Storskogen Group AB (publ)

Hi and welcome to Storskogen's presentation of our third quarter report. My name is Daniel Kaplan, I'm the CEO and co-founder and together with me presenting today is Lena Glader, CFO. So welcome, let's turn to the first page diving directly into Q3 highlights. In short, it was a business as usual quarter in line with our expectations. We focused on cash flows and I think we saw some good results from that. Sales 8.3 billion, organic net sales growth minus 2% with an adjusted EBITDA of 726. Organic EBITDA growth of minus 9%. The EBITDA margin 8.7 slightly below last year. Year to date however margin wise we're at 9.4 still better than last year. So looking at some key events and figures we could see that we had significant cash flow from operating activities at 584 million as compared to 204 million last year. A significant improvement, of course, in all our hard work delivering strong cash flows. And this means, of course, that year-to-date we have 1.3 billion in cash flow from operating activities. And this is, of course, partly due to the strong cash conversion. We, of course, communicate a target of 70%. We're currently, the last four months, at 95%. So gradually, well, producing some strong cash flows. Interest-bearing debt, we reduced that with almost 900 million in the quarter and the interest-bearing net debt with 190. We did five divestments and two add-on acquisitions. So those are the key events in the period moving on. A little bit deeper into net sales in EBITDA. As you can see sales quite decent more or less on par with previous years despite the fact that we have done some divestments. The margin however in the quarter has been decreased primarily driven by trade. As you know we have headwinds both with regard to to currency effects but also simply weak demand. To some extent we could see that as well coming in from services affecting margin as well. We had a slow July but a much better August and September. Looking ahead I think we're looking forward towards a seasonally strong Q4. As you might know Q1 and Q3 are weaker quarters and Q2 and Q4 are stronger quarters in our seasonality. So moving on to next page. Every quarter we will try to do one deep dive into some business aspect for relevant reasons. We're looking at cash conversion this quarter, the business insight section. So looking at last year at this time after Q2 2022 we had like a 32% cash conversion the last 12 months there rolling and as you can see we've gradually increased that as we have increased our focus and our various activity programs have come into effect. and currently at 95 percent. In the long term of course we think that we gravitate back to towards 70 percent which is our long-term healthy target but that said I think there's lots more to do within the reducing networking capital going forward because we're even though we've been quite successful we're still not really there yet. Q3 as a rule is a quarter where we build up networking capital to be able to sell goods in the fourth quarter. That's the seasonality from a cash flow perspective. So we're expecting strong cash flows in Q4. That's still not reaching our internal targets. So we have a lot more to do in the year to come as well to continue to drive strong cash flows. Looking at how we do this in practice. I mean, in theory, it's not rocket science. In practice, it's hard work and some rocket science as well. It's inventory reduction, accounts payable improvements and proactive accounts receivable work. And we do this, of course, setting up on an overall level. We're setting incentives and KPIs where we measure and drive these behaviors to do this. More specifically, looking at, for example, inventory reduction within trade. That means categorizing your inventory, setting targets, following up. Of course, understanding the service levels appreciated by customers so that you don't have things in stock that you don't need to have, basically. Another part is, of course, the fact that we have reduced supply chain disruptions, which enables us to Well, I think we're far off from the previous just-in-time methodology that you could previously use. It's still not functioning as well, but still better and better. So you can be tighter and tighter in your inventory planning. When it comes to inventory reduction, when it comes to work in progress for industrial companies, it's all about designing the goods in the right way, understanding the supply chain as well. And of course, you can all kinds of automated tools for inventory management. Looking at accounts payable, you understand your supplier relationships, you get deeper trust, you understand when to pay and how to pay and what to pay and then being stringent and disciplined and over time that delivers better accounts payable. Looking at accounts receivable, Especially important I would say in potential tough times so that you reduce losses from insolvent customers. You just have to be stringent and on your toes and being systematic in how you invoice, when you invoice, who you invoice, at what time and also your terms of course towards your customers. Through business intelligence dashboards and new routines you become more efficient too. Examples, LMS and industry, producing automation equipment, peripheral automation equipment. You can see tremendous work there, reducing their net working capital with 138 million a year on year, reducing working capital to net sales with nine percentage points, a tremendous journey for them. Cranlyft a