Storskogen Group AB (publ)

Good morning and welcome to the presentation of Storskogen's results for the second quarter of 24. I'm Kristoffer Ahnsson, the CEO of Storskogen, joined today by our CFO Lena Glader. During the last quarterly presentation, I was three months into my role as an interim CEO. After July 1st, I'm pleased to announce my transition to a permanent position. When I took on this role, I did so with a clear objective to drive earnings growth. Our performance this quarter indicates that we are on the right track, which I look forward to shedding further light on along with Lena Glader. So let's begin with an overview of Storskogen before we take a closer look at the quarter. Storskogen is a diversified international business group with sales of about 35 billion SEK over the last 12 months. and with an adjusted EBITDA of 3 billion SEK spread across our three business areas. I'm pleased to announce that Åsa Murphy has also moved from her interim role to become the permanent head of business area trade. I'm confident that Åsa alongside Peter Ahlgren and Fredrik Berrigård will continue to drive our mutual success. So let's move to the second quarter. We reported sales of 9.2 billion SEK and adjusted EBITDA of 894 million and adjusted EBITDA margin of 9.7%. Cash flow, organic EBITDA growth and profitability remains our top priority. This quarter I think that we are showing that we are on the right track with an organic sales growth of 2% and improving our organic earnings significantly from Q4 and Q1. The margin continues to improve, and we are now on the same level as Q2 of 22 and Q2 of 23. Cash conversion continues to be head of our target, and we are benefiting from the great work that our company has done over the past years. Our continuous efforts to optimize our balance sheet progresses. And I'm happy that we are able to refinance part of our bonds maturing in 25 at the significantly better terms compared to a year ago. Finally, I want to highlight our strategic divestment of nine business units. This is a key step in our journey to return to a more normalized state, but I will get back to that later in the presentation. As we noted in the Q1 report, we believe that Q2 would be stronger than Q1 with improved sales and margins. As you can see in this graph, the Q2 margin is back on the same level as 22 and 23, and we are moving towards our target of 10%. I'm happy to see that we are continuing to improve our margin as sales pick up. To some extent, positively affected by some of the initiatives we put in place to drive organic EBITDA. In some, however, we will continue to work hard to reach our target of 10%. In the second quarter, the service business area saw a decrease of net sales by 7% to about 2.8 billion SEK, entirely driven by divestment in the past year at minus 11%. This number was upset by organic growth, acquisitions and ethics contributing with a combined increase of 4%. The margin came in at 10.2%. There are positive signs of improving market sentiment and operational efficiency measures are yielding early positives effects. Demand in the quarter continued to be muted for companies with exposure to construction, impacting our performance in this segment. However, product and consultancy companies in the digital service vertical sustained a strong demand and profitable trend, a profitability trend. Overall, we see positive signs of improving market sentiment in the business area. Looking ahead, we anticipate Q3 to be seasonally softer to a large extent caused by the summer holiday period, followed by a pickup in Q4, similar to how Q2 is stronger than Q1. Further interest rates cuts are expected to support the positive signs of an improved market sentiment, though effects may be a little bit slower compared to, for example, some of the companies in the business area trade. Overall, our focus remains on adapting our cost base and expanding our service offerings to foster growth and respond dynamically to changing market conditions. In the trade business area, we saw net sales decrease by 2% to about 2.5 billion SEK in the second quarter. This slight downturn was primarily due to divestments, which impacted sales by 5%. but was partly upset by 3% combined increase from organic growth, acquisitions, and favorable FX movements. As we noted in Q1, there are encouraging signs of improvement in the overall market sentiment. The adjusted EBITDA margin improved to 9.8%, up from 9.6% in the same quarter last year, and the EBITDA of 246 million SEC was in line with last year. This shows the initial success of our ongoing efficiency measures and initiatives aimed to driving organic EBITDA growth. Demand in the quarter remain muted for companies with exposure to construction and end consumers, consistent with trends across these industries. Looking ahead to Q3, we anticipate seasonal and softer quarter, similar to services, but we expect to pick up in Q4. We remain cautiously optimistic about the overall market sentiment, Increasing consumer confidence, however slow, and anticipated interest rate cuts could provide a boost. However, ongoing issues such as delays and increased fee freight rates due to the conflict around the Suez can all remain challenging. To sum up, while trade business area navigates in a complex environment, strategic divestment and focus on improving operational efficiency are paving the way for more resilient performance moving forward. In the industry business area, we've seen sales aligned with our expectations, with net sales increasing by 2% to 3.9 billion SEK in the quarter. Adjusted EBITDA was 437 million SEK in the second quarter in line with last year. Our EBITDA margin has continued to show sequential improvement for the past three quarters at 11.2% for the quarter, slightly below what we saw last year. Despite seeing the soft demand in certain sectors in the quarter, the overall market conditions remained