase of 19%. So if we go to Slide number 4, And these diagrams shows the trend for Instalcos net sales and adjusted EBITDA compared to prior years. Our robust growth stems from our active acquisition strategy. Also, for several quarters, we have had an order backlog the size of the last 12 month sales. And these strong figures are now reflecting the result of our as I think, of our strategy of working with many small companies and medium sized projects, which keeps risk at a low level with a high profit margin. Our business also has low exposure to the housing market, in fact, just 10% over new construction. Our largest area of operations is installation work in public buildings such as schools, preschools, hospitals hospitals and other public facilities. And office and commercial facilities is our next largest area. If you look to Slide 5, as I already mentioned, our backlog of orders and 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 excellent opportunities for adapting our business if changes occurs in the market. I said that before, and also I will say that again. Seasonal fluctuations like summer vacation always affect us each year in the Q3, and you can see it was the same situation last year in 2018. So Slide number 6, and here are 2 of our projects from the quarter that I'd like to highlight as great examples of how we work. We signed 2 very important large projects contracts during the quarter. Gye and Eel has been contracted by Skanska for electrical installation in conjunction with the construction of Scania's new foundry in Salt Lake. Work will be done as a part of the collaboration contract where G and TL will be responsible for the electrical installations, and the sum is approximately SEK 100,000,000. And the other major projects involves Ruhr Lega in Malmo, which has been contracted for work associated with a new hospital area down there. Lager has been engaged by Skanskar for extensive heating and plumbing installations with an order value of 2.70 1,000,000. 2 new buildings are being built as part of the major investment to expand Minerals Health hospitals, Cares Facilities. There are more than 2,200 rooms and 108,000 square meters that will be added. If you go to the segments Sweden and also Adenutics, which was Sweden. And that's Slide 7. So looking more closely at segment Sweden, we see that the market remains stable with electrical installation as the largest component. About 50% of the total market is electrical installations. In the public sector, construction and renovation of hospitals, schools and preschools remains at the high rate, And the rate of construction for commercial property, and that means offices and business facilities, is also relatively high. And net sales for Sweden increased by 44%, 44.5%, in fact, and with an organic growth of 15 0.2%. And we also have a very strong margin area, so you can see there that percent. So if you go to rest of Nordics, the next slide, Slide 8. We will say that net sales increased by slightly more than 35% with organic growth of 12.9%. And for the Q2 in a row now, profitability at full Western Nordic is good, and we have recovered from the prior loss project we had in Norway. I have mentioned that many times before. The market in Norway is stable with high growth in all areas where Instacro is represented. The market in Finland is strong. We have a large order backlog, major metropolitan areas, and industry clusters are still the main engines in that market. Then we go to Slide number 9. As you have understood already, we have continued to actively pursue our acquisition agenda. And during the quarter, we have acquired 5 new interesting companies and operation. And those companies have broadened our geographic coverage and offering. And 2 acquisitions that we have made during the quarter I would like to highlight. The first is the heating and plumbing company, Poyama Thalotechny in Oulu, which is a city in the region of North Ostrand Botnia in Finland. Our expansion into Northern Finland is particularly interesting since it's an area we have not been previously represented. And the acquisition of Pojima marks the 1st step in our geographic expansion in Finland beyond Helsinki and Tandemforsch. Then the second I want to highlight second acquisition I want to highlight is in Sweden. We have widened our geographic scope with the acquisition of Uvad, which primarily serves the markets of Ostrachan and Ore. I think both are good examples of strategic acquisitions we made to strengthen our position in a particular area, both in Finland and in Sweden. They are all companies and all of our companies have strong brands and reputation in their local markets. Other companies that we acquired during the Q3 are ROTEEM and Neeshaping, Nieland Ventilation in Jeb and Ipseki in Helsinki. So you can see on Slide number 10 that we have made 13 acquisitions during the 1st three quarters, and we continue pursuing our agenda of making high quality acquisitions. Already during the 1st 3 quarters of the year, we have acquired annual sales in excess of €1,000,000,000 which far exceeds our target of 600,000,000 to 800,000,000. And subsequent to the end of the reporting period, we made an