significantly smaller company but having done even more impressive work in that respect you can see improving cash conversion tremendously. They actually already from the start had a cash conversion of 173 percent previously so they actually went up from strong levels to more than 300 percent this year and they released another 48 million in networking capital. which is a distribution company distributing mini cranes across Europe, Middle East and Africa basically. So hard work still lots of things to do here especially industry has some work to do and hopefully we will see some of our trade companies as well delivering in the fourth quarter. So moving ahead and this of course translates into strong cash flows. And here you can see the cash flow from operating utilities in the last 12 months, how it's developed, moving from 1 billion in Q3 2022 to the current 3.2 billion almost. Of course, even if you reduce, remove capex and leasing, it's still leaves us with a true cash flow free cash flow of about 2 billion which is of course a significant amount to use to reduce debt or acquire companies and in other ways create value for the shareholders so how has the quarter looked like then for our different business areas number one is services if you're looking at overall in the year you can see a significant margin recovery Year-to-date 9.5 percent compared to 8.8 previous years. That said in the third quarter a relatively tough quarter affected by both by companies exposed to construction or early stages of construction and our HR and competence vertical has also at least one company has suffered they're exposed to low it's basically a job matching company and of course they have been exposed to lower unemployment and dysfunctional markets basically looking at net sales minus eight percent primarily due to divestitures Organic net sales growth minus 2%, organic EBITDA growth minus 6% in the quarter. I think looking ahead, I think we can see a solid performance in infrastructure, digital service and installation. I think we see even in looking ahead a strong Q4, seasonally stronger and an overall solid demand across all verticals and most companies. But of course, the challenges remain in companies exposed to new construction as well in some parts of the HR and competence vertical. So looking at trade, this is the business area that have really had a tough time with weak consumer confidence. The high interest rates and the weak Swedish krona has really been tough on some of the trade companies. Sales 2.3 billion, so they're still actually keeping sales up. Gaining market share very competently, actually utilizing this market sentiment by being more forward-looking and forward-leaning. So I think they're doing great work from a strategic perspective and I think we will be a lot stronger on the other side of this business cycle. The organic net sales growth minus 3%. EBITDA 188 million with an organic EBITDA growth of minus 21% of course. And this is of course a combination of currency headwinds and the weak demand. So it's not particularly surprising at the bottom of the business cycle for our trade companies. However, we do see that some of the destocking we've seen in the value chains with our customers It's improving that so we do see some light in the tunnel. We will see how long that but people of course are cautious when it start comes to restocking as well. Adjusted Iptomarketing 8% and year-to-date that's 8.7 as compared to 10.3. So a tough time for our trade companies. Looking forward to a Q4 which is a seasonally stronger quarter. Health and beauty, I should say, is of course the star of the trade business area at the moment. Very resilient and strong performance. Okay, industry. Well, industry is doing quite well. They've had a fantastic year and a half, you might say, and demand is normalizing, but it's still quite decent. Decent order books, but of course decreasing from these high levels. Net sales 3.4 billion, organic net sales growth 0%. EBITDA 353 million with a minus 1% organic EBITDA growth. So still quite decent, I would say. The margins somewhat lower in the quarter, but still ahead of last year, year to date. Products performing well, margins expanding. and I think the underlying trends of reshoring green transition and demand for automation it continues to be supportive and of course some of the big projects in the north of Sweden really support our industry and some of our services companies as well giving us significant orders and providing demand so that's on industry looking at transactions We have done a few strategic divestments. We are, of course, reviewing our portfolio to sell off low performers and companies that we don't really believe are part of our long-term future for various reasons. We're doing some few selective add-on acquisitions and acquisitions. Looking at the right column here, you can see that we've sold off companies for 1.85 million in sales. or rather billion sales. And you can see that that's a minus or approximately 4% margin on the divested companies. Whereas the companies we have acquired with 583 million in annual sales have about 20% EBITDA margin. So you can see some of our strategic intention here of gradually shifting the portfolio to the financial trades that we want to see with regard to margins and long-term growth. And of course, one of the effects of this is, of course, that we free up capital to reduce leverage. But it's actually not the primary objective with the investors. So back on the transactions, Lena.

