Instalco AB
STO:INSTAL
Earnings Call Analysis
Q3-2023 Analysis
Instalco AB
In the face of market uncertainty, the company has continued to deliver improvements across various metrics. A key strategy has been to target attractive midsized projects, which offer scale and reduced risk compared to larger projects. This focus on quality, speed, local presence, and strong customer relationships, coupled with a deeply decentralized model and local market leadership through subsidiaries, has allowed the company to maintain a competitive edge.
The company has also been systematically fortifying its foundation by broadening its service offerings and geographical reach. Expansion into new regions and the addition of industrial disciplines and technical consultancy have diversified the business, reducing reliance on any one customer group. A notable growth can be observed in net sales for industrial disciplines, from 3% to 17%, and the introduction of technical consultancy now contributing 3% to net sales, signaling strong and resilient organic growth.
The market for the company's services is characterized as late cyclical with a high level of project visibility and a significant portion of revenues coming from recurring assignments. This stability is due to the strategic decision not to overcommit during market dips, opting instead for smaller local projects that carry less risk. The company is capitalizing on long-term market drivers such as energy efficiency, green transition and digitalization, with the installation business poised to play a central role in these megatrends.
The company reported a strong quarter, with profitability increasing at a higher rate than sales growth. The performance in Sweden remained solid, while the Rest of Nordics segment demonstrated particularly impressive results, underscoring the success of the company's profitability focus and acquisition strategy. Even in a market that presents some degree of uncertainty, the company boasts a solid order backlog and a business model that ensures close customer connections and local market savviness.
There's recognition that margin improvements in the Rest of Nordics are partly due to organic initiatives and organizational adjustments, especially in Finland. However, acquisitions, with a SEK 178 million impact on operating profit, have also contributed notably to this performance. When assessing year-to-date earnings before interest, taxes, and amortization (EBITA), it's implied that the margin might be under pressure organically, as organic growth is still robust, suggesting that EBITA might have decreased marginally when excluding the contributions from acquisitions.
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Welcome to Instalco conference call. [Operator Instructions]Now I will hand the contents over to the speakers. CEO, Robin Boheman; and CFO, Christina Kassberg. Please go ahead.
Hello everyone and welcome to this presentation of Instalco's report for the third quarter 2023. My name is Robin Boheman and I'm the CEO of Instalco and with me today I have our CFO, Christina Kassberg.Instalco is one of the leading installation groups in the market, Sweden, Norway and Finland. Our main business area is installation of electricity, heating and plumbing and ventilation along with solutions for the industry and technical consulting. We are a highly decentralized company, running through 130 subsidiaries, specialized local companies within the Nordics.We have over 6,000 employees, and we are driving the green transformation with a strong underlying market. So these 130 subsidiaries are run locally and I will come back to that a little bit later in the presentation as well.Going into some key financials for the last 12 months, we were just shy of SEK 14 billion net sale for the last 12 months. We have a order backlog of SEK 9.2 billion. We are a bit above SEK 1 billion in EBITDA and an EBITA margin of 7.6%. Cash flow from operations was SEK 943 million and we have an annual acquired sales of almost SEK 1.3 billion for the last 12 months.Jumping into some highlights for the quarter. We turned over SEK 3.3 billion and we had a EBITA margin of 7.4% and SEK 246 million in EBITA. Last quarter, we mentioned the short-term uncertainty in the market. Despite this, I'm very happy to say that last month of the Q3 ended up on a very strong note for us.For the quarter, we improved on across the board on our parameters compared to a year ago. Growth in sales both organically and through acquisitions, improved EBITDA margin and a significantly improved cash flow and a solid order book sums up the quarter.And I would like to hand over to you, Christina, and take us through a little bit of those developments in more detail.
