Instalco AB (publ)

Hello everyone and welcome to this presentation of Instalco's report for the second quarter of 2024. My name is Robin Bohman, CEO of Instalco and with me today I have our CFO Kristina Casper. I think you all know this slide by now, but to give a quick recap, Instalco is one of the leading installation groups in the market of Sweden, Norway and Finland. As you all know, we operate in a very decentralized module, but with strict control mechanisms. In total, we have over 6,200 employees working every day to help facilitate the green transformation. Demand for our services that we offer is supported by several strong underlying market drivers, and obviously green transformation being one of them. When looking at these figures for a rolling 12 months, we clearly report a stable development. We have sales of above 14 billion SEC and order backlog reaching above 9 billion. We have an EBITDA of 1 billion 51 million and contributing to an EBITDA margin of 7.4%. Solid cash flow of 907 million SEC. And the number of companies is now 160 companies within the group. Some quarter highlights from the second quarter. First of all, in our numbers, we are seeing the results of how the market gradually worsened during 2023. The products that we are now delivering on were for most part, I would say, taken during the second half of last year. But I'm very happy to see that despite the market driven challenges we have faced during this period, we remain by far best in class when it comes to our EBITDA margin, which in the quarter ended up at 7.2% and 265 million. We are now starting to see positive signs in the market, but it will take time before it materializes in our books. Some examples of this includes, for instance, record high order books when it comes to large construction companies. We see a high demand for our technical consultants, and we are also seeing a lower interest rate environment. But exactly when, it's hard to pinpoint that we'll see this shift, but we are expecting a slow gradual improvement as the market continues to turn. And last but definitely not least, during Q2, we launched a very exciting new business area. And on basically the back of our success with Intec. And I will come back to this a little bit more in depth in the presentation. But for now, I will hand over to you, Christina, to take us through the financial development in more detail.