Thank you, Daniel. So the following page here, we have the financial summary for the third quarter. Let's have a closer look at the numbers. Net sales growth was, as Daniel said, minus one percent, which is impacted by an organic growth in the quarter of around minus two. Divested companies affecting another minus three percent, whereas acquisitions contributed one percent and currency translation contributed plus three percent to sales growth. Cost of goods sold as percent of sales is fairly unchanged, as you see here, and so is selling an admin or SG&A expenses also unchanged as percent of sales, which means that it is other operating income and expenses that explain the lower EBIT, as well as items affecting comparability, of course. I will come back to that on the next slide. We have an increase in net financial items, largely due, of course, to the higher base rates compared to a year ago, since our interest bearing debt in absolute terms has been reduced by 2.5 billion Swedish krona from Q3 last year. In the net financial items, we also have currency effects that stand for 73 million Swedish krona increase, where interest costs are 121 million Swedish krona higher compared to the quarter last year. Return on equity was 6.1%, obviously also impacted by the higher financial costs. Return on capital employed was 8.6%. Net of goodwill, return on capital employed was 19.3%. So in other words, the return of the underlying businesses is still around the 20% mark. Earnings per share was 0.09 before and 0.08 Swedish krona after dilution. Although this is twice as high as in the second quarter, it is notably affected by the next financial items, leading to a year-on-year decrease. We'll have a closer look at the earnings bridge here on the following page, still sticking to the third quarter. We try to illustrate here what items affect the underlying profit in the third quarter versus the third quarter last year, obviously. Here shown as profit before tax, or PBT. If we disregard non-operational items affecting comparability and FX items and other non-operational items in the financial net, these are the light gray bars here, the comparable profit before tax was 443 million in Q3 last year and 230 million in Q3 this year. These are the two dark blue bars on this chart. Reported earnings were, in other words, favorably impacted. Reported earnings were fairly impacted by non-recurring items last year, but adversely impacted by non-recurring items this year. Gross profit held up well, as I said previously, despite the inflationary environment. And so did sales and admin expenses being flat, approximately flat year on year. So what did affect profits seeing the gross profit and sales and admin expenses were pretty much in line? Well, first we have 62 million sec explained by lower other income in Q3 this year compared to Q3 last year. And the vast majority of this 62 million is due to that the third quarter last year had large revenue, fairly large revenue from third party. relating to a company which was divested earlier this year. So this revenue is not included in Q3 2023. Second, net interest expenses have increased, of course, as mentioned earlier, due to significantly higher market rates. The STIBOR is up by more than three percentage points compared to Q3 last year. and of course higher coupon on the recently refinanced bond that we did in June this year. We've now however hedged around a quarter of our loans to fixed rates in order to stabilize this somewhat. But given that rates may be higher for longer, further reducing the absolute debt level will, as you understand, continue to be a top priority. That was about the third quarter, now let's have a look at the year-to-date financials on this page. Year-to-date net sales growth was a plus 11% to 27 billion SEK impacted by organic growth of minus 2% in the year-to-date period. Divestments affecting growth by minus 1%. Acquisitions contributing plus 11%. And currency translation contributing another plus 3%. When it comes to cost of goods sold and SG&A expenses, the same goes for the nine month period as for the isolated third quarter discussed previously. These costs are kept fairly stable or actually somewhat lower as percent of sales during the year to date period. Profit before tax was about 1 billion 77 million Swedish kronor for the period, a decrease of 32 percent due to the higher base rates affecting net financials again. Earnings per share for the nine month period was 0.40 SEK compared to 0.64 for the same period last year. And over to the cash flow statement for the third quarter. Our focus on cash flow is yielding significant results as shown on this page. Cash flow from operating activities after interest and tax was 584 million in the third quarter, which is a year-on-year increase of 380 million. Changing working capital contributed minus 6 million, so pretty flat in a quarter, when we normally would build inventories. Reduced inventories and increase in payables of items contributing slightly positively to cash flow or to operating capital, while increased receivables contributed slightly negatively, but no large amounts here. Cash effects from M&A activities, including earnouts and minority payments. was plus 65 million for the third quarter. And this 65 million consists of proceeds from divestments of 454 million. This includes a partial payment related to the Dextre divestment in the second quarter, as well