Thank you, Robin. And I will now take you through the numbers a little bit more in detail. On this slide, we can see the increase in net sales with a comparison of Q3 present and prior year. In Q3, we continued generating robust growth. Acquired growth represented 15.7%. While organic growth is slightly slower than previous quarter, it is still at a healthy 3%.Segment Sweden was flat while segment Rest of Nordic picked up the pace. We have divested one noncore asset, representing a minus 1%. In total, net sales increased by 18.7% and amounted to SEK 3.3 billion. This slide shows the quarterly trend of EBITA in both millions and margin. Q3 is usually a weaker quarter for us in terms of net sales and profitability and this is due to the vacation periods and reduced activity. And July is the most common vacation month on Instalco's markets. And this was, of course, the case also this time. But however, we picked up well after the summer and we recorded a strong September.As I mentioned on the previous slide, net sales grew by 18.7%. And I'm pleased to say that in Q3, our profitability grew even more. EBITA increased by 22.7% to SEK 246 million and this corresponds to a higher margin at 7.4%. So all in all, improved profitability in the current market.This slide shows the quarterly progression of the order backlog. We have a substantial order backlog, which grew by close to 13% compared to a year ago, or 0.5% organically. In absolute numbers compared to Q2, it is essentially flat and this is in line with the normal seasonality effect for Q3 that I've just mentioned. We feel comfortable with the level of the backlog, quality and mix is good with varying types of projects and contracts form that spreads our risks.Over to the slide that summarizes segment Sweden in Q3. Sweden held up well to a slower market. Although the underlying need and demand for our services as regards both new construction and renovation is generally high, the rate of new orders for installation assignments has slowed down due to the interest rate and the overall macroeconomic situation.We can especially notice this in the south of Sweden, while the north and west as well as our industrial discipline reported good development during the quarter. Overall, net sales increased in Sweden by 5.2% to SEK 2.2 billion, while organic growth was essentially flat. In total, this corresponded to a stable EBITA margin of 8%, roughly in line with last year's as well as the margin we saw in Q2 of this year. This segment still maintains a strong order backlog at more than SEK 6.5 billion.Also a summary for the segment Rest of Nordic. The market in Norway remains at a high level without much change from last quarter. Development of the market in Finland has been stable in recent months, but however, this is at a relatively low level. High interest rates have resulted in more cautious behavior in the construction industry. But in other areas, such as service and industrial operations, they are progressing as planned.For Instalco, this translated to a net sales growth of 60% in Q3, while 15% organically. The strong growth for the segment was equally distributed between our 2 countries. However, I'm pleased to say that profitability grew even more with an increase of EBITDA at over 130% to SEK 68 million, which corresponds to a margin of 6.2% compared to 4.3% a year ago.We are seeing positive results from our profitability focus in combination with strong acquisitions. Especially Finland delivered improvements, primarily due to focus on operation and project management.So as a summary for the group as a whole, our dedicated efforts are paying off. During 2023, we have been maintained our focus on profitability and we have intensified our emphasis on working capital.This is, I'm happy to point out this has been successful. We are tying up less working capital in the operation than before. I'm also pleased to say that we have improved invoicing net. This means contract assets minus contract liabilities. This translates to the fact that we for Q3, we can report solid growth and margins best-in-class and also a strong cash flow.So by that, over to you again, Robin.
Thank you. So going into some acquisitions. When looking at the table, you can see that we completed 9 acquisitions so far in 2023. One of them, I will come back to on the next slide. Our near-term focus, however, is on integrating these companies into the group.In total, we added slightly above SEK 1 billion in estimated annual sales through acquisitions. Due to the high pace of acquisitions this year, our net debt through EBITDA ended up this quarter at 2.6, slightly above our target. We still have good and healthy headrooms to the stated bank covenants and we will be at 2.5 at the end of the year.For our reported leverage does not include pro forma EBITDA. However, if doing so our leverage would be at 2.3x. So all in all, we remain secure with the rate of acquisitions, our strong cash flow and our balance sheet.Looking at one of the acquisitions we did in the quarter. We're happy to welcome URD Klima Sandnes to Instalco with annual sales of around SEK 85 million. The company offers installations within ventilation, heating and cooling systems for both new construction and renovation. This also broadens our geographical footprint in the Southern Norway with an exposure to the Stavanger area, where we see a lot of investments expected going forward.URD Klima Sandnes is a well-organized and highly profitable company with a very stable financial history and a wide network also in the area. So I think that is a good match for Instalco. Looking into one of the projects that we took during the quarter. We have 3 different Instalco companies working together on the product design for a new emergency hospital investor that is being built together with NCC and Region Vastmanland through a partnering project.Around 2 years ago, NCC and Region Vastmanland agreed to build a new emergency hospital through partnering. The work of project design is now underway to produce a detailed plan of what is to be built. And we're happy to say that the project design for ventilation and Sprinkler has been awarded to [ Instar ] and Sprinklerbolaget in close collaboration with our technical consultants Intec.Together, these Instalco companies have extensive experience from successful assignments, both when it comes to hospital, but especially also when it comes to partnering projects. And the new hospital like this will be a very large area that needs a lot of ventilation and active fire protection and comprise of approximately 75,000 square meters of new construction to