Storskogen Group AB (publ)

Hi, and welcome to Storskogen and our presentation of the second quarter. My name is Daniel Kaplan, CEO and co-founder of Storskogen, and together with me today, Lena Glader, CFO. So let's get into it directly. First, a brief recap of Storskogen. We're an international group of businesses, 37 billion in sales, EBITDA of 3.5 billion. Our mission is to empower our business to realize their full potential. We believe that we are uniquely positioned to identify, acquire and develop market leaders with sustainable business models with an infinite ownership horizon. And what we offer our investors is profitable growth and resilience. Resilience through managed risk, through diversification. And the reason we have this is that we have services, trade and industry, three business areas. Services headed by Peter Ahlgren, making up 32% of our turnover. divided upon seven verticals. Trade headed by Krister Hansson with four verticals making up 28 percent of our turnover and finally industry headed by Fredrik Bergergaard three verticals and 40 percent of our turnovers. So diving into the second quarter It's characterized by strong cash flows from operations. We're quite happy that we protected our margins despite the challenging environment. Net sales, almost 9.5 billion, which is a 4% increase. The adjusted EBITDA, 922 million. It's a 5% increase. And the adjusted EBITDA margin, 9.7%, as compared to 9.7 last year in the second quarter. The organic net sales growth minus 2% and the organic EBITDA growth of minus 5%. So looking at our key events, this quarter we had a success relations of 2 billion in bonds and repurchase of the outstanding 24 bond of 3 billion. So we finally got an average maturity and now death maturity profile of 30 months. So that's satisfactory to us. We're quite happy that we managed to protect our margins in the second quarter, and looking at the first half year, we have actually improved our margin from 9% to 9.7%, so that's also satisfactory. Cash flow, strong cash flows, 850 million approximately, a significant improvement compared to last year. And this is partly due to the fact that we have had a strong cash conversion of 105% in the second quarter. We did four acquisitions, out of which one, AC Electric, was the platinum acquisitions, the others smaller add-on acquisitions. And we also concluded four divestments, including Dextri Group. We'll go into that later on. So moving ahead, looking at our strategic priorities and how we're delivering on those. Almost a year ago we had a capital markets day and we basically stated six short-term strategic priorities. The first one most important potentially is to improve cash flows and refocus on cash flows. And we have to say that we're quite happy now that with three consecutive strong cash flow quarters We're quite happy about that development. We still have some way to go. We have lots of work and potential left. So even though we're not guiding any results or things like that for the second half of the year, we do believe that we continue to have strong cash flows in the second half of the year. Protect profitability. Well, 2022 was characterized by strong margin pressures basically with currency movements and all kinds of headwinds and I think these have continued this year but in a new form primarily through weakening demand but that said we still have improved our margins so we're also quite happy with that development even though of course we and of course over a business cycle we're guiding towards 10% in a week business cycle In theory, we would be happy with 9.7%, but of course, we wouldn't put this in green until we are at 10% or higher. So working towards the goal, but making headway, so to say. Leverage, well, we peaked at 2.7 interest-bearing net debt through EBITDA. We still have some work to do. The ambition remains that by the end of the year, we will reduce our leverage to the lower end of our two to three spectrum. And then the way to do that, of course, is the strong cash flow, the protected possibilities, but also the reduced M&A pace. We are doing strategic add-ons and very few select acquisitions, but very few. We are complementing that with some strategic divestments divesting low performers and companies not aligned with our ESG or strategic agenda, including margins, for example. And finally, we have reduced central costs as well, from 1.1% of sales to 0.7% of sales. And in fact, that's a 36% cost reduction as a percentage of sales. So it's actually a significant reduction in our central costs compared to our sales. So long story short, We believe that we are making great progress on our strategic priorities and with a strong ambition that this will result in reduced leverage by the end of the year. But most importantly, moving to the next page, is of course that we create value for our companies and in the end producing profits and resilience into our portfolio. The case study today we've chosen is Vibe Group. This is a company we bought in 2021 in Q2. This was a carve out from Schneider Electric. It's a leading company with regard to cable ladders, cable trays and mesh trays. They have some global really strong brands and operations in six countries, 280 employees. It's a significant company seen from the eyes of Storskogen. The reason why we bought it at the right price was, of course, that this was a carve-out, and carve-outs have risks and complexities that makes it unsuitable for all types of buyers, but we do feel confident in our operational capability to help a company become, so to say, an independent entity. So what we have done since the acquisitions is that we have created an operational platform to work together with Patrik and the management an independent organization, a separate sales organization, an independent systems architecture supporting the business, and the entire infrastructure from procurement to sales as an independent company. Of course, they have been excluded from the Schneider Electric purchasing agreements, et cetera, but on the other hand, Storskogen by now has more than 60 frame agreements supplying and assisting Vibe to achieve strong margins even going forward. And in addition to that, we've invested in the business, we have done an acquisition creating a further strengthened product portfolio. And the result of this in the case of Vibe has been a significant rise in sales, 27% uptick in sales, but also stronger margins. So we're very happy with the performance of Vibe currently with a turnover of around a billion Swedish kronor in the last 12 months. So this showcases our operational capabilities when it comes to how to create values, but also to create deals that might not be suitable for all types of buyers. So