as the divestments that were actually completed in the third quarter, of course, and paid earnouts and minority purchases of 389 million SEG in the third quarter. Earnouts will be substantially lower going forward, but we expect to continue to buy back minorities also in Q4 and next year. But please note that having smaller minorities actually impacts the earnings per share positively. Given that we've paid down loans substantially during Q3 using cash flow and cash at bank, the total cash balance was reduced to 1.4 billion SEK. But total available liquidity is still high at 8.2 billion if we include unutilized credit facilities. Cash conversion, as Daniel mentioned before, strong at 85% in Q3 and 95% for the LTM period. and let's have a closer look at the cash flow bridge here on this page we illustrate our cash flows for the last 12-month period please note that the previous page related to q3 only cash flow from operating activities was 3.2 as daniel said before during the ltm period of this i'm sorry a capex was 637 million approximately 1.7 percent of sales which is a a normal state and IFRS leasing which is of course not defined as operating according to IFRS but in reality it is pretty operational that was 557 million or 1.5 percent of sales so that means that free cash flow after leasing was 2 billion as Daniel mentioned for the last 12 months which is a year-on-year increase of 2 billion. M&A activities including minorities amounted to a total of minus 70 million for the last 12 months period and earn our payments related to previous year's acquisitions were 633 million during this 12 month period but will as I said earlier be lower going forward this means that cash flow before dividends and change in loans amounted to 1.3 billion for this period Over to the next page, we illustrate cash conversion, which is pretty much the same as Daniel showed on his theme slide there, with a group target of 70% marked as the dotted line on this page. The rolling 12-month cash conversion has, of course, improved every quarter now from Q2 last year, thanks to good work by our subsidiaries in reducing inventories and receivables. And over the last 12 months period, working capital has been reduced by 412 million, not including effects from divestments. Lower inventories and receivables contribute by 570 million to this, whereas payables are also somewhat lower, which affects cash flow negatively by around minus 160 million. But the work is by no means finished. We believe that there will still be further positive effects in the coming quarter. And then a look at the balance sheet on the following page. Here we show social and groups condensed balance sheet for the end of Q3 23, the end of Q3 22, the end of last year and the change from the end of last year. Our total balance sheet is 3% lighter year to date. And this is largely due to divestments as well as working capital focus, which has enabled us to lower our debt and strengthen our balance sheet. Seeing here also that equity has increased by 5% year to date, while debt and net debt have been reduced substantially, both interest bearing and non-interest bearing. And I will show this closer at the next page where we have total debt and leverage. Development since Q3 last year is what you see here on this page. So compared to a year ago, interest bearing debt is 2.5 billion Swedish krona lower, while contingent consideration, meaning earnouts and minority liabilities, are 650 million Swedish krona lower year on year. Compared to last quarter, so Q2, interest-bearing debt is 900 million lower, while contingent considerations are 375 million Swedish krona lower. We have used our cash flows as shown on the previous page. This was 1.3 billion Swedish krona, as well as cash at bank to do this. We had significant cash and cash equivalents at the end of Q3 still, totaling 1.6 billion, which in addition to cash at bank or 1.4, this also includes derivative instruments as well as cash in transit related to divestments at the very end of Q3 that were paid at the very beginning of Q4. And these two total 210 million. We will continue to use existing cash and expected good cash flow in the fourth quarter to further reduce debt. However, due to negative organic profit growth during the period, as Daniel showed, the reduction in net debt was not enough to bring leverage down. Interest bearing net debt to EBITDA was, in other words, still up 2.6 times at the end of the quarter. Nonetheless, our ambition remains to reduce not only growth and net debt, but also to reduce leverage going forward. That was it for me. Over to you again, Daniel.

Thank you, Lena. So in conclusion, I think we're still working hard on our strategic priorities. The primary one is, of course, to generate strong cash flow so that we can reduce leverage. I think we're seeing some great progress there even though we're not finished yet. I think we have lots more to do there. We're continuing our strategic review. We've done a few divestments in the quarter and of course in these challenging times from a macro perspective we're focusing on margin and we're actually quite happy in the business unit level with our ability to gain market share and position ourselves strongly going forward. Looking ahead in Q4 we know we're looking forward to a seasonally stronger quarter of course both from sales and the cash flow perspective. So thank you very much and let's get into questions.