Karnell Group AB ser. B

Good morning everyone and welcome to Kanell's Q2 report for 2024. I'm Petter Molinius, CEO of Kanell and with me today I have my CFO Lars Neret. We will be walking you through our financial performance for the quarter and we will be discussing our strategic initiatives and providing insights into our recent acquisitions. And as you can see on the screen, what we have lined up for you today, we'll start with a brief introduction to Canal. Again, as this is our second public report, just to give you an introduction for those of you who are new, listening in. Lars will then give you the highlights of our financial performance in Q2, including the acquisitions that we've done and organic growth. And after that, I'll dive into the specific results the last acquisition in Oyop and in NE Engineering. And at the end, we'll reserve some time for a Q&A session where you'll have the opportunity to ask questions and both through the phone and through the chat. To the introduction, Kanell is an active long-term owner of industrial technology companies. And our strategy is built around the clear thematic approach, focusing on acquiring small to medium-sized companies that hold strong position in their respective niche markets. We structured the group into two distinct business units, each tailored to leverage their unique strengths. The first one being product-owning companies, and they hold their own intellectual properties or IPs. Often the form of patents or what we refer to as technical height, some advantage that provides value to their customers, but keep our competitors at bay. The focus is developing innovative products that can deliver customers value and ensuring that they in turn also maintain their competitive edge in their markets. The second one is niche manufacturing and our niche manufacturing companies specializes in specific areas of manufacturing subsets and being able to provide exceptional value to their customers. And our success criteria for this unit is clear. We constantly want to achieve a 20% EBIT margin for all of our companies, as that is a quality stamp in terms of the value they deliver to their customers. At Kanell, we have a disciplined acquisition strategy targeting around two platform companies per year. We are highly selective, prioritizing industrial leaders in their niches and often opting out to pause on opportunities rather than to compromise on quality. As of now, Kanell compromises on 14 companies based in Finland, Sweden and the UK. And collectively, we're now employing about 700 people. financially as you can see on the screen we have our performer figures with 23 and they reflect solid performance with net sales reaching 1.3 billion and an ebitda of 183 million so moving on to q2 and as a reminder as i mentioned on the last call we strive to be very transparent And that means sharing detailed numbers that may sometimes sting in the short term. However, we firmly believe this as a commitment to transparency that will benefit us as a group and our shareholders in the long run. 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 advisors fee in the report or in the chart that you can see on the screen. At Canell, we believe in presenting the numbers as they are without resorting to adjusted figures that may obscure the true financial picture. So moving on to Q2, it's been a stable financial development for Canell, despite the challenges in the markets. We've achieved a 20% growth in net sales, which is a testament to our robust business model and strategic execution. What is particularly noteworthy is that we managed to achieve a small yet positive organic growth, even though it's been a softer market environment. But our growth this quarter wasn't just organic. It also reflects our ongoing commitment to the strategy we've outlined during the IPO. We have continued to identify and acquire niche industrial players, companies that not only exhibit high profitability, but also generate stable cash flows. These acquisitions have been made at reasonable multiples, ensuring that we not only are growing, but also doing so in a financial responsible manner. The quarter's performance is a clear indicator that our strategy is working. We remain focused on executing our growth plan, finding opportunities in niche markets and delivering on our promise that we've made to our shareholders. Despite these broader market challenges, our disciplined approach to the acquisitions and our emphasis on sustainable long term growth continue to drive Canal forward. I would also like to mention that we have a low leverage even exiting Q2 and have a very healthy M&A pipeline going forward. And with that, Lars will go through the financials in detail.