Thanks, Robin. I will start with a slide here where we can see the increase in net sales with comparison of Q2 present and prior year, as well as the development of the order backlog. Acquired growth represented 2.1%, with the biggest percentage increase within rest of Nordics. Organically, the top line was down 6.4%, reflecting our focus on margins over volumes. in the current market environment. In total, net sales declined by 4.6% and amounted to slightly above 3.6 billion. During the quarter, the backlog remained essentially flat, both compared to the same period last year, as well as sequentially. By the end of the quarter, the backlog amounted a bit over 9 billion. We have maintained our cautious approach to order taking, prioritizing the right project for the right customers. We have for several quarters now highlighted how well our subsidiaries have adapted to the lower number of good projects in the market by instead focusing more on service. This revenue from service, which is not included in the backlog, remained at a high level of 33% in Q2, which also reflects growth in absolute numbers. This slide shows the quarterly trend of EBITDA in both millions and margin. In Q2, our EBITDA amounted to 265 million, corresponding to a margin of 7.2%. While this is lower than the 7.7% last year and we are far from satisfied, it is still a proof of strength given the market environment. The absolute majority of our installations are late cyclical and the projects delivered during Q2 were to a large extent taken during the second half or late 2023, when we saw market conditions worsening. We have talked a lot about our careful project selection given the circumstances, but we are not completely immune. Also today, we maintain our focus on profitability over volume and remain selective and balanced regarding which order we take. As mentioned last quarter, we are taking measures where needed to protect our margins, implementing efficiency programs in some of our companies where that is necessary. We are proud to remain best in class among the larger players in our market, also in Q2. Over to a slide that summarizes segment Sweden in Q2. Geographical differences in demand and pricing remain, The market is still strongest in the northern parts of the country and somewhat weaker in Stockholm and southern Sweden. But for our technical consulting services, demand is improving. And this is a good indication since they are early in the same cycle as our installation offering. For Sweden overall, we also notice the positive signs Robin just talked about, such as high order backlog for large construction companies, an increased interest in energy efficiency investments, and a lowered interest rate, which will stimulate demand. Overall, net sales were down to 2.55 billion, while organic growth was down by 7.1%, which is less than in Q1. Acquisitions contributed with a growth of 1.4%. Profitability was also affected by the projects delivered in the quarter. which I talked about in the previous slide. And EBITDA amounted to 182 million, corresponding to a margin of 7.1%. Meanwhile, the order backlog remained roughly flat and increased somewhat in relation to net sales over the last 12 months. And a summary for the rest of the Nordics segment. The development of the market in Finland has been stable in recent quarters, though at a relatively low level. The interest rate situation makes the construction industry cautious, while other areas such as service, industrial operations and, for example, data cable projects are running according to plan. Increased defense investments are expected in construction and infrastructure. In comparison, the market in Norway remains at a relatively high level, with some caution being exhibited when it comes to decisions about project starts, without much change from previous quarters. Though we can notice more positive signs for the future. For Instalco, this translated to an essential flat net sales development in Q2. Organically, net sales were down by 5%, while acquisitions contributed a positive 3.7%. EBITDA grew to 85 million, corresponding to a margin of 7.7%. The improvement is driven by operational performance combined with quarterly fluctuations. On to the cash generation in the quarter. In Q2, cash flow from operations amounted to 158 million compared to 225 million same quarter last year. The change is partly explained by somewhat lower EBITDA combined with an increased change in net working capital. In the end of the quarter, the billing increased and we tied up some cash in accounts receivables. As a result of our lower acquisition pace over the last few quarters, we have lower outflow from those activities. But only two days ago, we were happy to welcome a new member in the Instalco team. IT line service, which strengthens our industrial offering in Finland. The company, based in Salo near Turku, primarily service customers in the mechanical industry. As usual, Q2 marks our yearly dividend payment, which this year added up to 179 million. The quarter also saw some outflow from earnouts and acquisition of non-controlling items, all in all according to plans. In operation performance, I'm pleased to say that we improved the cash conversion to 89% from 81%, which is the result of diligent focus on working capital and cash flow in our subsidiaries. To then look at our performance in relation to our financial targets. For the duration of the 10 years Instalco has existed, we have constantly performed well beyond our growth target, which is set over a business cycle. This quarter, the growth is not at 10%, and this is no surprising, given the market climate and our cautious acquisition pace during the latest months. But we are well positioned to capture opportunities for profitable growth when the market turns. Our EBITDA come in to 7.2% or 7.4% for the last 12 months. Still a strong performance given the current market. Cash conversion improved to 89% due to high focus on working capital. During the quarter, we paid out the dividend approved at our AGM in line with the 30% policy. After the second quarter, our leverage temporarily came in just slightly above our target at 2.6 times EBITDA. And this was the result of slightly lower earnings and largest outflow of money as expected in the second quarter. All in all, a stable earnings development given the market situation and we remain secure with our balance sheet and operational priorities. By that, over to you again, Robin.

