Storskogen Group AB (publ)

Good morning and welcome to the presentation of Storskogen's result for the first quarter of twenty four. I'm Kristian Hansson, the interim CEO of Storskogen, and with me today I have CFO Lena Glader. I took on this role about two months ago, but I'm not new to the company. I joined Storskogen about eight years ago, initially as an investor and then as operational head of trade. Before that, I've had senior position at companies such as Dustin and Delia. Since taking on this role, I've been focused on identifying both the challenges and the opportunities that we have ahead. I will share more on that a bit later in the presentation. To start, I would like to share some perspectives on the past quarter and then discuss how we plan to move forward, focusing on organic growth and improving our financial health. So thank you for being here today, and let's begin by taking a brief look at Storskogen. As you know, we are a business group with a sales of about 35 billion SEK over the last 12 months, and an adjusted EBITDA of 3.1 billion SEK spread across our three business areas. The average business unit size is around 280 million SEK in sales, and most of them have been around for decades. I also want to mention Åsa Murphy, the Interim Head of Trade, who's taking on my previous role. Åsa is a great leader with extensive experience in the tech and e-commerce industry. She has held leading positions such as Managing Director of Bookie Table in the Nordics and the DAC region, and Director of Expedia in the Nordics. So I'm really excited to have Åsa joining the team, heading a business area, and forming a great team with Peter and Fredrik. So let's move into the first quarter. We reported sales of about 8.4 billion SEK, an adjusted EBITDA of 703 million SEK, and with an adjusted EBITDA model of 8.4%. This quarter is a tough comparison against a strong start that we had in twenty three as reflected by the negative organic growth. Part of this is due to the continued difficult macro environment and what seems like a return to a traditional seasonal patterns with typically softer first quarter. On a positive note, the margin has improved from seven point eight percent in Q4. which indicates a positive trend in our operations. A significant event this quarter was stepping down of Daniel Kaplan as CEO and me taking on the role as an interim CEO. I'm in regular contact with Daniel and I'm really thankful for all his continued support. As we move forward, I'm committing to getting us back on track, growing our earnings again, while also ensuring continuity and stability in the Storskogen's leadership. On the financial front, we continue to strengthen our balance sheet, but refinance our bank facilities, extending the duration and reducing the scope to better align with our needs and priorities. This provides comfort in terms of our financial situation. Sales for the first quarter was in line with our expectations when adjusted for the divestment in twenty three, which accounted for about half of the decline. The remaining decline is due to negative organic growth and, as mentioned, a strong comparable from twenty three. I will add some additional comments on each business area later in the presentation. The EBITDA margin of 8.4% is more in line with the historical seasonality as shown in the graph, in contrast to the unusual strong performance in the first quarter of 2023. One of the main differences compared to last year is the Easter holiday came early this year, resulting in fewer business days in the quarter. This affected March, which is usually the strongest month of the quarter. High interest rates and the currency business cycle also had an impact. As mentioned in the fourth quarter presentation, we expected to see seasonality patterns align more closely with historical trends this year. This means softer first and third quarters and stronger second and fourth. While we are happy to see the margin improvement sequentially, we won't be satisfied until we reach our target of 10%. Turning our focus to the service business area, we observed a softer quarter. The beginning of the year typically see lower activity levels. Both sales and profitability were affected by significantly cold winter and fewer working days in March. Net sales decreased by 11% to about 2.5 billion SEK. Organic sales growth was down by minus 3%. But the divestment had a more significant impact with minus 11 percent, partly upset by acquisitions and FX at plus 3 percent. The adjusted EBITDA was 204 million SEK with a margin of 8.2 percent. This is lower than the comparable period at 9 percent, partly due to the continued soft demand in certain sectors. Looking at specific sectors within this area, companies exposed to construction continue to experience weak demand. Installation companies, however, which operate later in the construction cycle, manage to maintain a relatively solid performance with a slightly lower profitability due to increased competition. Logistics has continued to perform well, so has digital services, with a product and consultancy firm enjoying strong demand and profitability largely due to demand for general efficiency improvements where digitalization plays a crucial role. Looking ahead, while the second quarter is typically stronger, the market remains somewhat hesitant. We are hopeful, however, that potentially lower interest rates in the near future will have a positive impact on services. Similar to services, Our trade business area experienced a seasonally softer first quarter. Net sales decreased by 11% to 2.3 billion SEC, with organic sales growth down by 6%. The remaining change comes from divestment compared to last year. The adjusted EBITDA was 169 million SEC, with a margin of 7.3%. This is lower than the 8.4% last year, mainly caused by continued