Earnings Call: Q2 2019

Aug 23, 2019

Ladies and gentlemen, welcome to the Instalco Q2 Report 2019. Today, I am pleased to present CEO, Per Solstrom and CFO, Lars Sjorgren. 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. Speakers, please begin. Thank you very much. And I also want to welcome you to this presentation, Auguste Stalco's Q2 report for 2019. As you heard at the introduction, my name is Persher Strand. I'm CEO of Instalco. And during this presentation, as always, I have I'll be assisted by our CFO, Doctor. Schurgen. And let's move to Slide number 2, showing a brief overview over Instalco, the Instalco company. And of course, I'm now pleased to report that we have reached sales of more than SEK 4,500,000,000 at least on a 12 month rolling basis. We have now 60 companies and in total, almost 2,500 employees. You can also see there that we have a run rate increase down on 8.4%. Moving to the next slide. A little bit about the market. And we will say that the total value of the Nordic market is more than €200,000,000,000 Sweden is the largest component. And we think also that throughout the Nordic region, still urbanization is a strong trend, and one of the main driving forces in this sector. But we have also other factors fueling the market, such as a shortage of housing, technology development, a lot of investments in infrastructure and also aging property holdings. And as you know, more recently, there has also been greater emphasis on environmental awareness, generating benefits to society and sustainable entrepreneurship in the market. Over time, the Nordic operation markets have had a stable rate of growth. It's starting to level off. But important to emphasize that it is doing so at a record high level. We will be back to that later on. Going to the next slide, Slide 4. Of course, I'm proud to report that we have had a good profitability and strong growth in the Q2 of this year. During that period, we have made 5 acquisitions, which has broadened our geography coverage. We also start up 2 new companies of our own, and we will go back to that, too. Net sales increased by 20% to SEK1.4 billion and with an organic growth of 2.7%. Adjusted EBITDA for this quarter was €123,000,000 and that's up from €107,000,000 last year. That gives us a margin of 8.7%. Also, unordered backlog remains high at more than €4,500,000,000 which is an increase of 16%. We can move to Slide number 6, Slide number 5. And these diagrams show the trend for Instalco net sales and adjusted EBITDA compared to prior years. Our robust growth stems from our active acquisition strategy. And also for several quarters, we have had order backlog the size of the last 12 months. These strong figures are now reflecting the result of our strategy of working with many small companies and medium sized projects that keeps risk at a low level with a high profit margin. Our business also has low exposures to the housing declining housing market. We have just 10% new construction. Our largest area of operations installation is installation work at public buildings such as schools, preschools, hospitals and other public facilities. And offices and commercial facilities are our next largest area. We can then move to Slide 6. And as I already mentioned, our backlog of orders remains high, and our situation is quite stable, thanks to our wide portfolio regarding 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. If we go to Slide number 7, I would like to highlight 2 projects from the quarter. And I think they are great examples of how we work in Stalco. As we have said from the beginning, creating synergies and cross selling between our companies is fundamental to Instalko's business model. And one excellent example of that is our project from export, where 5 Instalko companies with different areas of specializations are collaborating. And together, we will provide heating and plumbing, electric and ventilation installations along with controller regulations technology associated with construction of the JUPE Supermarket for 10 ship. And another example of successful collaboration between the historical companies we find in Finland, where Elbit Paola and Saiki Bumi are collaborating on the heating, plumbing and electrical installation at the large focus building in Helsinki that is being renovated. Going to Slide number 8. If you look closer, more closely at the segment Sweden, you can see the net sales increased by 50%, over 50% with an organic growth of 2.4%. And I also think we have a stable margin here at 8.6%. Lotta will comment on that later on. I think we think that the Swedish market remains stable and with electrical installation as the largest component. We can also say that in Sweden, we have organized ourselves in 4 regions. It's North, South, East and West, where each region has a regional manager that can carry around 10 to 15 companies each. And these managers are working not only as managers, they are also acting like supporting coaches for the companies in the region. So if we want to grow, we can also start new regions. I think that's a strength that we have. Moving to Slide 9 and rest of Nordic, that means Sweden that means Finland and Norway, of course. Net sales increased by slightly more than 33% and with an organic growth of 3.8% It is about 7. And in recent quarters, and I think you have heard it before, but profitability for Western Nordic was negatively impacted by a major loss project in Norway. And that project has now been completed. So we expect to see good results here going forward. We can already see good results here. And of course, I'm very pleased with the steps we have taken to improve profitability. I'm proud that the rest of Munich is performing so well. I mean improvements are partly attributed to our efforts to improve processes, also higher focus on activities