looking forward to continue to support Vibe going forward. Back to the quarter and our performance, net sales and EBITDA margin. We're quite happy actually that we've managed to protect our margin in the quarter through the diversified portfolio. This has been strengthened by the strong performance of services. But trade is, of course, suffering from the recession, especially in Sweden, and the weak Swedish Rona, especially towards the dollar that affects the margins in trade adversely. And continued focus on margins in this challenging environment. Looking at the market development in general, well, we do see a solid demand in industry and services. We can see that the cost inflation that we could see accelerate during last year has stabilized. Many of the supply chain disruptions have also gradually been reduced, which makes life easier for us and our companies with margin consequences, positive margin consequences, of course. That said, we have a weak consumer demand in all industries related to consumer and durable goods. And also companies early in the construction cycle are suffering from weaker demands. Looking at the transaction market, it's a decent deal flow actually from Storskogen's perspective, a very strong deal flow from many markets and many different industries. Multiples have stabilized. And I think good companies always remains the same with regard to prices. And from our perspective, there are not that many bargains just because there's a low turn. On the other hand, when we've done a few exits now, we've achieved decent multiples on those as well. Of course, transaction processes take a little bit longer. And this is because it's a more complex environment. But for us, that suits us quite well because we're currently focusing on delivering, so we're doing less acquisitions, being very selective on what cases we are choosing at the moment, prioritizing small add-ons that support our current market positions and very few platform acquisitions. So looking at how we are performing against our financial targets, Well, one, and these targets, of course, are set in the medium term, seen over a business cycle, assuming access to capital. Looking at the organic EBITDA growth, we're guiding towards real GDP plus one to two percentage points. We're currently at minus five percent year to date. Not particularly surprising, but of course, not something that we're happy with, even though we believe over a business cycle that we are on target. Looking at the adjusted EBITDA growth, including acquisitions, we hope to guide on line with historical levels. However, without bringing new capital, we have a 25% growth year to date. I think that's satisfactory. I think we will see a slower growth going forward as we have reduced our M&A pace. Looking at the adjusted EBITDA margin over time, 10%, I think In this case, I think we are on target, 9.7% so far this year in a recession environment. I think that's decent. But of course, like I mentioned before, we're not satisfied until we've beaten that 10% target. Cash conversion, our strategic priority for the year. We're really over delivering here, 87% these last 12 months, and hope to continue on that journey to deliver strong cash flows. helping us with our final goal to reduce leverage. We are in the middle of our span two to three in that interest-bearing net at three EBTA. But that said, we want to be in the lower range and we will not stop until we're there basically. So looking at our three business areas, we have services who made a very strong quarter, significant margin improvement, um and the decent organic capital growth of eight percent we're strong in the growth actually uh this year uh some of the uh verticals that had a tough time last year infrastructure installation and infrastructure are actually really improving um both margins and sales and even some of our other uh verticals like digital services, logistics, et cetera, continue to deliver. Whereas companies with exposure to new construction, especially engineering services, they have a weakened demand. We know for a fact that Q3 is a weaker quarter for services due to holidays, et cetera, but we do see a solid demand in most areas. and have more visibility in this quarter for the second half of the year in a positive manner when it comes to services. So that's all that on the services side. Looking at trade, well, trade is certainly having a tough time. They have an organic sales growth of minus 3% year to date, but an organic EBITDA growth of minus 22%. And this is, of course, due to soft demand with consumer-related durable goods, e-commerce. It's not always consistent. A few of our companies do perform strongly. And from a vertical perspective, health and beauty remains strong. But we believe that the tough times will continue in the second half of the year. They're certainly meeting significant headwind with the weak Swedish krona towards the dollar. But I think what they have done quite excellently is to retain their market positions, even strengthen the market positions. They're doing a lot of hard work, including cost-cutting programs to protect profitability. And they've been really good at releasing working capital, getting their inventory down. So I think trade has been the great contributor in the second quarter to our strong cash flows. We're happy about that. Looking at the industry, they had an extraordinary Q1, still a strong but more normalized second quarter. We see a somewhat softer demand side in the autumn, but still from high levels and still a stable development for industry. We had a sales growth of 9% in Q2 and a margin expansion. So I think that's a positive thing, of course. Industrial technology is performing really well. increased competition in automation and price pressure but nevertheless you have these underlying trends reshoring ground transition and a great demand for automation solutions so they're all underlying the strong performance of industry so going into q3 we do see the trends of the second quarter to continue looking at our transactions like we said previously a reduced m&a pace mainly doing some small add-on acquisitions, one platform acquisition, AC Electrical. Looking at the divestments, we have done a few, Dextre Group being the biggest. And these of course could be low performers or they could be companies not aligned with our overall strategy. And of course, if you look closely at these divestments that we've done, they have a turnover of about 1.2 billion, and they contributed with 41 million in EBITDA. So from a margin perspective, that's below, well, it's closer to 3% or 3.5%. So that kind of shows a little bit why the thinking behind why we've done those divestitures. So, Lena, financial performance.