Thank you Petter. So first an overview of the development of the sales and EBITDA. And we have added some more quarters here so you get a feel for the historical growth in the second quarter. And looking to the left here on our net sales we've had a CAGR of 47% from Q2 in 21 to Q2 in 24. And the reported increase from the second quarter last year to this year was 23% and we ended at 357 million SEK. For EBITDA, the CAGR from 21 has been 42% and from last year EBITDA increased by 14% to 41 million SEK. If we look at the breakdown of net sales on the left here, we had an organic growth of 2 million or 1%, which we are very happy with considering the current market conditions. Acquisitions represented 22% of the increase and just a very small currency effect. The beta increased by 14% and most of that came from acquisitions. And organically, we had a decline of 21% or 8 million. And most of this is related to unusually high central costs in the quarter. And this was mostly due to timing effects, where some costs had previously not been fully accrued for, including board fees and bonuses. And then we had the transaction costs relating to the acquisition of Oiop of around 1 million second quarter. And some of the increase is also due to a higher cost base in general since we are now a listed company. And if we only account for our operating companies throughout our two business segments, the organic decline in EBITDA was 5%. If we look at another breakdown of EBITDA, we had reported EBITDA for our operating companies totaling 52 million for the quarter. And then we had the acquisition costs of 1 million for Oyop and then other central costs of 10 million. Now looking at our business segments and starting with our product owning companies, we had a good quarter with an increase in sales of 45% to 179 million. Most of that came from acquisitions, but we also had an organic growth of 4%. EBITA increased by 102% to 24 million SEK, and most of that also came from acquisitions, but we also had a strong organic growth of 16%. EBITA margin improved from 9.7% last year to 13.5% this year. And Q2 continued the recovery from a weaker year last year, and several of our companies performed better with higher sales and higher margins. And as we previously talked about, we have some companies that operate in the construction sector in Finland, and that is still very cautious. But during the quarter, we have seen some stability here and hopefully a beginning of a recovery. For our niche manufacturers, sales increased by 6% to 178 million. The increase came from acquisitions, and we had a slightly negative organic growth of 1%. EBITDA decreased by 6% to 28 million, and here we had an organic decline of 13%. EBITDA margin decreased from 17.5% last year to 15.6% this year. Our niche manufacturers had a very strong quarter and year last year. And this year shows a little lower activity in general, but still with good profitability across our businesses. We still see a little lower activity from some of our larger industrial customers and also a little weaker demand in the Chinese markets. Moving on to cash flow, and then we talk about cash flow from operating activities. We had a stable cash flow level in the quarter as well as for the last 12 months. But due to a little higher activity at the end of the quarter, the working capital is a bit higher than the previous year, especially accounts receivable are higher. And here we have some variations in cash flow between the quarters, which is why we usually view cash flow on that 12-month rolling basis. Onto our capital structure and net debt. And we still have a very strong capital structure. And during the quarter, we increased the net debt with the acquisition of OIO. But then we also received the remaining part of the cash from the IPO, the over-allotment option. And as of June, we had a net debt of 93 million, excluding IFRS leasing, and a leverage of 0.6x. And apart from leasing, we also exclude the earnouts and the liability for our put call options in our calculations. You can see them here on the table to the right if you want to make your own calculations. Back to you Peter.

Thank you. Moving on to acquisitions. And during Q2, we acquired Oyop. a well-established product-owning company with a strong market position in their niche of eccentric locks and battery connectors. Oyop was founded back in 1922, so it has a long history of innovation and quality, making it actually the second company within Canada's portfolio that has over a 100-year track record. This rich heritage aligns perfectly well with Canel's investment criteria as we seek out companies with strong and enduring market positions. Oyop offers around 300 different eccentric locks, but under four brand names, catering to OEMs and end users across 50 countries, with Sweden being the largest market. This acquisition is a prime example of what we are looking for and that we are executing on our strategy to acquire niche industrial companies that not only has a strong market presence, but also exhibit high profits with stable cash flows. And with OIOC, we're not just adding another company to our portfolio, we are enhancing our group's overall capabilities and market reach in product owning segments. And we expect this acquisition to contribute positively to our overall growth and profitability moving forward. Just after the close of Q2, we completed the acquisition of NE Engineering and further expanding Canell's presence in the precision engineering sector. NE Engineering is a British precision engineering company that specializes in CNC turning and milling. and it serves demanding industries such as subsea telecom, niche automotive, energy and food processing. This acquisition is significant as it marks our second entry into the UK market and we see great collaborations opportunities between NE Engineering and Playlight, the precision engineering manufacturer that we acquired in 2023. While their offering are complementary, both companies tend to benefit significantly from sharing best practice and leveraging each other's customer base. This cross-pollination will not only enhance the operational efficiency, but it also opens up new growth opportunities for both businesses. And as you can see here, the NE engineering has shown consistent organic growth. driven by its ability to attract and retain high quality customers. The acquisition aligns perfectly with our strategy requiring niche industrial companies that deliver stable cash flow and high profitability. Also during Q2, as part of the goal to grow and further strengthen our presence in the UK, we have recruited an investment director and he's going to start at the end of September. And by experience, we know that it's of great importance to have a local presence, and we will look forward to continuing our expansion in the UK. Good. To sum up, before we open up for questions, we are pleased with the results of Q2. Despite continued challenges in the market, we have successfully maintained our growth trajectory and executed on our strategic objectives. The IPO process that we navigated earlier this year continues to serve as a quality stamp for our group's vision and future. It has provided Kanell with a solid foundation of long-term thinking and home, perfectly aligning with our commitment to providing stable ownership to the companies that we acquire. The milestone has also equipped us with resources needed to pursue further successful acquisition of small and medium-sized industrial technology companies, each a market leader within its niche. And importantly, as I said earlier, our lower leverage has positioned us well and to take care of the advantages when we see opportunities in the market and that we can ensure of our continued growth without compromising our financial stability. We are excited about the path ahead and together with our new and existing shareholders, we are eagerly anticipating continuing on our growth journey and further solidifying Carrier'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 Bakko from SEB. Please go ahead.

Thank you, operator, and good morning. This is Max Bakko from SEB, first off. Well done. Nice to see that you are within positive territory in terms of organic sales growth during the quarter. A couple of questions from me. I'll take them one by one. Starting with the most recent acquisition of NE Engineering, quite steep improvement in both sales and profitability here in 2024. I guess that's rolling 12 months or something like that. What would you say is a reasonable level to assume ahead, both in terms of sales and profitability for that company?