to improve profitability. And of course, also our improvement program, the iFocus, that we have launched. We have also well done a lot of good acquisitions, I would say. Looking into the market. The market in Turkey, Finland, obviously, it's strong. We have a good large order backlog. Here, major metropolitan areas and industry clusters are still the main engines in the market. Going to Norway, the market is stable, has been so for many years, especially in the Western region, with high growth in all regions where we are represented as well. Okay. Going to Slide number 10, a little bit about acquired companies. And as you have understood, we have continued to actively pursue our acquisition agenda. And during the quarter, we acquired several new investment companies and operations, which has broadened our geographic coverage and offering. And here are two examples of that that I want to highlight. One is a company called Model Road. It's located in Kristiansand in Norway, which has given us access to a new interest in the market. The company primarily focuses on major heating and plumbing installation projects for industrial customers. And the second acquisition I'd like to highlight is Morgissons Aeron CLF. It's located in Odisha Hahn, Sweden. And it's specialized in electrical installation at residential property. And the acquisition broadens our coverage of Vesterjeotelan, which is a strategically important region for us. And I think that both are good examples of strategic acquisitions we made to strengthen our position in a particular area. As you all well know, I think all our companies and these companies as well have strong brands and reputations in their local markets. Also that other companies we have acquired during the Q2 are EOS EKRET in Katina Horn and Jable Eyringas. The latest was acquired by our subsidiary, Darla. Talk a little about what we call start ups. It's on Slide 11. And sometimes, we start up our own companies. That's a supplement to our main acquisition strategy. It involves setting up companies together with a local entrepreneur. We have concluded, of course, the first that the market there is favorable. And one example of this is our startup company, Instaiell Malmo. It's an electrical installation company, which enables us to work on major electrical installation contracts in South and Sweden, of course, as well collaboration projects with other Instacro companies in the region. And the other example to the right here is a startup company, InstaMate in Sodertelje. It was established for the purpose of running the installation division that we acquired from Dynomate, which is owned by Scania. And Instomate offers heating and plumbing, electrical and ventilation installation for industrial companies, of course, including Scania. Going to Slide number 12 and looking forward. Our assessment is that the market remains stable, as I said before, with the constant rising demand for energy efficient sustainable solutions. We also think that the rate of growth for construction in the public sector remains high, and the same applies to construction of commercial properties, such as offices and business facilities. But as you know, everyone this point has seen an overall slowdown in the economy and in our market, of course. But I think we have a wide portfolio and large back of orders. And because of that, we have many ways of adapting to any changes that might occur in the market. Thank you, Ben. I'd like to do some additional comments on that. Next slide, please. During the first half of the year, we have made 8 acquisitions in total. After the end of the reporting period, we have made another 5 acquisitions. These 5 companies have an estimated annual sales of around DKK350 1,000,000. That means that so far this year, we have acquired annual sales of slightly more than DKK1 1,000,000,000, which far exceeds our goal of DKK600 100,000,000 to SEK800 1,000,000 per year. With this in mind, we have more than 5 months left this year for upcoming interest and acquisition. What I'm saying is that we will keep up at the position pace even though we already reached our target by far. I'm also glad to report that thanks to our strong cash conversion, we have been able to mostly acquire companies without increasing our loans. As you perhaps noticed, the adjusted EBITDA margin for the group is lower than EBITDA. The explanation for that is that this stems from an adjustment of prior reported additional earnouts. I would also like to comment on the fact that EBITDA for Sweden is lower than it was for the same period in 2018. The slight decline is primarily attributable to an extraordinary margin in the same period last year and delayed start of some projects earlier in this year. These are now underway, however. On the other hand, as Dara said, the margin for rest of Nordics improved exceptionally well. Next slide, please. Just 6 months into the year, we nearly achieved our run rate EBITDA target of BRL450 million by 2019. As you might remember, it's a goal we formulated when Installedcore 1st was established. Since we started in Salzcor, we have had stable profitability, and the graph here shows that we have accomplished what we set out to do already back in 2014. And with this in mind, we will continue our plan of acquiring profitable companies, creating synergies and developing companies together with others within the Instalco Group. Next slide, please. On this slide, we show our financial targets. As you can see on the right, there are green lights for all the targets. Falco's growth target is that the average growth in sales should amount to no less than 10% per year over a business cycle. The growth should be achieved both organically and through acquisition. With that, we can conclude that our performance is in line with all of our financial targets, it