Karnell Group AB ser. B

good morning everyone and welcome to canada's q1 2024's earning presentation we're really excited to have you all joining us today at our first presentation as a public company and throughout this session we'll be providing you comprehensive overview our performance during the quarter highlight our key financial achievements operational updates and strategic initiatives that we are driving our business forward Let me quickly introduce our presenters. It's myself, Petter Molenius, CEO here at Kanell. And with me, I have Lars Nereth, who is our CFO. And at this first quarterly report, we thought that we should spend a few minutes, first of all, to introduce Kanell as a group. Then we'll reserve some time at the end, after the presentation, for a Q&A session, where you will have the opportunity to ask questions. So who is Kanell? We are an active long-term owner of industrial niche companies and we have a clear thematic approach seeking small to medium-sized companies that holds a strong position in their respective niche markets. We have divided the group into two business units based on their respective business models. We have first of all the product owning companies and these are companies that possesses their own intellectual property, their own IP often a form of a patent or technical height, and focusing on developing clever products that add significant value to our customers while maintaining a competitive edge. The second business unit is our niche manufacturing companies, and they focus on specializing in specific subsets within manufacturing, allowing them to add substantial value to their customers and our criteria for success in this unit is the ability to achieve some 20% EBIT margin consistently. Chanel has a strong track record of acquiring about two platform companies per year, and we maintain a highly selective approach, targeting industrial leaders within their respective niches, and rather pass on an opportunity than to buy a mediocre company. Currently, Chanel comprises of 12 companies, located in Finland, Sweden, and the UK, and collectively employing about 600 employees. Our financial overview, as you can see in the chart, is for 2023, pro forma view, so adding up the 12 companies in the group, a net sales of 1.3 billion SEK with an accompanied EBITDA of 183 million. We strive to be as transparent as we can possibly be, and that means sharing detailed numbers that sometimes may sting in the short term. However, we firmly believe that our commitment to transparency will benefit us as a group and our shareholders in the long run. By providing a clear insight into our financial and operations, we aim to foster trust and confidence in our decision-making processes and our strategic direction. And on that note, it is important to highlight that we have chosen not to adjust our financial figures for the IPO costs or external advisory fees in the quarter. At Kanell, we believe in presenting the numbers as they are without resorting to adjusted figures that may obscure the true financial picture. And with that said, we'll share the detailed numbers that actually reflects our operations and financial health. And by doing so, we aim to build trust among our stakeholders and demonstrate our commitment to long-term value creation. So without further ado, let's delve into the details of our Q1 performance. It has been undoubtedly a very transformative quarter for Carnell with a very successful completion of our IPO along the acquisition of both a platform company and an add-on acquisition. We navigated through significant milestones, Despite the prevailing headwinds in the market, I'm pleased to report that we have achieved a modest organic growth during the quarter. Cash flow from our operating activities amounted to 12 million SEK, which is an improvement from earlier Q1s, where we typically have a bit bigger buildup in inventory to meet demand that comes in Q2. To give you an even better understanding then of the reported 20 million SEK, we have high costs during the quarter, mainly driven by the IPO. So our reported EBIT aid from our subsidiaries amounted to 36 million SEK for the quarter, reflecting the operational performance across our business units. Group costs excluding IPO and acquisition related expenses totaled 6 million. These costs encompasses various administrative and operational expenses incurred at group level. During the quarter, we incurred expenses totaling $7 million attributed to the IPO process. Additionally, there were acquisition costs accounting for $3 million related to our strategic acquisitions. Excluding IPO and transactional costs, our EBIT A amounted to $30 million, and that would translate into an EBIT margin of 10.6% during the quarter. And with that, I'll let Lars go through the financial details.