robust, supported by solid order intake across several companies during the quarter. Also, our sustained efforts in operational efficiency have helped us protect profitability. Looking ahead, the pace at which the soft demand in the consumer and construction sectors will recover is still uncertain due to broader geopolitical climate. However, the overall market outlook remains solid and our focus remains on leveraging on our strong order books supported by a global trend of electrification, reshoring and optimization. As we move forward, our unified focus across all of our business areas is set on driving organic EBITDA growth and continue to improve our profitability through various initiatives. As we look at our short-term priorities, I want to revisit the slide from the Q1 presentation. As mentioned, our main focus today is on driving organic EBITDA growth. We're committed to building on strong cash flows from last year and continuing to work to improve our leverage ratio. After we get into bit momentarily, we have taken key steps and refine our portfolio and we aim to ensure that every business unit aligns with our strategic goals and financial targets. Achieving a satisfactory leverage rate remains a crucial trigger for our return to a more normalized situation where we deployed and invest our cash flow towards achieving a combination of organic and acquired EBITDA growth. In sum, our efforts are not just about navigating today's operational and economic landscape, but are aimed at positioning Storskogen at the chief habitat growth. To take a look on how we are driving organic growth, I want to turn your attention to some of the initiatives across four key areas. Sales, pricing, investment and cost control. I'll highlight a few selected examples from our business group to illustrate these efforts. If we begin with sales, this area typically includes activities such as broadening of product lines or new brands or other activities to increase geographical or market reach. For instance, Scandinavian Cosmetics, one of our biggest business units, has a super professional approach of attracting new and developing new brands. and have increased their geographical reach by establishing a presence in Finland. Ingeniörerna, a Danish engineering services firm, has expanded by opening an office in Copenhagen. This move has attracted numbers of qualified consultants and increased its market reach. Acreto, a distributor in the trade sector, has successfully expanded its product portfolio while excelling in its core business of mosquito repellents. Looking at pricing, this is an area that can include initiatives to optimize prices through more sophisticated pricing strategies, or it might mean a systematic approach to revisiting quotation processes or renegotiating terms. This is an area that we are focusing on throughout the business group, including Accreta that I just mentioned, who have effectively expanded sales while applying a solid approach to pricing. In the UK, our service company Stop Start has also refined its pricing strategies to better align with market dynamics, enhancing competitiveness and improving margins. Turning to investment, Stop Start, like most business units, are implementing initiatives that relate to a combination of the four areas highlighted on this slide. In addition to its pricing adjustment, StopStart has also upgraded its warehouse facilities, optimizing its distribution chain to meet increased demand. Pimulator, a distributor of coffee machines, among other products, have invested in sales training of its technical staff This effort keeps costs down and also enhance revenue opportunities by enabling technical service personnel to pursue sales and the customer's interactions. Another example is in the area of investments is ANK, the leading provider of ultra-fresh ready meals in the business area industry. ANK has doubled in size over the past years, in part by tapping into the growing trend in Germany of providing warm meals. We are supporting ANK in expanding their facilities to manage their increased demand. In the automation sector, we are capitalizing on the global automation trend by fostering increased collaboration among our automation businesses. This approach allows us to offer cutting edge solutions in order to meet rising demands. In summary, our business units are not just reacting to current economic conditions, they are proactively moving to take advantage of future market opportunities to enhance profitability, organic EBITDA growth, and cash flow, keys for our continued success. Before handing over to Lena Glader, I want to comment on the divestment of the nine business units that we announced at the end of June and which closed yesterday on August 14th. First of all, I want to emphasize that our primary objective is to support our business units, prioritize those that align with our strategic goals. By divesting these nine business units, we can better focus on areas with the highest potential for growth, profitability and returns. If we look at the financial impact of this transaction, Excluding these divestments of entities, our margin for the first six months of the year would have improved to 9.7%, up from 9.1. Looking at the last 12 months, the margin improvement is even more pronounced, showing a gain of 0.7 percentage points. More importantly, by addressing and divesting these business units, we are not only strengthening our profitability. Again, it also frees up resources to focus on areas with greater potential for profitable growth. While our portfolio review is constant, this specific transaction has effectively addressed the low performance we want to address. Looking ahead, I'm committed to continue our focus on driving organic EBITDA growth and maintain our strong cash flow and moving us closer to a more normalized state. With that, I hand over to Lena and a closer look at our financials.

