Storskogen Group AB (publ)

Good morning and welcome to the presentation of Storskogen's third quarter of 2024. I am Chris Bransson and with me today is our CFO Lena Glader. We are overall happy with the performance this quarter and I'm eager to get into the details with you. So let's begin with an overview of Storskogen's before we take a closer look at the quarter's highlight. Storskogen is a diversified international business group with sales of about 34.6 billion SEK over the last 12 months. An adjusted EBITDA of 3.1 billion SEK spread across our three business areas. After a number of completed divestments in the quarter, we now consist of 116 business units with an average sales approaching of about 290 million SEK. Highlights for the quarter. Cash flow, organic EBITDA growth and profitability remain our top priorities. This quarter continues to demonstrate that we are on the right track with organic sales growth in all three business areas and with marginally positive organic EBITDA growth. We reported sales of about 8 billion SEK an adjusted EBITDA of 783 million SEK, and our adjusted EBITDA margin came in at 9.8%. Cash conversion continues to be ahead of our target at 99%, and we are benefiting from the great work that our companies have done over the past years. Our leverage ratio came down slightly and is now 2.6. Our continuous efforts to optimize our balance sheet progresses, And I'm pleased that we have continued to refinance part of our bonds, maturing in 2025. And as of now, we don't have any significant bond maturities before 2027. I'm also pleased that S&P affirmed our credit rating BB with an improved outlook from negative to stable. As we noted in the Q2 report, the third quarter is typically a seasonally weaker quarter and sales was in line with this pattern. Decreased sales can be attributed to divestments explaining 5% of the drop and acquisition FX minus 2%. These were offset by positive organic growth of 3%. And I want to underscore that we saw positive organic sales growth in all business areas. If I may turn your attention to the quarters margin in the right side of the graph, at 9.8% we are inching closer to our target of 10% and significantly higher than the 8.7% in the Q3 of 2023. This meaningful year-on-year improvement can be attributed to divestments and positive organic growth in services and trade. I'm happy to note that our continued margin improvements are in part the result of both the initiatives that we have implemented to drive organic EBITDA and the strategic divestments that we have made. However, there should be no doubt that we will continue to work hard to reach our target margin of 10%. Going into the business areas. services reported lower sales but notably higher profitability in the third quarter the sales decreased of nine percent was driven by divestment that contributed to the decrease with eleven percent however this was offset by positive organic sales growth of three percent we saw underlying improvements in most areas such as digital services logistics and installation while the market for companies exposed to construction remained soft. The dedicated efforts to adapt cost has contributed to maintain profitability throughout the year. Gradually recovering demand also contributed positively to profitability in the quarter. It's also worth noting that divestments completed on August 14th is supporting the margin improvements. overall i want to mention that we are seeing positive signs of improved market sentiment and looking ahead i will conclude and mention that q4 is seasonally stronger quarter looking at trade for trade business area we saw sales decrease with four percent divestments contributed to decreased with six percent which was offset by organic growth of four percent Consumer demand remains subdued. However, we are seeing early signs of recovery in the consumer sentiment. Our operational initiatives are already yielding positive results with the potential for even better profitability as demand gradually improves and as the effects of interest rates cuts materialize. Looking ahead, as with services, we anticipate a seasonally stronger fourth quarter, though we remain mindful of ongoing market uncertainties. Industry's profitability and net sales were in line with last year's figures. Sequential margin development is somewhat impacted by subdued demand in the UK, and as expected, Q3 reflected seasonally softer performance due to the summer holidays. operational focus to offset unsteady demand in some sectors remains central. Overall, market conditions are stable and order books remains at the healthy levels. Consistent with the first half year, companies involved with automation solutions, especially those offering robot integrations, metal processing and infrastructure, continue to see a solid demand. That said, global uncertainties pose potential delays in the broader recovery into 2025, especially for companies exposed to the consumer market and the construction industry. As a result, our commitment to counter these effects and maintain continued solid profitability continues to be highly prioritized. As we look at our short to medium term priorities, I want to revisit an important slide from the past two quarterly presentations. Our main focus today continues to be on driving organic EBITDA growth. We are committed to building on strong cash flows from last year and continue to work to improve our leverage ratio. In the past quarter we finalized divestitures of a group of businesses in order to ensure that every business unit aligns with our strategic goals and financial targets. Achieving satisfactory leverage ratio remains a crucial trigger for our return to a more normalized situation where we will deploy and invest our cash flow towards achieving a combination of organic and acquired EBITDA growth.

