Earnings Call: Q1 2019

May 8, 2019

And I also want to have to say welcome to this presentation of Instalco's Quarter 1 Report. And my name is, as you heard, Kerstrand. I'm CEO of Instalco. And with me, I have Lotta Sjoggen, our CFO, as usual. We start with Slide 2, and here you can see it shows a brief overview over Instaanko. And of course, I'm pleased to report that we now have reached sales in excess of SEK 4,500,000,000 on a 12 month rolling basis. We are around 60 companies today and in total more than 2,000 NPGs. You can also see that we have an LTM adjusted EBITDA margin of 8.5% And our order backlog is high. So I think with that, we can go to Slide 3. And there has been a very, very rapid growth in the Nordic installation market for some time. You can see that up to the left on the slide. Now, however, I think it's starting to level off. And in some regions, the rate of growth will likely slow down. But as I said, it's important to remember that the drop will be from an all time high level. The value of the total Nordic market is more than SEK 200,000,000,000. And as you can see, Sweden represents the largest component. And throughout the new region, urbanization is a strong trend, one of the main driving forces in the installation sector. Other factors fueling the markets are shortage of housing, technological development, investments in infrastructure, aging property holdings, higher demands on sustainability and energy efficiency improvements. And with that, I think we can go to Slide 4, highlights. And I'm proud to report that in the Q1, we not only had robust growth in profitability, but also were able to make 3 acquisitions of top quality companies in Sweden, where we're continuing to grow in accordance with our acquisition strategy. Net sales, as you can see, increased by 25 percent to SEK 1,200,000,000. Organic growth was 5.8 percent and EBITDA for quarter 1 was SEK 90,000,000 with a margin of 7.6%. And our observation is that the installation sector is still stable even though there has been an overall slowdown of investments. Our order backlog remains high at more than SEK 4,600,000,000, which is an increase of 18%. Then we go to Slide 5, and Lotta shall you take over there? This diagram shows the trend in net sales and adjusted EBITDA compared to last year. And as you can see, we had record high sales compared to early 1st quarters. Sales in 1st quarter are typically lowest compared to the rest of the year. Next slide, please. Already in 2014, when Instelco was established, we formulated our run rate EBITDA target for SEK 450 1,000,000 by 2019. And once again, I'm happy to report that we're well on our way to achieving that. Next slide, please. Okay. As I already mentioned, our backup orders remains high and our situation is stable. And thanks to the level of diversification we have in types of projects and markets, we focus on what we call the middle segment, by which we mean smaller and medium sized projects. That's because of over the reduction of risk. Our large order backlog also provide us with excellent opportunities for adapting our business exchanges across in the market. We can go there to Slide 8. And here are 2 of our projects from the quarter that I'd like to highlight as a great example of how Constelco works. Collaboration between Instelco companies enables us to deliver attractive solutions to customers that meet all their needs. For example, 3 of our companies working with heating and plumbing, ventilation and sprinklers have been contracted by Skanska, which is building a new major shopping center at Volstad for their client, Iker Fastrators. Another example is Roer Leggett and Vivant have also won new contracts from Skanska who work at the site where ESS Research Institute for Lund is being constructed. We have been there for a long time. And this time, it is ventilation and pipe installation work for the TSS campus area. If we go then to Slide 9 and closely look at operation in Sweden, we can see that the market for installation services remains stable, particularly in the public sector where the rate of construction and renovation for schools and hospitals is high. Net sales for Sweden increased by 21% with organic growth of 4.6%, and we also have a very strong margin here at 9.1%. I think we can go to the rest of Nordics. Next slide, Slide 10. And for the rest of Nordics, net sales increased by slightly more than 35% with organic growth of 9.7%. But as you can understand, we are still not quite satisfied with the margin for the rest of Nordic. We have taken several actions taken to aim at raising the profitability of this segment. For example, with these continued 2 significant loss projects, and we are in the process of shutting down operations in 1 loss lagging company, but we also replaced the management tool. And we are confident that those measures will ensure that we achieve the same high level of profitability as in segment Sweden. The Norwegian market is stable with growth in all areas where Stelquist represented. Market, I think, is also stable in Finland, fueled by activity in the Helsinki region. And by that, we can go to next slide, Slide 11. We acquired 3 companies during the 1st month of 2019, all which are in Sweden. In total, the annual sales are around SEK 230,000,000, which puts us well on the way towards meeting our target of SEK 600,000,000 to SEK 800,000,000 in acquired sales per year. And I'd like to highlight 2 of the acquisitions that were made during the quarter. 1 is EcoTie EcoTie, Soala, which specializes in electrical power solutions for the process industry. It's an acquisition that strengthens our position and offering to industrial companies. And we also acquired Aquadence, which is hitting a plumbing company in Esprituna. It is situated in Meladana, which is a strategically important area to install. I think both are good examples of acquisitions we make to strengthen our position in a particular area. And I think you know that, but all our companies have a strong brands and reputation in their local markets. It's very important for us. We have also made 3 additional acquisitions after the end of the reporting period. Shall we go to Slide 12? Since the beginning of the year, we have new financial targets for the group. Instalskon now has a target of average growth that should be at least 10% a year over 1 business cycle. Growth should occur through a combination of organic growth and successfully acquisitions. Another new target is to achieve cash conversion rate of 100% on a rolling 12 month basis over one business cycle. And we're off to a great start and are well on our way to meeting targets. Next slide, please. Thank you, Lothar. So looking ahead and looking forward, our assessment is that the market remains stable with a higher demand for energy efficient sustainable