Indeed. Thank you, Krister. So let's have a closer look at the financials then. Given the items affecting comparability, This quarter that we communicated in relation to the aforementioned divested portfolio that Krister just described will show you two sets of P&L statements here. First the adjusted on this page and on the next page reported. In the adjusted we have removed all items affecting comparability. Net sales growth was minus 2% to 9.2 billion and the organic growth was, as Christy mentioned, a positive 2%. I'll show you a more detailed sales bridge on a separate page in a while. Adjusted EBIT then also declined by 2% to 690 million, indicating an unchanged EBIT margin compared to Q2 last year, of 7.5% underlying in the quarter. Next financials adjusted again for non-recurring items were a minus 237 million versus minus 306 into two last year when we had a higher FX related cost item. Of these 237, net interest costs represented 228, which actually is somewhat more than 218 million in Q2 last year. Thanks to lower financial costs, pre-tax profit increased by 13% and net profit increased by 21% compared to the second quarter 2023. The effective tax rate when removing these non-recurring items was 28.5% and I'll remind you that these items are generally not tax deductible. Then turning to the financial KPI table below, Krister already mentioned adjusted EBITDA and the EBITDA margin, which was in line with that of Q2 last year. However, adjusted return on equity was lower, 4% for the 12 month period and return on capital employed for the 12 month period was 6.7%. These are obviously burdened by the however negative organic growth that we've had the past 12 months, even though this has improved significantly in Q2. Net of goodwill. The return on capital employed was 15.4%, which is a better indication maybe of the operational return on capital employed without goodwill. And finally, earnings per share adjusted for these non-recurring items grew by 21% to 0.16 Swedish krona from 0.13 in the second quarter last year. On the following page here we have the unadjusted reported profit and loss statement for the quarter. All line items below net sales were obviously affected by the costs that we communicated in conjunction with the portfolio divestments and these costs make up almost all items affecting comparability. Our total, and I'll try to explain these briefly, but you'll find more details in the text here. Our total non-recurring costs above EBIT or operating profit line amount to 957, and this consists mainly of capital loss, asset write-down, and goodwill impairment, which is the largest share of that item. And again, of the 958, all of 976, so a little bit more than that, relates to this portfolio divestment and a goodwill impairment. The rest is other capital gain and a small burnout revaluation. Looking below the EBIT line in net financial items, another 37 million is non-recurring. And out of this, 20 million is relating to the portfolio divestment that Kristo described on the previous page, and 17 million to the fund buyback that we made in the mid quarter. Over to the sales bridge for the quarter on this page. And here we illustrate contribution to sales from organic structural and currency changes. Organic sales growth, again, plus two for the group in the quarter, 2% for the group in the quarter. It was positive in all business areas. Divestments represented minus five of the minus 2% sales decline. The largest divestment here being the Dextry Group and the electrical installation company sold last year. Just to be clear, these divestments here do not include the portfolio divestment that we talked about which will actually take effect in mid Q3 this year. Acquisitions and currency small effect this quarter representing a combined plus 1% of the year-on-year change in sales. On the following page we have two sets of bridges sales and EBITDA for the second quarter divided here by business area starting with the sales bridge to the left as mentioned on the previous page all three business areas contributed with positive organic sales growth in the quarter but however recent divestments and acquisitions small however still in services and trade not yet again including the most recent large portfolio divestment impacts the group's reported sales growth by a negative 3 and 1% respectively, explaining the reported 2% negative sales growth. And on the EBITDA waterfall to the right, you see a similar effect on EBITDA where the net of divestments and acquisitions in services and trade reduce group EBITDA by 1 and 1% respectively, so 2% in total. Central functions costs increased as a result mainly or entirely actually increase is explained by one-off costs stemming from share incentive programs that were decided at the AGM in May and these are of an EO item characters. Over to the next page where we have the cash flow statement for the second quarter. I'll start actually here with the income tax. Paid income tax was minus 190 in the quarter, 24% lower than Q2 last year. The cash flow effect from change