is also worth mentioning that we have set targets that we can maintain over time and which enable us to scope with the fluctuations in the market. Okay. Thank you for those clarifications, Lotta. We can then move to Slide 16 and a summary. So I could probably conclude that Instac has another strong quarter and with high growth and profitability. Of course, as you have understood already, I'm particularly proud of how Western Nordic has performed. As we have also mentioned, we have made 5 additional acquisitions subsequent to the end of the reporting quarter, leading me to conclude that the acquisition climate remains favorable and interest in becoming part of the Instalco Group is very high. And then we can go to the last slide. This time, I'd like to conclude with a reference to another classic Rolling Stones hit from 1974 and time waits for low one, at the moment, for us. I think the song and its titles reflect what profitable entrepreneurship is all about, namely during business, here and now. And what I mean with that is I think we have the right business model for acting now, and the climate for consolidation in our industry couldn't be better, both from a customer and a sustainability perspective. I also think that conditions are right for making acquisitions, and we have many interesting acquisition targets in the pipeline. We both can and should act now on the opportunities in front of us. The last slide. And with that, I'd like to thank you all for joining in on this call. And now I'd like to take your questions. Thank first question comes from the line of Jefa Anderson of SEB. Please go ahead. Your line is open. Stefan Hansen, yes. A couple of questions. First, on the growth rate, two questions there. Can you speak out louder, please? Absolutely. Can you hear me better now? Yes. Okay. So two questions on the growth first. You said organic growth in the quarter was 2 point well, almost 3% and for the half year, 2%. And if I remember correctly, it was 6% or something like that in Q1. So it doesn't really work if you weigh those together. And maybe it has something to do with the all the companies coming on stream. Maybe if you could just elaborate on that number. And while you do that, what kind of impact do you think that Easter had on your revenues in the quarter? I guess, it's been negative. Is it like 2% to 4% or around 3% negative? Yes, that's first. 1st, for the organic growth. When you have just the Q2, it's the same as the Q2 last year. But when you take for the 1st half year, it's not the same company because some of the companies was not there from the beginning of the year. And that's why it doesn't really collaborate when you look at that like that. It's a bit hard to explain, but Okay. It's a different basis that I used. Yes. Okay. I guess, yes. So if I'm trying to understand, why the reason I'm asking is that I would like to look at the half year, see the underlying organic growth. And Easter is impacting Q1 positively and Q2 negatively. So if you just look at Q2 isolated, the 2.7% or 3%, what kind of impact do you think Easter had, if any? Maybe you would say it had none impact, I don't know. I don't think the suddenly It's more the how the project is starting and ending and what projects it's going on for the time being, it has much more impact than it is that comes from out. And then second question is on the earnout revision that you do here, maybe if you can just mention where it originates from? It's from several companies that we had bought from both last year or the year in 2017 2018. Some of the companies hasn't performed so well that we thought they would do. So they didn't get so much earn out that we thought they should have. Q1. Sorry. We have tried to refine how to calculate it. So it won't be so big difference in the future. So is it fair to say that you made a bigger run through of that subject and adjusting it and then okay, good. And then the financial net, boring question. And maybe it's in the report, I haven't seen it. But it's only SEK 2,000,000, I think, which looked a little bit low. Is there any positive is there any specifics in there? Or is that the level now? On what? I didn't hear from The financial net was SEK 2,000,000 only in costs. I think it was SEK 5,000,000 in Q1. So it was a little bit on the low side. Is there some revaluations in there? Or No. Now you look surprised. Maybe I'm wrong here. No. I have to look into that, but I can't answer that. Okay. And then the Swedish margin, I don't you don't write much about that on a year on year comparison, but I guess you saw a little bit of that in Q1 as well. So it's 2 quarters with margins down. Maybe if you would like to elaborate a little bit on that development, why it's there and how we should view that going forward. It's well covered now by the improvement in the international. But still, it surprised me on the weak side, to be honest. Yes. I mean, it's more normalized margin now, I think. I think that last year was extraordinary margins. You can't held 11.7% of what we had. It's impossible. So I think we have our financial goals, 8% margin over time. You can also look into the nearest Nordic, where we today have 9.7%. So it differs. But I think Sweden is going very well. And I think also we can accelerate the production this year or next year. But the margins, I don't think we can expect 11% in margin in any market. And we also can say that I think this year, maybe the second half of the year will stronger. But I think the margin, as I said, is more normalized now than last year. Thank you. Okay. There seems to be no further questions at this time. So I'll hand back to our speakers for the closing comments. Thank you very much, and see you next time, November 6, I think, or 5, something there. So thank you very much, and have a nice weekend. Thank you. Thank you.