Thank you, Petter. So first, an overview of the development of Net Sales and EBITDA. And here we have added some more historical quarters for you to get a feel for the historical growth in Q1. So looking at Net Sales, we have had a CAGR of 54% from Q1 2021 to Q1 2024. And the increase from last year was 15%, and we ended up at 286 million. For EBITDA, if we exclude ICO and transaction costs that I mentioned during this quarter, then the CAGR from 2021 was over 100%. And the increase from last year was 6%, and we ended up at 30 million. If we look at the breakdown of net sales on the left here, we had organic growth of 5 million SEC or 2%, which we are very happy with in these market conditions. Acquisitions were 13% and we had a small currency effect as well, 1%. EBITDA was affected a lot by the IPO and transaction costs again. in the quarter of a little more than a 10 million SEK. So if we exclude these costs, we had an organic growth of 1.5%. But including these costs, we had a decline of 36% of 10 million. Acquisitions represented 7% and a small currency effect, again, of 1%. And now looking at our business segments and starting with our product-owning companies, we had a very good quarter with an increase in revenue of 27% to 117 million SEK. And most of that came from acquisitions, but we also had a nice organic growth of 8%. EBITDA increased by 73% to 11 million SEK, and most of that, More than all of that was from organic growth, 87%. And we actually had a negative acquired growth in the quarter, and that is due to the latest acquisition of Sekiyokunen. And Sekiyokunen has some seasonality in its earnings, and the Q1 is the weakest quarter. This is according to plan, and we expect Sekiyokunen to contribute to Evita in the coming quarters. The beta margin improved from 7.1% last year to 9.7% this year. And in general, Q1 had seen some recovery from a weaker Q1 last year from the product companies. And several of our companies performed much better with higher sales and much higher margins. In this segment, we have some companies that operate in the construction sector in Finland, and that is still very cautious or even weak. For our niche manufacturers, revenue increased by 9% to 168 million SEK. Most of that came from acquisitions, and we had a small negative organic growth of 2%. EBITDA decreased by 8% to 25 million SEK and here we had an organic decline of 19%. The EBITDA margin decreased from 17.5% last year to 14.9% this year. Our niche manufacturers had a very strong quarter last year where some of our companies showed record sales and margins This year shows a little lower activity in general, and we have especially seen a little lower activity from some of our larger industrial customers. And this has led to slightly lower sales and some pressure on the margins and the segments. Moving on to cash flow from operating activities, and we have had a very strong cash flow for the quarter as well as for the last 12 months. And this is due to both increased operating profit as well as positive networking capital development. And we have some variations in cash flow as we have in revenue and earnings, which is why we usually view cash flow on a 12-month rolling basis. So Q1 is usually the weaker quarter, but we have a positive cash flow in the quarter as well. Then on to our capital structure net debt. And we think we have a very strong capital structure. It was strong even before the IPO, but obviously even stronger now after the IPO and the issues that were made. At the end of Q1, we had a net debt of 77 million and a leverage of 0.5x. And that is excluding IFRS 16 leasing. And this was further improved in the beginning of the Q2, where we received the remaining of the cash from the IPO, the over allotment option or the green shoe. So we added 37 million. And in our definition, we also exclude earnouts and put call options, the liability for put call options. But we have included them here on the chart on the right if you want to make your own calculations. Back to you, Petter.