meet the future care needs for Vastmanland. So very exciting projects in phase 1.The theme for this quarter is resilience. And I wanted to take a closer look at the resilience that we have shown and also that we have proven once again. Our performance in Q2 is a testament to that strength. I don't think anyone has missed the fact that the market is currently somewhat uncertain and yet we're still able to deliver improvements across the board, which I'm very proud of the team effort that has been done.And let's deep-dive into a few of these reasons. First of all, targeting the attractive midsized projects. We've talked about it before and we will come back to it many times more. The attractive midsized projects are large enough for scale, but has a lower risk than the mega projects and its B2B focus. Key success factors, quality, lead time, local presence and relationship and that is some of our core experience.And we also have a very strong position in the local market to our local subsidiaries. However, when it comes to marketing uncertainty, we will have to remain on our toes just like everybody else, but we believe that our truly decentralized model gives us a severe benefit in this regard and now more than ever. We have a unique culture. Installation is not a national market, but a local market and we are local market leaders with our subsidiaries. We have a decision-making by those that are locally best-in-class and know the market best.I think it's very important here to be close to your customer in this type of market environment, something that we are due to our specialization and we can also collaborate with local players within the market. And we have been working systematically in Instalco and making it a more stable and resilient company.This slide may be familiar to some of you that I've shown previously that we launched a few years ago, in addition to working constantly improving our core business, we have put significant effort into expanding our footprint into new geographic -- geographies, sorry, as well as branching out into new discipline. As shown here, the industrial discipline and the technical consultant, both that I've spoken to you about before.And if you're looking at this page, that has really paid off. We are today a much more diversified business. As you can see on this slide, we have reduced our reliance and are today more spread out when it comes to customer groups we serve as well as areas we provide service for. So referring back to the focus area, if you look at 2022, our net sales, for instance, for the industrial discipline was only 3% and has grown to 17%.And back then, technical consultants was not even part of the offering, today represents 3% of net sales and the journey has been done primarily by organic growth, once again a testament of our resilience. Then I'm going to try to explain this slide to you as well. And compared to the construction industry and sector, that the installation business is less cyclical and less affected by general economic trends. Our market is more late cyclical and our project portfolio is categorized by high level of visibility in terms of the future project.A large portion of revenues are derived from recurring assignments and we have a low level of dependence on individual customer and contracts. This means that we have a better potential to bridge the gap when we see a dip in number of projects. And what this slide kind of tries to illustrate here is the lower cyclicality of the installation market.And one of the main key things here is to try to not take too many projects so to say, in the dip, but instead try to find those more local projects that are going on with less risk and not be stuck, so to say, with projects taken in a bad market that you have to live with for a very long time. And this is something that Instalco once again has proven that we can handle.If we then also go and look at the long-term market drivers, which I think is also good to emphasize on in times like this is that energy efficiency and the green transition, we haven't really seen the full effect of this yet, but the installation business is the leaders here. We will be the ones that are going to install for the next generation. So this is something that makes me very excited. Whether you look short term, maybe housing isn't the shortage at the moment, but house shortage is a big driver going forward.Just looking at Sweden, we need to build 60,000 to 65,000 apartments every year. We are definitely not at that rate at the moment, but eventually, we will come back to that level. We are also seeing -- we also have aging building stock in the northern part of -- or in Scandinavia overall, which needs renovation, which needs to be refurnished to be able to cope with the energy efficiency demand that are coming into legislation eventually.Also looking at digitalization and increasing building complexity within the projects that we are doing and the installations we are doing, looking at historical numbers, installations, may be 30%, 35% of the total cost of construction.Now we're looking at much higher numbers in the 40%s, 45%, even sometimes for 50% of the total cost of construction installation takes a bigger chunk of the total cost. And that is basically due to that we want it to be more digital and it is much more complex than it was historically.So these are a few of the key points when it comes to how we can stay resilient and also how we can deliver this type of result in the market we have.Taking you back a little bit to Q3 to sum up the key takeaways from this quarter. Overall, a strong result with high profitability that grew more than sales. I'm also glad to see that Sweden held up well and especially, of course, I'm very happy to see the strong result in Rest of Nordics, a segment that shows that our profitability focus and strong acquisitions has paid off. There are several underlying mega trends, such as the green transition, which makes me incredibly excited about our business long-term.In shorter perspective, there is no denying that the market is a little bit uncertain, though we still have a solid order backlog that we can continue to execute on for the coming quarters. And our main and unique business model gives us a very strong position at the time like this. We are more diversified today, serving a broader customer base through more technical disciplines and our decentralized structure keeps us close to the customer with decision-making closer to those that has the best relations to market.And with that, I would like to thank you for joining this call, and I will now open up for questions.