muted demand for companies exposed to construction and consumers. However, on a positive note, we did see an improvement from the fourth quarter, where the margin was 6%. We continue to see a solid performance from our companies within the health and beauty vertical, despite the soft quarter. Overall, continued high interest rates weakening Swedish krona continue to impact margins negatively. Through long-term cost efficiency measures, they'll have started to show some positive effects. Looking ahead, the second quarter traditionally shows stronger seasonal performance. We remain cautiously optimistic, expecting the lower interest rates may soon strengthen demand, especially benefiting sectors like consumers and construction. Meanwhile, demand in the health and beauty vertical expected to remain solid. In the business area industry, we've seen demand stabilize as reflected in the past three quarters. Net sales of about 3.6 billion SEC with an organic decrease of 8%. The adjusted EBITDA of 387 million SEC with an adjusted EBITDA margin of 10.9%. This is lower compared to the very strong first quarter last year, but shows sequentially improvements from the two previous quarters. These progress comes as companies focus on price adjustment, productivity improvements, and rationalization, also supported by positive currency effects. Orderbook has strengthened, providing a solid outlook despite continued uncertainty. Automation solutions, especially in wood processing and robot integration, continue to see a robust demand after sectors like metal processing and infrastructure. However, the consumer market and parts of the construction industry remains weak, similar to what we see in other two business areas. Looking ahead, while the market is generally solid, the geopolitical impact is unpredictable. order books have improved and we do see signs to further strengthening. Though consumer and construction demand may stay subdued. Before I hand over to Lena Glader, I want to share some reflections on the short term priorities to achieving organic growth. As we look at our short term priorities, I want to highlight our focused approach towards navigating the immediate future. We structure our plan around three core phases. today, triggers and tomorrow. Driving organic EBITDA growth will be our top priority even if the macro environments remain challenging. We will also continue to focus on cash flows, building on the great work that all our companies did last year. Growing EBITDA with a solid cash flow will gradually improve our leverage ratio, which of course is an important step for us in order to return to quiet growth. We will also continue to review our portfolio to ensure that each business unit aligns with our strategic goals and financial targets. So what do we want to see before adding acquisition on our agenda? A satisfactory leverage ratio is key to returning to acquired growth. Persistent organic EBITDA growth will demonstrate the effectiveness of our operational efforts and readiness to scale up. This is also important for demonstrating the strength of our business model. We are also closely watching for more favorable market conditions, especially for an uptick in demand related to the consumer and the construction sectors. And if you look towards the future development, the tomorrow phase, we anticipate persistently EBITDA growth building on the base groundwork. Cash flow from today's operations will strategically be deployed into EBITDA-positive initiatives. Capital allocation will ensure that every investment is justified by its return, supporting a sustainable growth. Whether this means paying off debt, investing in our companies, or acquired growth. In our tactical approach to achieving organic growth, we are implementing a balanced mix of initiatives to strengthen our market position and prepare for increased demand. Regarding sales initiatives, here we are focusing on increasing sales volume and gaining market shares. Our efforts include strengthening sales organizations, working with customer segmentations and branding. Regarding pricing strategy, I think our companies have done a great job in handling inflation and currency effect the past two years. However, I do think that we can take a more structured approach to pricing optimization. Obviously, improving sales and aiming for solid pricing strategies are part of the everyday work of our business units all year round and over a business cycle. However, Equally obvious from our perspective is that we can always improve, especially when identifying various best practices in certain areas of the business group that can be replicated in other areas of the group. To establish a more structured approach to sales and pricing, Fredrik Bergegaard, the head of industry, is leading these efforts along with a number of other members of the team. We plan to share these best practices at our KX portal, similar to the efforts last year to decrease networking capital. In terms of strategic investments, we continue to enhance scalability and professionalism across our operations, such as in some of our largest entities in the industry, VB and L&S, for example, or warehousing initiatives in Båstadgruppen and Scandinavian Cosmetics and Trade. These types of initiatives, which increase production capacity, streamline product lines, and enhance warehousing solutions, will allow us to benefit when demand increases. Cost control, of course, remains crucial, especially in challenging times. Our rigorous cost control continues, identifying efficiencies to reduce overheads without compromising on quality or output. In summary, these strategies are designed not just to navigate the current economic landscape, but to position Storskogen to capitalize on the opportunities as market demands strengthen. Now over to Lena Glader.