Yes, thank you. So during April, so after the quarter, we released our sustainability report for 2023, which underscores our commitment to our responsible and long-term ownership. Our sustainability report serves as an important component of our corporate governance framework, highlighting our efforts to integrate sustainability into our business operations. It is noteworthy to also see that we have used scope three emissions in our calculation this year. This is the first year we do that. And that expansion represents a significant step forward in our sustainability journey, enable us to capture and address indirect emissions across our value chain. And by incorporating the scope three emission, we aim also to enhance our understanding of our environmental footprint and identify opportunities for improvement. We have also done a CSRD gap analysis across the whole group during the year to prepare ourselves for the upcoming regulations. And for those of you who want to read this more in detail, please go to our homepage and have a look at the full report. Now to acquisitions, the platform acquisition that we did during the quarter. It's a company called Säker Jokkuna. It's a second generation family business who was identified through our proactive search. And the initial discussions were held already in March 23. And that's typically how it looks in our proactive processes. They take quite some time. And we bought this from the Jokkanen family. It's five siblings, all of them active in the company. Säkiökkinen specializes in outdoor lightning products in Finland and is perhaps most known for their pole bases and their collusion safe lightning poles called Kappu. And they also have standardized poles. Säkiökkinen exemplifies quite well what we're looking for for companies. It's an established, it's a family owned slash entrepreneurial business with growth potential and succession consideration. So a family who who are then looking for a long-term home for their business. As you can see from the chart, it's a solid financial track record with a favorable market dynamics. And we believe that we can continue on that journey and support in increasing the company's business in Finland and not the least in exports to Sweden and other markets. We are really happy about this transaction and the faith placed in us by the family Jokkinen to continue on with their legacy. So to sum up, we're very pleased with our results on Q1. Despite the challenging conditions in the IPO market, we successfully navigated that process, which serves as a quality stamp for our group and our visions going forward. The IPO has provided Canada with a long-term home, aligning our commitments to providing stable ownership to the companies that we acquire. The milestone has also equipped us with the resources needed to further pursue successful acquisitions of small to medium-sized industrial technology companies and niche market leaders within their respective niche. Additionally, our recent acquisition and modest organic growth in net sales and EBITDA, excluding IPO and acquisition costs, further underscore our positive trajectory. Together with our new and existing shareholders, we eagerly anticipate the continuation of growth and reinforcement of Cornell's position as a leading industrial technology group. And with that, we open up for 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 6 on your telephone keypad. The next question comes from Max Bako from SEB. Please go ahead.

Good morning, Petter and Lars. Well done on your first report as a listed company. Nice to see. A couple of questions from my side, if that's all right. Perhaps starting a bit with the details, but I mean, looking at Säköjokkinen, I believe they had sales during 2023 full year of some SEK 100 million. And here in Q1 2024, I believe the contribution was some SEK 7 million on sales. Would you say that that is in line with normal seasonality or has demand weakened compared to last year?

Excellent question. No, it's very much in line with our own forecast for the business. It is somewhat seasonal business as these posts goes into the ground or the concrete basis goes into the ground. So construction is lower during Q1. So that is fully aligned with our own forecasts.

Okay, so I interpret that as it's mainly then driven by seasonality. And of course, I mean, the next question also relates to the same question then, but on earnings, negative here in Q1, minus 3 million on operating profit. I guess that also gets the same answer in line with your forecast to get better ahead here.

Yes, I'm sorry to say that's the same answer. According to the forecast that they have a weak Q1 as they sort of building up to sell customers during Q2, Q3 and early Q4.

Yeah, understood. And then moving over to the niche manufacturer segment. I mean, the product-owning company is very strong. Niche manufacturer is a bit softer. Organic sales down 2%. It beat organically down 19%. Could you elaborate on that a bit, what you're seeing among your customers and what they are indicating ahead? And also, I mean, a lot of your companies within that segment

is operating in finland did you see any impact from the strike in finland here in q1 yes so many questions at the same time but yes so starting off niche production then yeah i mean in in uh first of all as i think uh we said during the call i think uh last q1 was really exceptionally strong so it's very difficult to to have that as a basis but As you rightly say, it is also a signal that the market is a bit weaker. Nothing dramatic, but it's a bit softer in general, as I think you can see across many other public companies. And the last question was, Yes, that has a somewhat marginal impact on us. Not that our company has had a big effect, but some of our customers, larger global industrial customers, have difficulties with their logistics, meaning that they have built up some inventory and we are waiting for new orders until they sort of get that shipped. So to some extent, but it's nothing material.

Understood. And then, I mean, we are now halfway through Q2. Could you say anything how this quarter has started? Is it in line with Q1? Or have you seen any material changes in demand overall for the group? And perhaps also on that question, if you could remind us about your seasonality. I mean, Q1, the week of quarter, how is it with the with the coming quarters ahead here?