Well, thank you, Daniel. Over to the numbers here. So let's have a closer look at the Q2 numbers. First, repeating what Daniel just said, Q2 net sales grew by 4% to 9.2 billion. This growth is driven by acquisitions, as you understand, since the organic sales growth was slightly negative during the quarter. And I'll come back to that in a little while. For the last 12-month period, net sales were 36.9 billion and Performa, which is now adjusted for acquired and divested companies. So divested companies are removed for the entire 12 months period here, whereas acquired companies are included for the entire 12 months period. So that leaves us with 36.1 billion in Performa turnovers. Adjusted EBITDA grew by 5% year-on-year to 922 with the last 12-month period, delivering 3.5 billion in EBITDA and performer, again, 3.6. This corresponds to an EBITDA margin of 9.7% for the quarter, same level as Q2 last year. For the first six-month period, however, EBITDA margin, in fact, improved substantially from 9.0 to 9.7% year on year. This reflects in numbers, obviously, the operational efficiency improvements that you just mentioned, Daniel, price increases that have been successful as well as good performance overall in industry and services. Besides the softer demand in trade, as just mentioned, the weak Swedish krona obviously also continue to put pressure on margin for the business area trade. Compared to Q2 last year, in fact, the net effect of this week's Swedish krona against the dollar pressed the trade margin by as much as one percentage point, in fact. The group operations, HQ costs as we call them, were maintained at the same level as Q1, but significantly lower compared to last year at 68 million Swedish krona. compared to 97 a year ago representing 0.7 percent of sales which is I think unchanged for the past few quarters. EBITDA adjustments amount to a total of 101 million for the quarter where approximately half is a revaluation of earn out and half is net capital loss on divestments. We have recorded both capital gains and capital losses on these divestments. The net is negative 46 million. Net financial items were pretty high in Q2, 357 million versus only minus 26 million in Q2 last year. So there's a big delta here, which of course impacts the net results and especially the net results of development versus last year by quite a bit. However, the actual interest costs are unchanged from Q1 at roughly 220 million Swedish krona. This is equivalent to an interest rate of 6.2 on the average interest-bearing debt during the quarter. Other items in the net financials are non-recurring costs related to this early redemption of the 24 bond that you just mentioned as well, Daniel. And then we have revaluations and effects for the parts that are unhedged in the internal loans that are negative 84 in this order. So the aforementioned net adjustments and non-recurring financial items affect net results by all in all a negative 236 million or 0.14 Swedish kronor per share, which of course impacts the reported EPS, which was 0.04 for the quarter, 0.18 if we had adjusted for it, added back these non-recurring items. And this, of course, also impacted the return on equity, which was 7.7 percent compared to 9.2 in Q2 last year. However, return on capital employed increased from 9.6 percent to 10.2 percent. Return on capital employed net of cash was, in fact, 11.8. and net of goodwill 24.2%. So this is a good improvement from 18.5% a year ago, which reflects a healthy return on capital employed in the subsidiaries, of course. We have cash flow from operating activities, as in the cash flow statement, of 852 million Swedish krona in Q2, which is an improvement of all in all 517 million. from Q2 last year, with 2.8 billion Swedish krona in cash flow from operating activities during the last 12-month period. Cash conversion was 105% in Q2, a significant improvement from last year as well, and 87% for the last 12-month period. So I'll come back to both cash conversion and leverage separately in a little while. Let's spend some time on looking at the organic sales growth in the meanwhile. So on this slide, we show organic sales growth per quarter. In the isolated Q2, this was minus 6%. As you can see on this graph, sales growth has been strong the past years, driven by volume and price. But in the negative territory, as I just said, in Q2. We have all in all been successful in increasing prices also in the second quarter, but volume growth in particularly in trade, notably the home and living vertical, has impacted group organic growth negatively. On the next page, we're going back to the cash flow here. We're showing operating cash flow now here defined as the EBITDA less change in net working