Well, thank you, Christian. So let's have a closer look at the numbers here, starting with the Q1 financial. Christian already mentioned that sales growth of minus 9%. And I'll come back to a closer look at the sales page on the following page. However, the negative organic volume growth compared to a year ago and, of course, items affecting comparability, again, compared to a year ago as well, meant that we had an EBIT decline of 43% to 478 million in the first quarter. Had we adjusted for these items affecting comparability in both periods, then the EBIT decline would have been 27% from 679 to 497 and not 43. Net financial items were a negative 280 million versus 194 in Q1 last year. This increase is due largely to, of course, higher rates, both base rates and margins. and a one-off cost of 24 million related to the refinancing that we did in March that Christian mentioned, and I'll come back to that in a little while as well. However, if we split out interest expenses and look at the sequential change, you can see that they decreased from 217 million in the first quarter, from 225 in Q4, and 257 million in Q3 of last year. thanks to lower debt and somewhat lower average margins during these three quarters. Looking at our KPI table below, I already mentioned the adjusted EBITDA and EBITDA margin, which was in line with our own expectations, but below where we should be. Return on equity was 2.8 for the 12-month period. adjusted for IACs, it was 3.7, negatively affected by, of course, these financing costs and, of course, then the volumes decline and consequent margin pressure that a number of companies in trade and services have experienced. Our return on capital employed for the 12-month period was 6.8% or 7.1, adjusted for IACs, mostly impacted by the lower profit levels. EPS adjusted for items affecting comparability in both EBIT and net financials declined 49% to 0.09 Swedish kronor per share. Then on the following page, the Q1 bridge, we show sales in EBITDA for the first quarter, starting with a sales bridge to the left here. Again, total sales growth minus nine. Our three business areas contributed equally to the group's sales growth, part of which was, of course, a result of divestments. Total EBITDA growth was minus 21%, and the corresponding EBITDA bridge to the right here shows that all business areas contributed negatively to the group's EBITDA change. All three business areas had an organic EBITDA growth of around minus 20%. percent, which is not shown on this page, but Krister had them on the previous slide. Business area industry is the largest negative contribution here, with 11 out of the total 21 percent decline. And that's largely explained by the fact that it currently is our largest business area in terms of absolute profit levels. In fact, industry represented more than 50 percent of the group's EBITDA in the quarter. And you can also see here that lower central costs contributed positively by one percentage point to the year-on-year EBITDA change. And then a closer look at the Q1 sales bridge here. We illustrate the contribution to sales from organic, structural and currency changes on a group level. Same numbers as Krister showed per business area just before. Organic sales growth was minus six for the group, whereas minus three in services, minus six in trade, and minus eight in industry, which again had a very strong Q1 last year, so demanding comparisons there. Divestments represented minus five of the 9% sales decline. The largest divestment was Dextre Group and the three electric installation companies within services. as well as in business area trade. All of these were included in Q1 last year, but not in Q1 this year. Divestments had a weaker margin, bear in mind, I think an average of 4% margin last year. Acquisitions and currency represented a combined plus two of the three. year-on-year sales change in Q1. And then over to cash flow statement for the first quarter here. First of all, a reminder that we do have seasonality in our cash flows as well, especially in trade and services, but also in paid taxes, which is why we've included the LTM or the last 12-month period on this page. Paid income tax was 387 million, which is lower than Q1 last year and it was as a reminder actually positive in Q4 and it's expected to be lower again going forward in Q2 and Q3. The cash flow effect from change in networking capital was minus 163 million That's due to somewhat higher inventory and receivables, but partly offset by higher payables as well. And we would say that this is the normal seasonal pattern. Summing up all cash flows from operating activities, and mind you, again, this is after interest costs as well as after tax. We arrive at 109 billion for the first quarter and 3.0 billion for the last 12-month period. CapEx to sales, 1.3%, or just over 100 million SEC in the first quarter. Cash effect from M&A is minus 171 million for the first quarter, of which acquisitions is only 7 million, while paid earnouts represent 150. And cash out for purchase of minority shares is 19 million. And a reminder that when we buy back minority shares, which we will continue to do throughout this year and next year, we're also buying shares in profitable