[Operator Instructions] The next question comes from Karl Noren from SEB.
A couple of questions from my side. And maybe if we start on the margin improvement in the Rest of Nordics, which is quite impressive here. So I'm just wondering, how much of that is organic initiatives making results and how much is driven by M&A, we have acquired high-margin businesses?
I think there is obviously a combination of both. The exact split we don't have. However, we can see that we obviously track all our subsidiaries. And what we can see is that there has been significant improvements in those companies where we have struggled in the past.As I've mentioned in the calls previously, we have done some organizational changes. We have also put in place some additional area managers for -- especially for Finland. So we have grown the organization a little bit to be able to take care of the companies in a more professional way as well in the last 2 years.So it's a combination of both. I don't have the exact split, but we can definitely see some improvements in local companies, especially in Finland at the moment. So that's very nice to see that those initiatives pays off.
Yes. Sounds good. And then just one other question on the M&A contribution. I tried to do some math -- if you look at the report on Page 8, you state that the M&A contribution year-to-date. And it looks like that if you deduct the acquired earnings, the earnings is down a bit from last year organically. I'm just wondering if you could maybe put some comments on this and maybe also explain a bit what is driving there, what it seems, at least to me, the continued margin pressure in the, let's say, existing business?
I don't 100% follow. I'm going to take up Page 8. Just give me a second. Not the presentation, we're going to look at the reports. Sorry, give me a second.
Yes. All the acquisitions we have made this year as -- is lying on a very good profitability level, slightly above the general margin in rest of our group. That's sure. So...
But I don't think that was the -- can you take the question again, Karl? Sorry.
Yes. I'm just looking here because it has impacted the operating profit, the impact from acquisitions has been SEK 178 million.
Yes. Correct.
And if you look on EBITA year-to-date, it's up by SEK 151 million. So then, I guess, like-for-like, so to say, EBITA seems to be down. And I'm just wondering what is -- like the margin -- because I guess it's margin because organic growth seems to be quite good still. Yes. You understand the question now I guess.
Yes, yes, yes. Sorry. Yes. Now I fully understand. No, I mean like I said, there has been a little bit of margin pressure on existing companies, obviously, like you calculated. And we still have some companies that are struggling in a market like this, obviously, but we're still happy to be able to report a 7.4% profitability in a market like this and show a resilient. But yes, we have companies that are struggling, obviously, yes, that is correct analysis.
Yes. Just wanted to check that. And then cash flow here, quite good and improving year-over-year. One of your peers saw a bit weaker cash flow. Some of it's company-specific, but I guess some is also related to that a weaker market for customers are trying to pay later, et cetera. Are you seeing that as well or are you expecting a continued good cash flow going forward?