solutions. The rate of constructions for new apartment buildings in metropolitan regions is slowing down, as you know. Nevertheless, the overall demand for installation service remains high. There's a high level of installation service demand. As before, and I said it before and I will say it again, one of the biggest challenges is finding enough skilled labor to meet the demand. We also say that our future I would say that our future acquisition opportunities remain good, and we have an ongoing close dialogue with several potential candidates. With that, I think we can go to Slide 14, which is summary. And I can proudly conclude that Instalco has had another strong quarter with high growth, high profitability and a very strong order backlog. And I'm very enthusiastic about the GEO head full of Falco during which we will celebrate our FEED anniversary. And as you know, I used to have some music next from the last slide. This time, I have Schusser Niklas Strem's steps hit to Slabora, which can be translated to unbeatable. And that song is from the album halfway to the future because that's, I think, how it is. We are unbeatable, and we are halfway to the future. And with that, I'd like thank you all for joining in on this call. And now I'd like to take your questions. Thank you. Ladies and gentlemen, we're now ready to take your questions. Our first question comes from the line of Stefan Anderson from SEB. Please go ahead. Thank you. Three questions only. First, Easter is falling into the 2nd quarter. Has that had any impact on your organic growth, positive in this quarter? And it's just good to know if it has a negative impact on the second quarter? The impact for Easter has very little impact on organic growth. It's more like where the projects are sometimes they end or start and so on. So if it's 1 or 2 more days in 1 quarter, it doesn't matter so much. Okay. And then the it seems like that you've one of the companies you acquired are not forming. I'm talking about the other Nordics where you referred to some projects that you want to close down. Could you maybe elaborate on is that a mistake in acquiring a company? And what kind of volumes are we talking about that you will close down? Is it going to impact the top line in some way? Yes. It really impacted top line. It was a mistake maybe to acquire that company. I talked about it a lot before, and the company brings with them 3 projects that was loss making. We have now shut down the company. We have taken the costs. There is some costs we have taken now this quarter for the shutdown, but we are not having any loss making projects in the company anymore. There has also been a little bit slowdown in Finland this quarter. So it's not just Norway that has affected the rest of Nordic figures this quarter. I'm not I'm very I'm still very confident that on a full year basis, we will reach our goals in both Finland and Norway. There's been a little bit slowdown in the Q1. On our top line, I think about SEK 40,000,000, SEK 45,000,000 will affect us for loss making company that we have shut down. Okay. Just so I understand correctly, you because when you talked about that in Nordic, you said that as those projects are fading off or gone, your profitability should close in on the Swedish profitability. I mean, are you saying that adjusted for the one offs in the quarter and those projects, your other business is actually generating closer to the Swedish level of margin? Yes. Almost at least. So that's things works out fine. That's what we should expect for Q2 as well. Right. Yes, right. Thank you. And then the second last question, you talked about your celebration, your 5 year celebration. Is there a lot of costs associated with that, that will impact the Q2? Or is it just smaller impact? It's smaller. It's smaller. But again, we take all the chance we can to have the party else. Okay. Thank you. And the next question comes from the line of Robin Newberry from Carnegie. Please go ahead. Hello. It's Robin from Carnegie. I have a couple of questions. First, related to cost inflation. Is the situation right now quite similar to what you have seen during the past few quarters? Or have you seen any changes there? No. I think, Erud, it's the same. I mean, we have a couple of percent in salary increase and a couple of percent on material the material side. So I think we are used to it. And you know that we have this type of calculation, We call it cost plus. So we are taking care of cost increases. All right. And then one question related to the margin in division, other Nordics. You mentioned some actions that you have taken in order to improve margins. But when do you think it's more realistic to see segment other Nordics to reach kind of similar level you are seeing in Sweden? Yes. And because we of course, you always underestimate the cost for shutting down, and we have done that too. But I think that's over now. If the Finnish market is, yes, going as we will want to go, I think we will see the same margin for rest of Nordics in the Q3 this year as we have seen the same margin as in Sweden. Okay. And then one question related to the backlog. It was up 18%, if I remember correctly, year over year. But how much was it in sort of like for like terms up? Or was it up? It was up, but I don't have this exactly figure here. Do you have the lockdown? Just a second. We will see what we can find here. Like for like, year like for like. I'm sorry, I don't have the quarterly report here, but it's under our financial information. You can find it. Order backlog, organic growth of order backlog. Okay. And then finally, to Lotta, one question. Cash flow was quite strong, but I guess the IFRS 16 had some positive impact. Do you have any sort of calculation of how much the operating cash flow would have been with the previous accounting definitions? Yes. You can we have made very detailed information of that in our annual report that you can read. I don't remember the pages, but I think if I remember right, it's about Page 56 or 57 or something like that in the annual report, you can see all the calculation and how it impacted on the figures in the balance sheet and result. Okay. All right. Thank you very much. Thank We received one question from the webcast, and it's about the decrease of the order backlog in rest of Nordics. And we can comment on that. Yes. The negative development of the order backlog for the Nordic is the rest of Nordic is due to the phasing out of the operation in Norway that we talked about. Because last year, we had quite a big order backlog in that company that we are shutting down now. And today, that order backlog is 0 and that impacts on the organic growth. Okay. Thank you very much. If there is no more questions, thank you very much for taking to joining me on this call. And we'll see you in next quarter.