Thank you very much. Now to the project highlight of the quarter. Over the past years, everyone has been talking about the sharp decline in new-build residential projects. That is certainly true and definitely noticeable. This order highlights that the market is not completely dead. Four Instalco companies have been awarded the contract for installations at the new landmark project Docks in Malmö, which is a new build of 160 apartments. The installation for Instalco are multidisciplinary and includes electrical, heating and plumbing, ventilation and sprinkler. The following Instalco companies will be involved, Elpågarna, Rörläggaren, Bivänt and Sprinklerbolaget. In total, this adds up to a combined order of volume or value for Instalk of around 100 million. Something I'm very happy to see, and especially in the southern parts of Sweden. So well done, team. Going into the theme of this quarter. This quarter's theme will be a small deep dive into something very excited that we announced during Q2. the launch of our new brand and also business area in Matic. So I will talk a little bit regarding what it is, how it fits into the rest of Instalco and how we will do it. In Matic is something new, a fast-moving company that is not stuck in any old systems their offering includes both property and process automation utilizing the local market products and thereby selling both consultancies as well as hands-on installations and end market support aftermarket support as well organizational wise we are broadening our division technical consultants to now include two business areas And to make things easier, we have named these two business areas after the main brands that they will use. So it's InTech and also InMatic. But let's get back to basics. InMatic offers automation. And what do we include in automation definition? Automation in this context of buildings and installation services refers to the use of technology to control and monitor systems such as lightning, heating, ventilation, security, water management for some examples. It involves integrating sensors, control and software to automatically adjust operations based on preset parameters, real-time data and use of preferences. This enhances and makes it easier to do energy efficiency, but also comfort, safety and overall system performance. And it also reduces the need for manual intervention. Common examples of this is smart thermostats, automated lighting and building management systems that centralize control of multiple systems, for example. We believe that the automation fits very well into Instalco's overall portfolio of services that we offer to our customers for several reasons. By adding automation to our more traditional installation services, we can help clients to save energy, reduce cost and improve overall efficiency and safety of their buildings. Enmotic will focus on energy efficiency and automations in facility and process areas. For these customers, automation is a prerequisite for efficiency and sustainable operations, delivering advanced future-proof solutions in line with increased demand for digitalization and resource savings, measures from buildings, industries and facilities. Furthermore, it also gives us an even better insight into the real needs of our customers and also enables us to act more proactively and strengthen customer relationships throughout the life plan of a facility or a property. And not just in a few touch points, such as when you build or refurbish or sometimes service them. And how will we do this then? Our venture within Intech, where we now today have over 400 consultants in three countries, has been very successful. Already last quarter, we mentioned that they reported margins over the group average, and that is also true for Q2. Intech was built mainly organically through Instalco's startup model, and this enterprise It's also how we will do it when it comes to Inmatik. So it's been done the same way. And also obviously with all the learnings that we took with from Intek. Our first Inmatik establishment was in Sundsvall. But we have now expanded rapidly just over the past couple of months. And we have far more to do. On this map you see that Stockholm is red since that will be launched in September. The map also includes a location where Instalk already had a company doing a lot of automation services before that is now part of the business area. So in total we are now around 60 people and that is from zero just in a few months. This sums up the start of Inmatik and I'm really looking forward to touching upon this subject again in the future. But let's get back to the Q2 report and sum up with some key takeaways from the quarter. There's no surprise that we are facing a challenging market as you've heard today and before also. We are delivering on the projects taken during more pressured circumstances. I'm not satisfied, but I'm proud to say that we are doing what we can. We are carefully selecting the projects. We maintain focus on margins over volume. And that has paid off with relatively stable development. And we continue to be best in class when it comes to margins. Operationally, we have kept very busy. In Mautic has been long in the works and automation is a new exciting addition to our expanding service offers as you heard before now and there is many different ways to grow and we have successful track record in showcasing that our startup concept really works. And finally we are now starting to see some positive signs in the market one that I mentioned before in this call and Kristina as well, is the demand for technical consultants. But while technical consultants are positioned early in the cycle, the majority of our installation services are late cyclical. So this means it will take some time until we might see the changes in our numbers. But we are more than ready to grab the opportunity we see once the market turns. And I also like to conclude with that every day we're a little bit closer to that today. And with that, I will thank you for joining this call and we will open up for some questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Carl Bockvist from ABG Sundal Collier. Please go ahead.

Thank you. Good morning. My first one is on other Nordics, strong profitability here. I was just curious to hear about the drivers here, if there is any particular region behind it or a combination of the two?

I mean, we have talked about other Nordics for quite some time and we have said that we are trying to improve profitability in other Nordics. We have over there downsized it a bit and worked with profitability. That work continues and we are seeing some positive signs and we're also seeing good trends. However, the margin that was in this quarter, I would not focus too much on that specific margin this quarter. I mean, we are a project-based company. So unfortunately, we cannot expect that kind of margin always going forward. But we see some positive trends and good work has been done in these regions over the last couple of years. But it was a really, really good quarter for them. And that happens from time to time when it comes to projects and quarters.

Understood. And on that topic, but on the opposite side, perhaps, if we put it that way. In Sweden, where the margin is down and adjusting for the credit provision last year, it's down from almost nine. So any particular effects in Sweden that weighs on the margin there?