in net working capital, which has been a focus area here, as you might have understood by now, was plus, no, the contribution was plus 54 million in the quarter. Higher payables and somewhat lower inventories contributed positively, while higher receivables contributed negatively. All in all, we're of course glad to see that working capital efficiency persists. Summing up cash flow from operating activities, and mind you, this is after interest and tax, we arrive at 855 million for the quarter and 3 billion for the rolling 12-month period. CapEx to sales, 1.1%, or just above 100 million in the quarter. So around the same level as in Q1, but below previous historic levels where CapEx to sales has trended around 1.52% of group sales. Cash effects from M&A, very small, a net 2 million only in the quarter, but this is a net of divestments, acquisitions, including acquisitions of minority shares in our companies and paid earnouts. Finally, then cash flow from financing activities was a negative 619, including loan amortization, leasing, and of course, paid dividend to shareholders. Summing it all up gives us a cash flow for the period of 99 million in the quarter. And then what is the free cash flow after leasing the past 12 months? This is a KPI we like to look at internally. This was 1.9 billion. Again, a free cash flow after leasing, which is actually exactly almost the same as a year ago. The 12-month rolling basis here is recommended to look at because we do have seasonality in cash flows, typically. Our cash balance was 1.5 billion at the end of June, around the same level as previous quarter, with total available liquidity including undrawn credit commitments of 3.7 billion, which is a comfortable level, obviously. On the following page here, we have a graph showing the operating cash flow and cash conversion trend for a longer period of time since Q2 2022. These bars are shown on a rolling 12-month basis. Here in Q2 2022, we were at a low level with a cash conversion of 32% only, which is below the target level of at least 70%, marked here as the dotted line. However, this has improved now and has actually the cash conversions actually been above or around a hundred percent for the past rolling trauma for the past four consecutive quarters now. And for the isolated Q2, we had a cash conversion rate of ninety six percent and on a rolling twelve month period. You can see here it's hundred and one percent. However, as demand returns and growth starts to come back, we do expect cash conversion to normalize again, but at a more efficient level than pre-pandemic, obviously. However, just pointing out the cash flow will continue to be a high prioritized area for us. Looking quickly at the balance sheet on the following page, we have the condensed group balance sheet here. Total balance sheet is 6% lighter compared to a year ago, largely as a result of divestments and as well as, of course, working capital focus and consequently reduced debt. Equity ratio increased to 45% from 44% a year ago, despite impairments and write downs affecting equity negatively by 866 million as shown on the previous page. This relates obviously to the portfolio divestment there. So our interest bearing leverage ratio was 2.7 times at the end of Q2, a reduction from 2.8 at the end of Q1, but nevertheless, an increase from 2.6 a year ago. Interest bearing net debt has decreased by more than 700 million or 6% since June 2023. But EBITDA has also decreased partly as a consequence of divestments, but also of negative organic growth during this 12-month period, which explains the leverage. And then finally, it shows a look at the debt and cash development and leverage development over the period. We show quarter by quarter here since Q2 2022. The dotted line shows the 12-month pro forma EBITDA used in our leverage definition. After a period of declining EBITDA stemming from divestments and organic development, as mentioned, we now had a flat RTM EBITDA for the quarter compared to Q1, which is encouraging, obviously. Debt and net debt came down in Q2, thanks to the strong cash flow shown on previous page. Interest-bearing net debt was in fact 336 million lower than in the first quarter. And while speaking of debt, I'd like to spend a few words on the most recent bond transactions we made in June. We issued a 1.25 billion new three and a half year bond. And we used those proceeds to buy back parts of our bond with maturity in December 25 to improve the maturity profile, obviously. The remaining share of that bond with maturity in December 2025 will likely be addressed within the coming quarters. The issue was done at 375 basis points above Stibor, which can be compared to a similar transaction we did a year ago at 687 basis points above Stibor. This is obviously substantially better terms, which I believe. It's a testament to the almost complete restructuring we've done in the past quarters of our debt portfolio and improved maturity profile. So with those positive words, I think I'll hand over to you again, Christopher, concluding remarks.