In sum, our efforts are moving ahead in the right direction.

To take a look at how we are driving organic growth, I want to turn your attention to some of the initiatives across our four key areas. Sales, pricing, investment and cost control. And here are a few selected examples from our business group of these efforts. Starting with services. Evio, this e-commerce digital agency, has over the years helped many of the Storskogen's portfolio companies in building their e-commerce platforms. As a result, they have developed the Evio Storefront, a plug-and-play solution tailored for trading companies. Dan Boring, this Danish company that offers horizontal drilling services, has begun collaboration with the Swedish business units MDS and Toftagård to strengthen their offering. Currently, they are collaborating on a large wind power project intended to supply electricity to nearly a million households. The companies are supporting each other with resources and expertise. Going into the trade, about two years ago, we conducted a merger of a number of business units active in the distribution of professional hair care products into the business unit by WE. The improved Nordic reach of ByWi recently contributed to winning the global brand Olaplex with retail sales in Sweden, Norway and Denmark. Recently, we also noted the win of the key account Nikita Hair, a chain of hair salons in Norway and Sweden. What we have achieved with ByWi is something that we are now aiming to emulate through having merged five Storskungen companies into Ash Sport. forming a leading Nordic distributor and brand partner in sports and active lifestyle. Ash offers products in areas such as alpine, tennis, paddle, outdoor, and sports fashion with more than 30 global brands like Bubble Up, Nike, and Blizzard. And as a group, Ash will benefit from the scale and achieve several synergies while also meeting external demands to remain an attractive partner for customers and brand owners. In the industry segment, I want to mention Ståler Rörmontage. This is a leading supplier of qualified construction in stainless steel. They are benefiting from the positive macro trends relating to electrification and infrastructure. Among other areas, building bridges and very large carousels for cables. To meet an increased demand, they have invested in an 1,800 square meter facility, building part with internal resources, which will deliver cost efficiency with a fast payoff. Lastly, Brandrup, a manufacturer of various types of trailers, acquired its Norwegian peer, Tysse, approximately two and a half years ago. Since then, Brandrup has achieved multiple synergies, one example one recent example at the time of acquisition to have more advanced offering for the professional segment which was limited to the norwegian market currently brandrup is in the early stages of expanding this offering across europe leveraging its broader european distribution network These are just a few examples of various types of initiatives across our group to provide a flavor of all the different types of initiatives we are pursuing to achieve organic e-habitat growth. With that, I'll now pass over to Lena Gader for a closer look at our financial performance.

Thank you, Christer. Such interesting stories from our businesses. Now over to the Q3 financials and on this page we show first the adjusted P&L and or profit and loss statement and on the next page the reported. So this is adjusted for items affecting comparability and we already mentioned the net sales decline of four percent to eight billion driven by divestments and whereas organic growth was positive and I'll come back with a more detailed sales bridge on a separate page. So we had a sales decline of 4%, but we had an adjusted EBIT growth or operating profit growth of 19% to 597 million with an adjusted EBIT margin that consequently improved from 6% in Q3 last year to 7.5% in Q3 this year. Operating profit in the quarter was, of course, helped by the divestment, partly of the nine unprofitable businesses, but also, like Christy mentioned just now, by operational improvements, most notably in business area services, but also within trade and underlying also within industry. And in addition, margins were positively affected by lower central costs as we reversed some provisions tied to an incentive program from 2021. Moving on to the net financial items that were 242 million negative. Of course, this is a clear reduction from minus 290 million in Q3 last year. And of this 242, the net interest costs represent 207, which is an almost 20% reduction year on year. thanks to a combination of lower interest rates and lower absolute debt. This is still a high level, of course, and our ambition is to reduce it. Now, I believe the Riksbank will come back with some news in 15 minutes. So let's see what that does. A one percentage point reduction in base rates overall should reduce our interest costs by around 60 million Swedish kronor on an annualized basis. The lower financial costs and the EBIT growth of course meant that profit before tax increased by 68% in Q3. And then looking at the taxes, they were higher compared to the previous quarter due to positive one-offs in Q3 last year. And then the net profit consequently increased by 31%, so a little bit less than 68% obviously. And then turning to the financial KPI table below there, we already mentioned the adjusted EBITDA growth of 8% and margin of 