I mean, typically, Q3 is not our strongest quarter when it comes to cash flow. So typically Q4 historically has been quite strong when it comes to cash flow. So we don't see any near-term big changes in that seasonality either. Yes, there are some maybe issues in the sort of say, society overall today to get paid. So we're not any different there. However, we have improved our processes. We have been working on this and Christina, especially with her team has been working on this together with our local subsidiaries to be on top of invoicing, to be on top of customers that are delaying their payments a bit.So I mean we follow the overall trend in society, but I think this is something that we -- you always have to work with, you always have to be on top of. We're happy that we can approve once again that our decentralized model also works in a tougher environment. So yes.
Yes. I agree it looked good here in Q3. So it should look better in Q4. Sounds good. And then just the last one on the cash flow again because cash flow from acquisitions and divestments was a negative, I think, SEK 222 million, but you did not really do any larger M&A in the quarter? Can you explain that?
Yes. Yes, of course. And it has to do with that, as we have explained in some calls before, we have some minority shares and stakes from minority shareholders in for instance, startups. We've also acquired some companies that we don't own to 100%. And we were in the quarter able to buy a few of these, so to say, minority stakes.So that is why you see. So we bought up some minority stakes in some of the companies. So we've also been able to own more in those subsidiaries. So that is the reason why the sort of say, outflow cash is a little bit higher compared to maybe the number of acquisitions we've done.
The next question comes from Carl Ragnerstam from Nordea.
It's Carl here from Nordea. A couple of questions here as well. Looking at your backlog, it grew again 0.5%. How does that would you say, compare to the market currently? And could also perhaps shed some light on your strategy here if you look on a cost plus or index closed price -- contracts versus fixed price?And also maybe on that a little bit, maybe if you look into your backlog, which I, of course, know that you do, what is the quality of the backlog currently? You say, I mean, given the volatility in raw material prices and raw material prices are still, to some extent, at least continuing to tick up or at least the components?
I think as I mentioned on the slide there, it's hard to explain on a graph. We try to do it a little bit in the theme for the quarter. I think it's very important in a market today to take the right type of project for the right customer. And here, it is a focus on margins. So we don't want -- we want to make sure that our subsidiaries don't take too many projects at the moment.So yes, we grew the order book a little bit. That has to do with a few a little bit larger orders. However, we are quite, so to say, we don't want to push our subsidiaries to take on projects at this moment. We want to make sure that we take on the right projects. So I mean quality of the order backlog is, as Christina mentioned, we are quite satisfied with what we have seen and what we have taken into the order book so far.And next question from you was more on the, so to say, strategy when it comes to pricing and so forth. I mean, as you see, we have gone -- so to say prices hasn't gone down for raw material and so. So we are trying to push an index clause. This is something that as I mentioned in a few calls before, has not been very, so to say, used in the Swedish market, especially not in Finland.In Finland, it's still hard to get. In Sweden, it is much more common nowadays. And I think it is important to continue to push in index clauses even if we were in the future, might see, so to say, a price drop in the future. However, I think it is important that we are supposed to make our money from good installation, not from speculating whether index is going up or down. That will leave to you guys on the bank side. But we make our money on installations. So the strategy is to get index clauses in most of our longer-term contracts to minimize risk.
No, it's very clear. Very clear. And also, by that entering Q4, I mean when a lot of these -- a lot of projects are obviously finalized, I mean, how would you see that your POC is looking currently entering Q4? Obviously, if you have more index clauses, I guess you have a less of a -- perhaps an earnings cushion entering Q4. Is that correct assumption or...
I mean, typically, it's always hard to talk about the future, but we can always talk about the history. And typically, historically, Q4 is a good quarter for us and it has mainly to do with that once you finalize the projects, you can take away, so to say, the cushions that you might have brought in. And there's typically also some additional work that needs to be done to finalize the project. That was maybe not part of the scope in the beginning and so forth.So typically, finalizing a project is typically a good -- how to say, good earnings when you finalize projects because at the end, there's always a little bit of extra orders coming in and so forth. So that is typically why Q4 is better than other quarters as well.When it comes to POC, I mean, we are looking more and more on the POC to make sure that we are also on top of things with Christina and her team is of business controllers and also especially our local CEOs are more and more getting used to the way of calculating POC and so forth. So we feel confident about the order backlog and the project we have at the moment.
Sounds very good. Perhaps joined the call a little bit late, but did you give any comments on September development or maybe I misheard?