additional 3 acquisitions, which contribute another 260,000,000. Okay. I will talk a little bit on Slide 11. You can see I will talk about how we create value. First off, we already, as I mentioned, purchase high margin companies, and we pay reasonable multiples for them. And furthermore, we have a high cash conversion rate and low level of investments, which enables us to acquire companies with our own generated profits. And then when a new company joins the Instalco Group, it gets to collaborate with other Instalco companies, which creates synergies on many levels. New customer contacts are created, and with that comes what we call cross selling. New companies in the group also gain access to projects they wouldn't have been able to manage on their own, and they may also use the central purchasing agreements we have created. Another key success factor is that the entrepreneurial spirit in our companies is very high, along with the desire to continually develop and improve throughout the entire organization. And through it all, we keep our central costs at a very low level. Okay. Next slide, Slide 12. Looking ahead and looking forward, our assessment is that the market remains stable with a constantly rising demand for energy efficient sustainable solutions. And there has been a slight slowdown in the overall economy, as you're all aware of, but we have a wide portfolio and a large backlog of orders. And because of that, we have many ways of adapting to any changes that might occur in the market. And according to the Solesholm, that is the Employers Association representing the Plumbing and Electrical Industry, the outlook for next year is about a decline of 2% to 3% in the installation sector, and that is for 2020. Okay. Slide number 13. Also looking ahead at Nastaukos, sustainability and providing benefits to society are key concepts. You have heard it before, and I will say in the future as well. We have also noticed that both our customers and subsidiaries are showing a higher level of awareness and interest in such matters. There is increased awareness of the importance of sustainable entrepreneurship and societal development among both companies and consumers. 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 safe, stimulating work environment at all companies in Greenstad will move. With this in mind, I'm very proud to report that we are about to take the next step with our sustainability efforts. We are working intensively to design our new sustainability program, and we will launch that early next year. Service is another item that is high on our on the agenda. We are currently designing a plan for soon providing a wider scope of service with our EMEA, our subsidiaries. And going forward, and in an effort to increase comparability, we also clarify what we package in the service area. Slide number 14, one of my favorite slides, I will say. We have now reached or we have achieved our run rate EBITDA target of SEK 450,000,000 by 2019. It's a goal we formulated when Instalco was first established. And since it was founded, Instalco has had a stable profitability, and the graph here shows that we accomplished what we set out back in 2014. And we will continue pursuing our plan of acquiring profitable companies, creating synergies and developing companies together with others in the Instacro Group. If we go to Slide 15, financial targets and dividend policy. As you well aware, maybe our target growth rate is at least 10% a year over a business cycle. Growth, there shall occur through a combination of organic growth and successful acquisitions. We have another goal for us to achieve an adjusted EBITDA margin of 8.0 percent. And also furthermore, in Stylus, Europe, our net debt adjusted EBITDA should not exceed percent. And as you can see, there are green dots there. And Instacro's cash conversion rates should be 100% on a rolling 12 month basis for 1 business cycle, also green dot. We can conclude that our performance is in line with or exceeding, I would say, all our financial targets. It is also worth mentioning that we have set targets that we can maintain over time and which enables us to cope with our expectations in the market. Okay. Shall we go to Slide 16 and then to start summarize? So in summary, I can proudly conclude that Instalco has another strong quarter with strong growth, high profitability and a healthy cash flow. The acquisition climate remains favorable, and interest in the coming part of the Instalco Group is still high. And this time, I'll wrap up by mentioning the heat zone, the heat is on by Glen Frey. We have the same energy here at Instalco. Where we have cranked up the temperature even further. We are continuing to deliver high margins and strong growth in sales via our high quality subsidiaries. And with that, I'd like to thank you for joining in on this call, and I'd like to take your questions. So please go ahead. And as there are no questions, I will hand the word back to the speakers for any final comments. I think it's all for us. I think it's thank you very much for joining in, and see you next time in or hear you next time in January or February, I think, the next call. Thank you very much, everyone.