9.8%. But looking at the return on equity, the adjusted return on equity here was 4.3% for the 12-month period, which is lower than that of last year, but a small sequential improvement from 4% in Q2. And the same applies for the adjusted return on capital employed of 7.1%. This was also lower than Q3 last year, but a slight improvement from the second quarter this year. And net of goodwill, the return on capital employed was 16.4%. Again, our ambition is obviously to improve the return metrics over time and successively. Finally, EPS adjusted for items affecting comparability grew by 35% to 0.13 from 0.10 Swedish krona. Finally, a few words on the year to date numbers there to the right. As a reminder, we had a quite slow start of the year, as you may remember, with significant negative organic growth in Q1. This then turned to positive organic sales growth in the second quarter and now also in the third quarter with a slight positive organic EBITDA growth actually also in the third quarter. But considering that our nine-month operating margin is at the same level as that of the previous years despite the significant year-on-year decline of 20% in Q1, that shows I believe that our focus on cost control and operational efficiency throughout our businesses including divestments of low performers, has yielded results in the past two quarters. On the following page, we have the financial summary for the reported, so without these adjustments. So how does that look? Well, in Q3 this year, we had items affecting comparability quite low on EBITDA of 8 million stemming from capital gains, while we had a negative minus 11 in the same quarter last year. And so the reported EBITDA is up 23% year on year to 604 million. And looking at the year, I'm sorry, looking at the year to date result, The year-to-date results, we had a total of 970 million affecting EBIT, so that's the items affecting comparability on EBIT level, and more than a billion SEC affecting net profit for the nine-month period, and these relate to capital losses, impairment, and write-down that were communicated and done in conjunction with this portfolio divestment in Q2. So as a consequence, obviously reported EBIT declined by 58% to 814. Then we have the Q3 sales bridge right here on the next page, where we've already mentioned these numbers, organic sales growth plus 3% for the group in the quarter. This is the second quarter in a row now with a positive sales growth and it was positive in all business areas. Obviously, divestments represented minus five of this sales decline. The largest divestments being the portfolio divestments that we made this summer, as well as Crownlift earlier in the year, and actually the divestments of, I believe, three electrical installation companies that were sold in September last year are also included here. Currency represented a combined minus 2% of the year-on-year change in Q3. And then on the following page here, we have a quick glance at the Q3 sales again and EBITDA, but here divided by business areas. So starting with the sales bridge to the left, we just mentioned all three business areas had a positive organic sales growth and divestments impacted negatively. And the largest part of the past year's divestments have been made within services, both in terms of number of divestments and also in terms of size. And the EBITDA waterfall to the right here, there you can see the opposite effect on EBITDA. So the divestments made in services, trade and industry actually lift group EBITDA by 4% in total comparing to Q3 last year. This is a result of the fact that these divested companies on aggregate were loss making in Q3 last year. Lower central costs of course contribute positively around three percent to the year-on-year EBITDA growth. There you go and then over to the cash flow statements on the next page. For the third quarter, so first of all as a backdrop a reminder cash flow and cash conversions generally seasonally lower in the third quarter compared to Q2 and Q3 that are generally stronger. Trading companies typically build inventories in the third quarter that they then release in the fourth. The cash flow effect from change in working capital was with this as a backdrop then minus 142 million in Q3 and But this is a combination not only of inventories, but this is a combination of lower payables actually and somewhat higher inventories. Not significantly higher in fact. And this is partly then offset by also a reduction in receivables. Summing up the cash flow from operating activities and again mind you this is after interest and after tax. We arrive at 453 million for the quarter and 2.9 billion for the rolling last 12 months, a period in cash platform operating activities. CAPEX to sales was 1.4% in the third quarter, which is actually in the lower end of historical levels. And cash effects from M&A was minus 91 in the quarter. The majority of this, 84 million of this actually is acquired minority shares in portfolio companies. Cash flow from financing activities minus 300 this is loan amortization and leasing and that all sums up summing that all up give it gives us a cash flow for the period of minus 213 for that quarter. And on the next page here we show the rolling 12 months EBITDA based operating cash flow and cash conversion over the past nine quarters. So a little bit more history here. We've gone from a cash conversion rate of 50%, I'm sorry, two years ago to