Thank you, Liana. To conclude this, if I reflect on the first half year, it has been six months since I stepped into the role as an interim CEO, and I'm honored to now continue as the permanent CEO. I want to highlight three areas that have paved the way for improved performance and growth in the quarter. First of all, strategic divestments. These have significantly enhanced our profitability profile and opens up greater potential for profitability growth across our business group. Secondly, operational initiatives. The initiatives being implemented have started to yield earlier results. setting a strong foundation as we progress into the second half of 24. Organic EBITDA growth and cash flow. Our continued focus here is crucial to us returning to more normalized operational state where we add acquisitions in addition to organic EBITDA growth initiatives. And with that I want to thank you for joining us today and we are ready for questions.

If you wish to ask a question, please dial pound key 5 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 Karl Ragnastam from Nordia. Please go ahead.

Good morning, it's Carl here from Rodia. A couple of questions. Firstly, it's great to see that you returned to positive organic sales growth, but could you give any flavor whether you saw any variations of this during the month of the quarter and also perhaps if you could say something about the trend continuing so far in July and August. Thank you.

Hi Carl. As I said it was still a tough quarter but we see broadly improvement in the quarter in the business areas. July is too early to say but we continue to be cautiously optimistic on the trend going forward. But we have seen that it's a broader, where we have a better situation in all our business areas.

Very good. And in general, in Q3, quite few business areas is seasonally slower, as you said, due to the summer break. But do you see that the customers might take longer holidays this year owing to somewhat muted market, or is it Is your feeling that it's more or less the same as last year?

I don't know. It's hard to comment on that. But as you said, some of our companies, I mean, small companies almost close their businesses in July. We have services companies that are really, really slow in the summer. But if it's more or less than last year, I don't know that. It's hard to answer.

Okay, you mentioned that in one part of the report you mentioned that you saw solid order intake in industry and another you saw a strong order intake in industry. Just to clarify, is it possible to give any numbers on the order intake whether it's solid or even strong in the quarter?

But it is strong in the quarter but we don't give any but it is a strong order intake in Q2 for industry and it has been for some while so they are really doing well.

Perfect and when do you is it longer orders that is expected to be delivered during early 25 or should we see effects from this already in second half in deliveries as well?

Now, but that's both. I mean, there are longer order intakes, orders that we take now that will be delivered in 25 and some of them are even in 26. It's a wide range of that. But it's a solid order intake if you look at the industry as a whole.

Okay, very good. And in terms of trade, you guided that you saw quite the broad based improving markets here. To what extent would you say, I mean, it's maybe hard to tell, but to what extent it's driven by better underlying sentiment in the market and to what extent you think it is distributors after a long period of time reducing inventory started to refill inventories again?

Yeah, I think it's a multiple things there. Of course, there's some distributors are effectively by what you were talking about in inventory build up from the customer side. But I also see that still consumers are getting more confident, but still there are kind of There are, you know, hasn't, it's not a strong sentiment from consumer yet. Hopefully we see, if we get interest rates cuts in Sweden in particular for the trade, hopefully that will help the consumer to come back and have confidence again. But of course there are some things regarding the inventory things that is improving.

Okay, that's very clear. And finally, you said that you saw enhanced collaboration between the companies and you see an effect from this. I'm a bit curious to hear more about how you accomplished this. Is it driven centrally or is it locally for some reason that the company started to collaborate?