companies, so that will contribute positively to the earnings per share. Cash flow from financing activities comes to zero, so summing it all up gives us a cash flow for the period of minus 176 million for the first quarter. I'll come back to cash conversion on the following page. But finally, a remark on the total cash balance that was 1.4 billion at the end of the quarter with total available liquidity of 3.7 billion. And the reason for the lower available liquidity is simply that we tightened our revolving credit facility to better fit our current balance sheet and funding needs and as a consequence, as a consequence, reduce the funding costs. So then here on this page, we show operating cash flow and cash conversion, which is one of our financial KPIs. We have a group target of at least 70% cash conversion over a 12-month period, which is the dotted line here on this page. And a reminder, cash conversion is defined as EBITDA less change in networking capital, that's CapEx, divided by EBITDA. And in the isolated quarter, cash conversion was 72%, also again above target. But given the already mentioned seasonal nature of especially trading and services businesses, we prefer to look at the rolling 12-month number, which is, as you can see here, improving significantly from the low point in mid-2022, thanks to great work by our subsidiaries in reducing inventories and receivables and negotiating payment terms. And we reached 104% cash conversion for the rolling 12-month period, which is actually the same as for the full year 2023. But as demand returns and growth starts to come back, we do not expect cash conversion to normalize. Sorry, we do expect cash conversion to normalize again, but at more efficient levels than pre-pandemic. And then a few remarks on the refinancing, which we did in March and that was quite significant and important to us. Kristi already mentioned that before, but we successfully refinanced both our outstanding credit facilities in March. One positive aspect of the refinancing is that it removed the nearer maturities and prolonged the weighted average maturity, which is now more than 30 months. I believe it was 23 months at the end of last year. Secondly, it gives us a more diversified maturity profile. As you can see here on this page, we have 3 billion maturing in 2025, 3.8 billion in 2026, and finally 3.7 billion in 2027, where 1.7 billion can be extended to 2029. And it also better aligns the overall facility size with our current balance sheet and financing needs by reducing the overall RCF substantially with consequently lower costs, of course. And yet we have unutilized credit of sufficient size, in this case, 2.3 billion in undrawn facilities. And then finally, the margins in these new facilities is actually somewhat lower compared to the prior facilities which is of course nice uh following this refinancing our next bond maturity is in december 25 and we will of course continue to actively work with our desk portfolio to make sure that we can gradually reduce our financing and interest cost and keep our refinancing with flow and then over here to the condensed balance sheet per the end of March. Our total balance sheet is 5% lighter compared to a year ago, largely as a result of divestments, of course, as mentioned, as well as working capital focus that has enabled us to lower our debt. Equity ratio increased to 46% from 43 a year ago. while debt and net debt have been reduced. Interest bearing net debt, including leasing and pension liabilities, but excluding earn-outs and minority options, is 615 million lower compared to March last year. If we include earn-outs and minority options, then the net debt is reduced by 1.2 billion year on year. But quarter on quarter, however, comparing to the end of 2023, net interest-bearing debt increased by just about 600 million, largely due to leasing debt increase of more than 200 million, currency translation that increased debt by 75 million SEK, and paid earnouts, as mentioned before, during the quarter of 150 million. So our interest-bearing leverage ratio was 2.8 at the end of Q2, and we had expected it to increase from the year-end level of 2.5, which we were clear about at last quarter's earnings calls, given that we rolled out such a strong Q1 last year and rolled in a little bit more normalized Q1 this year based on the lower of volumes that we experienced also at the end of last year. Our ambition remains to bring leverage down to the lower end of the range of two to three times, which is why we will continue to prioritize profit growth and cash flow. And yeah, I think that was my last slide. So over to you, Krister, for final remarks.

Thanks, Lena. To sum up our first quarter performance, We experienced a seasonally softer quarter, facing a challenging year-over-year comparison due to last year's exceptionally strong start. The quarter was also impacted by divestment made in the year. Our bank financing is now better aligned with our current needs and has significantly extended our maturity profile. And moving forward, our priorities are clear. focusing on organic EBITDA growth and maintaining strong cash flows. And with that, we want to thank you for listening and are ready for questions.