It is a little bit the same answer as before, but the opposite, basically, when it comes. I mean, it is one quarter. I wouldn't put too much emphasis on neither other Nordics or the Swedish marginal for one quarter. Obviously, this quarter for Sweden, they've also taken the cost for this in Matic investment. That would be one of the things specifically. I mean, hiring 60 FTEs and so forth. But I wouldn't put too much emphasis on the difference in these segments in one quarter.

Understood. And my final one is just usually when we look at seasonality in your business, we tend to see a lower margin in Q3 compared to Q2 and then a better margin in Q4 again. Any reason why this shouldn't be the case this year?

I think I mean seasonality like you said I mean historically it's been that type of seasonality and yeah I see no big difference I mean the years look the same the dates are the same so I would say that that's a good good assumption but it comes down like I said once again we are a project driven business so it comes down a lot to when projects are finalized started and which project we work on during the quarter, but obviously looking at the history will give you some indications of where we're going.

Understood, thank you.

The next question comes from Johan Dahl from Danske Bank. Please go ahead.

Yes, good morning everyone. Just a few questions, firstly on Robin, you talked about invoicing reflecting orders taken in H2. Would you say that the current invoicing and current profitability fully reflects the weakening market conditions, or are you still anticipating certain contracts taken prior to that period, which will impact profitability negatively?

I mean, like I said, we will be living with the projects that we have taken in H2 last year and also obviously in the beginning of last year as well. And we have to finalize those. That's what I also mean that we are late cyclical. They were taken at tougher times. sort of say price point than maybe those projects that were taken 21, 22. So we have to live with that. That's also why we launched last quarter, this sort of say savings program, which are also to make sure that we sort of say downsize in some areas and in some daughter companies as well to fit the market situation that we are in today. So we will obviously be affected going forward as well, but we try to do everything we can to protect the margin. We have shifted our focus into, like Kristina mentioned earlier, more service, shorter projects. We tend to steer away from these really large projects. We don't want to be stuck for too long time going forward in projects taken now.

All right. Also, there seems to be a fairly big shift from sort of sub consultants to your own sort of staff, own employees compared to last year. Does that sort of impact the reported numbers in any particular way that we should be aware of sort of in understanding the numbers that you deliver?

So if I understand the question, it is correctly that we tend to not use so much subcontractors anymore due to that. And that has to do with that volumes are down overall. So we don't need, I mean, these subcontracts that we use are taken to be able to, so to say, work in the peaks. And obviously now we're not in a peak. So we will tend to not rent so many people in. The reason for that and how it affects is basically it We tend to be more profitable on our own staff, but on the other hand, renting and so to say, obviously helps dividing the overhead costs on more FTEs or more employees in that sense. So yes, it affects our profitability a bit, but tendency is that own staff are more profitable.

Got you. Final one, just on the contracting order book, you talked about, you know, big chunks being allocated to large construction companies. Does that mean that the duration of the order book is sort of longer or more extended in time? Or is it, you know, similar to what it's been previously in install companies?

I think for the order backlog of our construction companies, it's best to talk with them. What we can see from the outside is that they have taken a lot of orders. Some were focused on the infrastructure, but also infrastructure projects tend to lead to normal installation projects as well. So I'm guessing they will try to keep a healthy mix on their side as well. It's hard to talk about duration of their projects.

Good, good. Thank you.

The next question comes from Johan Lankvist Sundin from Carnegie. Please go ahead.

Good morning and thank you for taking my questions. A couple from my side. The first one is on details in the cash flow. and related to minority buyouts. Is it possible to give some comment how that kind of profile looks ahead of us? Do we have more minority interest to be without in the coming quarters or should we think about that?

I mean the way it is done is that we have with this startup model and a few of the companies that we acquired, we try to limit risk a bit and maybe not buy the whole company day one. So where we go into sort of a joint venture, we buy maybe 70% and the additional 30% is bought at a later time. And these are options that we have. And these options are executed during certain time periods. And in Q2, it was such a time period where we saw a good possibility to utilize those options and be able to buy these minorities at a better price than we could buy new companies for. So then that's why we executed these options as well. So it's hard to say exactly because different companies have different time slots of the options where we can execute. But I think on top of my head Q2 is a typical one because you have finalized the annual report in Q1 for most companies and then there is a discussion along whether we want to execute or the option or not.