capital less capex and cash conversion which is the same divided by over EBITDA. So essentially how much cash is generated out of the operating activities. On this graph we show the last 12 months here. It's a rolling 12 months in the bars here. Operating cash flow, LTM as I said in Q2 was 3.9 billion. And cash flow has, as you can see, improved significantly quarter by quarter over the past four quarters on the back of substantial work with reducing working capital especially. In Q2, cash flow was positively affected by reduced inventories and higher payables. But overall, receivables were fairly neutral here. Cash flow improvements from Q2 last year are significant, showing through in cash conversion, which was 105% in the isolated quarter, compared to 44% a year ago. So now we are significantly, or at least a bit above the 70% target again, which is as we planned. So capex to sale, 1.8% in Q2. pretty much in line with previous periods. And then over to net debt and leverage on the following, on the next slide. Showing here is the interest-bearing net debt and interest-bearing net debt to EBITDA, the leverage. Interest-bearing net debt was 11.9 billion at the end of the second quarter, which is down from 12.1 at the end of Q1. And in fact, so that's a decrease of 230 million Swedish kronor during the quarter. In fact, with an unchanged stable SEC euro rate, the decrease would have been 100 million more. But leverage was 2.6, or actually just below 2.6 at the end of the quarter, which is the same as last quarter, where it was a tad above 2.6, in fact. which is within our target range. But as I think Daniel made it pretty clear here just now, we have an ambition to reduce this further by year end. The denominator here, the RTM EBITDA, so that's the performer EBITDA in Q2 was 4.6 billion versus 4.7 in Q1. So this of course affects leverage as well. Liquidity wise, our total available liquidity amounts to 8.9 billion. 2 billion in cash and 7 in unutilized credit facilities. Regarding the overall financing strategy, we've continued to work towards extending the overall maturity profile to arrive at a more diversified debt portfolio and to reduce the absolute debt. This is particularly relevant, of course, for the current interest rate environment. And as part of this focus, we extended our bank loans by one year in Q1. And in Q2, we continued the work by refinancing the bond maturing in 24, reducing its size by a billion and rolling two of the three billion over to a new bond maturing in 2027. This means that we now have no debt maturities in 2023 or 2024. And in fact, when looking at the gross interest-bearing debt, we in fact reduced the gross interest-bearing debt by a billion since year end. So we are working towards lowering the gross debt, so not only focusing on the net debt. And during the quarter, we reduced the gross debt by half a billion. And then finally, looking at this, showing this diversification effect In a nice illustration here, we have a diversified business portfolio, obviously, of businesses that we operate in the three business areas. And on this page, we illustrate the diversification by showing the EBITDA margin of our business areas over the past eight quarters. The dotted line there that you see is the Storskogen Group EBITDA margin. And you can see here that this is actually net of the HQ headquarters. So this is the business areas only. And you see here, obviously, that EBITDA margin from our businesses, the dotted line here is much more stable on a group level, which is obviously the diversification effect when the business areas are combined. And in Q2, you see that trade and services are moving up, in fact, sequentially. with industries on a strong margin level, but slightly lower in Q2 than in Q1 here. And this is pretty much the expected seasonal pattern for the quarter. So I think that's it from me. So I'll hand the word back to you, Daniel.

Thanks, Lena. So in conclusion, some key takeaways. I think we're continuing to deliver on our strategic priorities. A strong cash flow in the quarter, retained margin and seen over the last six months, significant margin increase actually. A seasonally strong performance in services, showcasing our diversification in the portfolio. Looking at our maturity profile, it's been extended first by extending our loans in the first quarter and now refinancing the 2024 bonds. with a smaller 20s issue due in 2027 so a successful refinancing as well looking forward we're still continuing our operational focus protecting our margins focusing on cash flow and of course we want to continue our work with our balance sheets reducing leverage going forward so thank you very much for listening in and now it's time for questions