No. In September was really strong, typically in the quarter, we make most of the result in September and that was the case this year as well. I mean, we are at the end of the day, we sell a service. So I mean, we charge for the hours and the material we install. And obviously, in Scandinavia, we go on vacation during July and August. So that's typically not the best month of the year, so to say, so [indiscernible].
If you adjust for seasonality, was it same as last year or better or worse? Because I guess what you're describing is the seasonality. But if you try to adjust for seasonality.
It was -- the September this quarter was better than September last quarter, not -- September last year. So Q3 2022 September was not as good as Q3 September 2023.
[Operator Instructions] The next question comes from Johan Skoglund from DNB Markets.
This is Johan from DNB here. Good to see that profitability is holding up. So I have a few questions from my side. We again saw quite CapEx step-up in the quarter. I'm assuming this is related to the industrial end market expansion, but what can we expect going forward? Is this a run rate we could assume or is there any other way we should consider this?
Sorry, you got chopped off in the beginning there. Could you please repeat the question?
Yes. Okay. So we again saw a CapEx step-up in the quarter of, I think, SEK 35 million. Are these CapEx related to the industrial end market expansion? And what can we expect going forward? Should we think about this as a run rate? Or is there any other way we should consider this?
Yes. The CapEx is definitely related to our expansion into the industry, as I showed you in the presentation a little bit earlier. I mean we've gone from 3% to the industry to almost 17%. So we are increasing the CapEx a bit, goes all the way from scaffolding to other types of machines we need to be able to provide services for the industry. So I think you should looking long term, you need to look at the percentage a little bit and adjust for the growth in the industry. That's correct.
Okay. Good. And then perhaps a detailed question on Industrial Services, where you acquired Boas in Sodertalje, we noticed that they're focused on a wide range of services, but they also seem to have a share of contract manufacturing in there. Are you able to quantify how big that share is? And how should you view this? Is your plan to expand further within contract manufacturing?
No, that is not the key area. Obviously, I mean, for this type of entrepreneur business, these are entrepreneurs, you have to understand and they are then obviously trying to do business where they see a possibility. They are very strong when it comes to, for instance, [ Skorn ] and [ AstraZeneca ]. And the likelihood here is probably that these 2 have asked for more products from one provider and therefore, they have grown the business. So this is -- this is not a move into manufacturing at all, but it's more of that they are providing help for existing customers.
Okay. Yes, that's good to hear. Then third question is if you could comment anything on the technical consulting side. You say that demand has declined a bit, but happy to hear any additional color you might have.
So on technical consultants, during the quarter, we have added like, I think, almost net, I think it was 30 new consultants. So we are almost at 400 consultants. We are just I think is around 390 consultants at the moment. They have broken through, so they are around breakeven, but they are on the profitable side. So similar to Q2.But obviously, as I've mentioned before, every time we bring on new consultants, we will obviously so to say that with a little bit of cost on the margin. But once again, this is done organically. So we think long term, this is a very profitable way for us to grow. And we have also signed a few new consultants that will start around New Year's as well. So probably around 400 when we close the book for this year.
Okay. Good. That was exactly what I was asking for. And then as a final question, I was thrown out of the conference earlier, so apologize if you already addressed this. But another company with similar exposure to you without citing price pressure in certain areas and regions. I mean, which regions do you believe this could be? And are you seeing similar things, is it mainly south of Sweden or are we seeing it spread across the country?
As I mentioned before, I mean, there's always price pressure, I would say, in this market. The competition is always high. You need to provide a good service with high quality and that's also why we focus maybe on these midsized projects as well where we see that quality and lead times and so forth are maybe key factors and relationship is very key. But yes, we are seeing absolutely some price pressures in areas. Once again, these are local, I would say.And as you mentioned a bit, if I were to give some more flavor, I would say it's more in the southern part of Sweden, I would say. It is not the case in the whole market. And it's also in some segments that might have more price pressure than others. So you need to once again find the right customer with the right type of project. That is key at the moment.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Yes. Thank you all for listening. We have run over time a little bit, but it was nice to talk to all of you and I wish you a great day and thank you for listening in. And have a nice weekend eventually as well. Thank you for us.
Thank you, and bye.
And bye-bye.