So basically no more this fall at least?

On top of my head, we don't have any big ones in the fall. But like I said, these auctions are run typically in a six month period where we can execute the auctions or not. On top of my head, we don't have any big ones, at least in Q3.

Excellent. two questions on kind of the top line trends and in the Q1 report you gave some color on how you have made layoffs and cut down on subcontractors etc. Is it possible to give some comments how that has developed during the summer and where the kind of run rate are compared to maybe a year ago?

Yes, absolutely. I mean, this is an ongoing project. As you all know, it takes a little bit of time to execute, but we have executed a lot of the points. We are, I would say, on target. We continuously adapt the cost structure of subsidiaries where we see it necessary based on market outlooks, as I explained before. But we also have areas where we are actually increasing the number of FTs, for instance, in Matic, in Tech. But we're also looking over our whole cost base in some subsidiaries. So it's a lot of market driven. Like I said, we are decentralized companies. We look at the local market outlook and take decisions accordingly.

Great. And then on the comment you had on the potential and the gradual recovery that is anticipated and that it's hard to predict when it will happen. Is it fair to assume, given the comment, that it shouldn't materialize during the fall at least? Because now we're quite far into Q3.

That is a good assumption.

And discussions with clients, are it more like before summer or is it even after the summer of 25 for the volume pickup to really materialize for your site?

It's very hard to say like the question beforehand here regarding the order backlog of our customers. It obviously depends on which which of these orders we are able to win, which we want to win, which we win, so to say. So it's very hard to say when this happens. The only thing that we can see is that the order backlog is increasing on our customers, which, if everything stays normal, would then generate more projects for us. We're also seeing a, so to say, a better interest rate environment going forward. which is positive for the construction industry overall. We are also seeing that technical consultants have more to draw and more to calculate, which tends to lead or mean, it's at least an indicator that projects are coming. But then it's also up to which one do we win and which one do we want to win. And we also have to see that the price is correct as well on these projects.

Just one Finally, if I may, on the M&A market, how would you describe the competitive environment? Notice that there are quite some financially sponsored competitors to you out there, making quite a lot of acquisitions.

My guess is that those competitors are also on the way to list, so I leave it at that. So I think that there are some aggressive companies out there doing a lot of acquisitions in a market like this. And my guess is also that they are on the way to selling their business or listing their business.

Would you say that given your focus on buying best-in-class businesses, I guess it should be a bit tougher when the competition is higher?

yeah but we saw a similar thing happening a few years ago also if you remember the cause as well we had some competitors that were just listed and they were quite aggressive and we all know how that turned out um so i mean we focus on our view we focus on the companies that we want to take into the business that we believe has the capacity of delivering in an environment like install code where we think that the culture is fitting, we see that the price is correct, and then we will be doing those acquisitions. And we're very open to do acquisitions, but we have basically not seen these companies the last couple of months. Instead, we are focused on growing in other areas, like in Matic, Intech. Intech has started a new company in Finland, a new company in Norway. I think it is two companies now in sweden and so we have focused on on other areas and like you saw in the presentation today i think we have six uh subsidiaries now in in matic as well and more coming as well so i think there are different ways of growing and and in this market environment we more focus on these startups and then acquiring companies excellent thanks a lot for your answers i get back in line

Thank you.

The next question comes from Carl Norren from SEB. Please go ahead.

Yes, hello. Good morning, Robin and Kristina. A couple of questions from my side. Firstly, it's on the service revenues. I noticed there was a quite big drop in Sweden compared to last quarter. I was wondering if there was something specific In the year-over-year, I think service was down 6%. While, if I remember correctly, it grew in Sweden in the first quarter.

It's a little bit the same when it comes to projects. To look at one quarter is a very short period of time. um in a mark or like in a company like ours i don't know if you have anything you want to look into that minor quarter fluctuations i would say okay so it's nothing that we should it's nothing that we have yeah it's nothing that we have seen or or anything that we can basically comment on uh regarding that we see a trend or anything like that

Yeah okay that's clear and then I have one question here on the order or the orders you've taken now basically would you say that the margins in the orders you're taking right now are at similar levels as the ones that you're now producing on taking in H2 last year?