This is of course locally, it's driven by, we have a decentralized business group and they are collaborating on their own. Of course, we can help on doing that together with the company, but it must be driven by the company, the companies and the will to want to collaborate. But we see that in several areas where companies do take why they're kind of in orders taking a better group on orders together.

But I know that you're decentralized and so on but I mean for a company just to wake up one day and say hey we need to collaborate with another company in an improved way I mean have you done anything to enhance the collaboration or the

No, yeah, but this is something I wouldn't say that we have done. We have always wanted our companies to collaborate. So this is not something new, but we might see more of it often. But so this is not something that just wakes up. This is something that the companies wants to do. And if they have a good profit of it, all of them, that would be more of that. So I think that's something that we continue to see if the companies wants to see that they

profit of it all of them so to say okay very good all for me thank you thank you as a reminder if you wish to ask a question please dial pound key 5 on your telephone keypad The next question comes from Johan Dahl from Danske Bank. Please go ahead.

Yes, good morning. Just two questions, please. Firstly, on these minority options, I was wondering if you could possibly update with some sort of payment schedule there, if you have that for the current year and possibly next summer, what the cash outflow is planned for there. Secondly, I was just wondering, If you look on the LTM EDTA for the group, I think you put down 4.1 billion approximately in this quarter. It peaked, I think, a couple of years back at 4.8. I was just curious to know when you adjust for all these divested units, is there any sort of material difference in the volatility of the LTM EDTA Just to understand the volatility of the portfolio post the divestments that you've made, if there is any material difference at all. Thanks.

Hi Johan, I can start with the first question, which is the easier one regarding the minority options. We do have a total liability of 2.1 billion in the balance sheet. of which 530 something is the short term, so next 12 months. And of those, we believe that around 150 million might be called upon during the coming two quarters, so Q3 and Q4 this year. And of course, this is attached with a lot of uncertainty because it might also be that minority share holders do not want to sell at this point, but if they do then that would be 150 million roughly. And then the earn out liability is very small. It's only 60 million in the balance sheet of which 30 is short term and of those only a very small amount is likely to be paid out in the short term if that helps. Regarding the question about the RTM EBTA, you're right, it was 4.1 billion at the end of Q2. It was the same amount at the end of Q1, and it was significantly higher at the end of last year. Again, this is a result of, of course, divestments that we've made, bear in mind that we divested electrician companies and the DEXTRI portfolio and some others during last year. Kronlift also in Q2 this year that had a low profitability, but yet profit making. And that, of course, impacts. And then the other ingredient there is obviously the negative organic EBITDA, EBITDA and also EBITDA growth that we've unfortunately have seen, especially in trade and services. due to macros mainly in the past quarters. I'm not sure, maybe you want to rephrase the question about patterns?

Yeah, thank you for those answers. I was more interested in sort of the long-term view looking a couple of years back when I think you had 4.8 in LTM EBITDA on a pro forma basis. And now the portfolio has changed slightly. I mean, it's not huge, the changes, but I was just interested to understand if you've done that analysis, whether the volatility in the portfolio has been materially reduced following this divestment. Do you see what I mean? So if you make the adjustments in 4.8, a couple of years back to these companies, we should now divest them. Is there anything we should take into account or just if you've done that analysis?

Yes, now I understand your question. And I think you're... right that the companies that we have divested have contributed with higher earnings volatility and then unfortunately primarily negative such in the past years and we're also talking about the main maybe even more so the portfolio that we just divested yesterday that we closed yesterday, which has contributed with quite significant, as you understand from the numbers, earnings volatility and then again earnings decline, if you will, during the past years. So I think that you are right about that. And of course, all the activities and transactions that we do when it comes to both divestments and acquisitions, of course, and the underlying work that Krista is describing in the existing portfolio, those are all kind of done with the idea of reducing volatility in earnings for the longer period going forward. Thanks a lot.

Thanks. There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you for those questions. And thank you for listening in today. If there are any questions after this meeting, you know where we are. But thanks a lot for listening in and see you later.

Thank you.

Thank you.