So, I mean, in general, we don't sort of give a forecast or guidance in terms of the ongoing quarters or even the full year. We only talk about our financial goals. But seasonality wise, we can give you some flavor. And Q1 is the weakest. That's without a doubt. Q2 and Q4 are typically the strongest. And Q3 a little bit slower than Q2 and Q3. And Q4, sorry. So that's the seasonality we have in the group.

Understood. Great. And the last question. I mean, as you said yourself, following the capital injection here, during Q1, really strong balance sheet. How is the M&A process going? Do you see a lot of attractive opportunities out there?

Yes, it's a short answer, but we are... We don't comment on exactly where we are in the processes, but in short, we can give you a different answer that we there's a lot of activities ongoing and actually sort of the IPO process and all of that entails has sort of took some time. But now we're sort of again fully committed and and looking for several process across the Nordics and in the UK. And hopefully we'll be able to get back to you on that over time.

Perfect. Sounds exciting. That was all for me at the moment. Thank you very much for taking the questions and well done.

Thank you, Matt.

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

Yes, so we have a few questions from the chat and I can read them and answer them as well. How do you manage succession planning of your companies? It's the first question, and that's a really relevant question, as that's typically always a situation we get into. It's an entrepreneur. It's a family who are looking to find a long term home for their business. And naturally then succession is the important part. Sometimes these companies have external MDs running the business. And naturally that's ideal for us as we know then that we have proven management on board who has been driving the company successfully. But if it's not, if it's the entrepreneur or the family who's driving it, then we are always setting up a very clear succession planning. And we also have incentives that follow that succession plan. Sometimes it is that they remain as minority shareholders, sometimes it's an earn-out, sometimes it's a mix of both, sometimes they also receive shares in Canell as part of the payment, So we're trying to find a win-win situation between the seller and ourselves, because we know that all companies are looking a bit different and all situations are unique. The important part for us is to really have an orderly and good succession when we take over the companies. How do you secure, going on to the next question, how do you secure and grow further entrepreneurial spirit of your company? I think that that's really sort of the culture that we foster or has been fostered in the companies that we acquire are indeed entrepreneurial. And we let our companies keep driving that culture. And that looks a bit different from company to company, but we really inspire to go on their continued growth journey. And I think that sets us apart from some of our peers. We have a very strong commitment to further growth. And as you can see here with the Zaki Okunun family and their financial results, it's a very solid track record. And actually, we hope to continue on that line or even increase the growth further. So that's the spirit we want. We want to keep the local spirit, the local culture. And on top of that, hire the ambitions and go out and really have a five-year plan on how to grow the company. Question, the last one, I guess, is around our earnouts. If there is a risk in the earnouts that managers are solely focused on them instead of the long term. And that's also an excellent question. So there are pros and cons to all of these mechanisms. I think the major disadvantage with earn-out structures is typically just that, that the question sort of alludes to, is that the former owner then tend to focus only in short-term EBIT profit margins. And that is naturally not always the best for the company in the long run. So that's why I said earlier, we try to customize that solution depending on that specific situation. But typically we have more of a law that we buy 90.1% and they remain with 9.9. And that is for specifically that, that they also then share the upsides of the growth that's coming to not focus on short-term profits. Anything else? Good. Yes. One more. What is the value proposition for new companies? Why these companies are more valuable on the canal? I mean, our value proposition is that we know this space very well. The thematic approach that we talk about that we have similar companies and we have a track record of being able to keep growing these companies and keep building of what these families and entrepreneurs has already built. So we keep the brand name, we keep the management and hopefully we can add new employees to that local company. And that is very important because the families and the entrepreneurs They want to be able to live in this small, typically rural areas, and that should be proud of the company, even though they enter into retirement. So I think that's the key thing for us, that we are responsible long-term owner of these companies and we know how to keep building them. And with that, we thank you so much for taking the time to listen to us today. And hopefully then, see you in the Q2 report that we have coming up on the August 16th. With that, thank you so much and have a good day. Thank you.