I would say we have a similar price indications as last year And as we have said before, it's one thing with the price. Now it's all about being efficient in the projects as well to sort of get the payment that we anticipate when we take the projects as well. But price levels, I would say, are similar.

OK, that's all for me. Thank you, and have a good day. Thank you very much.

The next question comes from Carl Bockvist from ABG Sundal Collier. Please go ahead.

Thank you. Just two follow-ups here. First on the in-tech and in-matic. One being now up and running and one being the next project to start up, so to say. Just curious, how many people roughly are you now in tech? And do you have any kind of... goal how big Inmatic should be in say three years?

First of all InTech is roughly 400 technical consultants in three countries and Inmatic is now 60 FT's in Sweden at the moment. We will do the same since it was quite successful in the intake case that we will not reveal exactly our plans for enumatic and how we will grow but this is obviously something that we put a lot of emphasis on and put a lot of time on and we worked hard to make this happen and so obviously this is when Instalco does something we do it for real so We will continue to grow the business, but we don't give out exact numbers of what our goal is at this time.

Understood. Then question for Kristina. One first on capital expenditures. Do you foresee a need or ambition to continue to step up the intangible capex as well as the tangible capex if we look at it on a kind of annual basis?

The tangible assets in Instalco, as you already are aware of, is most connected to our acquisitions. And the tangible more connected with our industrial business and industrial installation business. So when it comes to... This follows, of course, our operational performance and our priorities when it comes to investments in these in these two different areas because they are very different actually.

Understood and then on working capital and payment conditions and so on has that aspect also become more difficult in this market if we look ahead in terms of you know working capital build up or releases?

I think we have been on this topic earlier working capital is It's hard work, and we have and continue to have a diligent focus on it. We had a stronger cash conversion this quarter, but nevertheless, in the working cap, we had a dip, but it's a dip from the invoice when it comes to tying up someone in accounts receivables at the end of the quarter. so we are not worried about it but it's hard work and we will continue with it and of course it shifts a little bit quarter to quarter and months to months understood that's all from my side thank you

As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. The next question comes from Johan Lankvist Sunden from Carnegie. Please go ahead.

Just one follow-up from my side on intake. You mentioned that there was a strong quarter for that part of your business. Is it possible to give some color on the kind of comparison during the fall for Intech? Because you said, if I remember correctly, that you have seen a gradual improvement in that business in Q1 numbers. Just curious to see if there's a tough or easy comparison for that business in the fall.

So, just so I understand, so you mean... Comparison numbers from 23. So, yeah, they have some easy, easy, easy, but they have some not too tough numbers. Let's say it like that. Not too tough numbers to beat in the fall to be better than last year. Let's say it like that.

We're in the prof breakeven in H2 last year already.

Now you're into maybe break even or slightly below. Fortunately, a little bit too much detail to have on top of my head on all the business areas. But I would say that they broke even and started making money mainly in Q1 last year. But they were not too bad in the end of the fall either. That's on top of my head.

Yeah, excellent. That was all for me. Thanks a lot.

There are no more questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.

We do have some written questions to start with. When will the EBITDA margins in the Swedish market recover and what actions are needed to reach 8% EBITDA margin?

I would say that the actions to reach the 8% are the actions that we're taking. Like I said before we are proud of the work that we've done and the work that are done by our 6200 employees. Obviously we need some help and getting market back on track basically. And we will be definitely back on our target. When it comes to Sweden, I mean one quarter is too short of a time period to talk about in this type of business where we deliver projects. We are running 6,000 projects at the moment. So I think that it is a little bit too short time period to talk about that something has happened in Sweden.

And the final written question. Any forecast when you will start to see organic growth again?

No. As mentioned before, we're seeing some positive trends. We are late in the cycle. And I think that We leave it at that and like I said every new day we're a little bit closer to a good and better market. So I think we will sum it all up there and thank you all for the good questions and thank you for listening in and have a nice day everyone.