As you rightly state, Max, they have had a tremendous organic growth and speaks well of their ability to attract customers in an organic manner. However, you can't grow these type of companies that fast. So I think we have to see that the last financial year, which ended end of March this year, is a bit of an exception, especially in terms of profitability. So when we look at these type of companies, the average assumption we have or what we're looking for is 20% EBIT margin. I think a smaller company like this with the strong presence they have in the market, one would think that long-term they can be between 20 and 25% on a more normalized level.

Okay, perfect, understood. And then I noticed that, I think it was in the report you mentioned, that overall the niche manufacturers are indeed having a bit lower demand, at least compared to last year, but that you have noticed or sensed a bit more positive tones, if I understood it correctly. Could you elaborate a bit on that more in detail about what you're hearing and what you're seeing here for the coming quarters?

Absolutely. So as you said, I think first half and even now Q2, it has been somewhat softer out there in the market in general. It's no single company within the niche manufacturing that stands out. They all more or less felt a bit softer markets. especially also when we entered into H1, it was a bit of a lower demand and the order books were actually going down. Now, we, as you know, don't really comment or giving any guidance, but what we can say is that we see that the sentiment overall is picking up and it is a bit more of a positive attitude entering into H2 versus what we had when we entered H1.

Okay, understood. That sounds promising. And then on M&A, I mean, you have done free platform acquisitions year to date. And as you mentioned during the presentation, your outspoken target has been to do around two acquisitions annually. And it sounds like your M&A pipeline continues to be strong and so on. But in terms of capacity within the organization to take care of additional companies, Basically, do you have the capacity internally to do more M&A this year and then more focusing on not on the financial side, more on how much you can manage yourself?

That's a good question. And I think also that is, as you said, that we have spent time and effort and also invested in recruiting a person on the ground in the UK that will now also start at the end of September. In addition to that, we're also looking to strengthen the team in Stockholm. So we've also been looking for adding an investment director here. But with that said, we are driving a very decentralized model and the companies themselves are driving their business and that's very important for us. So we still have capacity to continue on the growth journey as we've committed to during the IPO 1-2-0 shareholders.

Okay, understood. And then perhaps a question for Lars. I mean, as you mentioned yourself, quite negative networking capital effect here during the quarter on the cash flow, minus 18 million. I think it was plus 12 million here in Q1. I guess it's seasonality and so on. If you have any thoughts on the networking capital development here during the second half, Is it possible for you to actually release some working capital and in that way support the cash flow instead?

Yes, also a good question. Absolutely. And as we see, so we have a seasonality in our cash flows as well. And if we look at the big items in working capital, it's inventory and accounts receivable. And inventory is pretty stable and follows pretty much the seasonality of the earnings of the company. Accounts receivables are a little bit more flexible or fluctuating. So we had a little bit higher activity at the end of the quarter here, which is why the accounts receivables are a little bit higher than they were last year. Yes, we expect those to release in Q3. So we expect, of course, that Q3, especially for accounts receivable, will be a little better, at least for working capital. And we have... I wouldn't say it's normal to have these high accounts receivables, It is fluctuating in some companies and we don't have any problems with old accounts receivable and such. So yes, we expect them to release and working capital to be a little bit lower in Q3 at least.

Okay, perfect. Very clear. And then on the topic of seasonality, could you perhaps remind us of your, I mean, looking at sales and earnings, the seasonality here during Q3 and Q4. I mean, I think Q2 is usually your strongest quarter during the year, but how should we think about Q3 and Q4?

Well, Q2 and Q4 are our best quarters seasonality and Q1 is probably the lowest and Q3 is also very low. Q4 is usually a little bit better actually than Q2. Q3 is usually low, but it might be good to keep in mind that actually last year we had a very good Q3, especially for the niche producing companies.

Okay, understood. So a bit tough comp here in Q3 then. And on the central costs, which were minus 11 million here in the quarter, and you mentioned that they were a bit unusually high. And historically, I think it's been around 6 million on a quarterly basis. But now we have added another or a new investment director in the UK. And of course, you're now a listed company. So what would you say is normalized level to assume going forward?

Yes, it's obviously done a little bit higher now. And both with the new hires and of course, with some added costs and for for us now being listed companies. So I would say around seven to eight million per quarter would be a reasonable level.

Okay, understood. And then the final question. You mentioned in relation to the working capital that the end to Q2 was quite strong. And I mean, we are halfway through Q3 now as we speak. If you could give any comments on the development here during Q3, has it continued to be stable and perform as we have seen during the first half of the year?

Again, I think we're not really giving any real guidance, but more than what I said earlier on that we are creating H2 with more confidence than we did when we entered H1.

OK, sounds good.

um thank you very much for taking all the questions and good luck going forward thank you there are no more questions at this time so i hand the conference back to the speakers for any written questions yes so we have a couple of questions here uh from martin at central invest i think A couple of them have already been answered, the development in NE and high central costs. Another one from the footnotes is that Sakyokunen rebounded due to seasonality to 22% margin in Q2 after a loss in Q1. Do you still see around 20% margin for 2024?

Again, we're not sort of giving guidance on specific companies within the group, but in general, they are doing very stable performance and we expect them to be more or less on the same level as they have in the past.

Okay, no more questions, but I can see.

Good. Then thank you all for joining and listening in. And we wish you a great day. Thank you.