being at or around 100% in the past five quarters now. And this is on a rolling 12 month basis. And in the isolated third quarter, cash conversion was 75%, which actually is a quite good number looking at where Q3 typically is. But over the last 12 months period, the cash conversion is 99%, so still very strong. Worth pointing out again, however, that a cash conversion of 100% is not sustainable for our lines of businesses over time. As demand returns and growth starts to come back, we do expect cash conversion to normalize slowly again, but at more efficient levels than pre-pandemic. Our target level being over 70% over a 12-month period. A quick look at the balance sheet next. Our total balance sheet of 43.3 billion is 6% lighter compared to a year ago. And this is largely a result of divestments as well as working capital focus obviously has meant that we've been able to reduce debt as a consequence. I'll show you the net debt items and how they've developed in more detail on the next page. But our interest bearing leverage ratio of 2.6 at the end of Q3 is a reduction from 2.7 at the end of Q2 and 2.8 in Q1. but unchanged from a year ago. And finally, our equity ratio increased to 46% from 45 a year ago. And on the next page here, we will have a closer look at the debt and leverage development. We show the quarter on quarter development since Q4 22 here. The dotted line shows the 12 months pro forma EBITDA, which is used in our leverage definition. After a period of declining EBITDA stemming from divestments and organic development, we've now had a flat RTM EBITDA the recent three quarters. It was in fact marginally up in the third quarter, but you can hardly see it here on this dotted line, but nevertheless important to us. Debt and net debt came down further in Q3, interest bearing net debt 255 million lower than in Q2. And looking at the longer period, our debt level has of course been reduced more substantially Interest bearing debt, the light blue or gray bars, is almost 3 billion less compared to what it was in Q4 2022. And the yellow bars below is cash and cash equivalents that has been pretty stable during the past quarters. And then, of course, we have also unutilized credit facilities of 2.1 billion, which gives us a solid liquidity balance. Finally here a few words on the debt maturities and improved maturity profile and the way we've worked with especially our bonds but also our bank loans. We have refinanced a large part of our total debt portfolio during the past 12-18 months including the RCF term loan and bonds. And during the third quarter, we issued 1.25 billion bond of four years. Of this, 900 million was used to refinance buyback of bonds with the shorter maturity. And this transaction was, however, settled in October after the quarter closed. And the net amount, so 1.25 minus 900 million, was used to pay down the RCF in Q4. The most recent bond issue was done at CBOR plus 325 basis points and although I would say this is still a too high margin level, I believe Krister agrees. Yes. We're of course glad that we're refinancing at better and better levels with every issue we've done now and this bond was in fact issued at 50 basis points lower margin and with a longer maturity compared to the similar size transaction we did only in June this year. And we believe of course that this is a testament to the almost complete restructuring that we've done in the past quarters and the improved maturity profile as illustrated here. Now there is only one smaller 843 million bond maturing in December 2025 and we are of course finally also happy to have maintained or reached a stabilized outlook with a double B rating from Standard & Poor's during the quarter as you mentioned. That's it for me and the financials over to you Krister.

Thank you Lena. To conclude this I'd like to highlight the key takeaways from today's presentation. Our operational focus is yielding positive effects across all prioritized areas. The initiatives were implemented are starting to show tangible results, reinforcing our commitment to driving organic EBITDA growth and maintaining strong cash flows. With no significant bond maturities until 2027, we have the flexibility to concentrate on our operational improvements without the pressure of refinancing. The firm credit rating improved outlook from S&P is a testament to our successful effort in enhancing Storskogen's overall credit profile. Since becoming the CEO, I've had the opportunity to visit many of our colleagues across different geographies. Meeting with our business units and discussing their challenges and opportunities has been both inspiring and reassuring, strengthening my confidence that we are on the right path. The insights gained from these visits have contributed to the strategic work that has been ongoing over the past year. I look forward to sharing more about the strategic direction at the Storskogens Capital Market Day on November 27th. And with that, 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 Carl Ragnestam from Nordia. Please go ahead.

Good morning, it's Carl here from Nordia. A few questions. Firstly, I mean, quite impressive margin uplift in the quarter, but I'm a bit curious to hear more about the dynamics, especially in regards to the big portfolio divestment you announced during the summer. What margin impact did those have? Because you've done other divestments as well, right? So if we isolated to those divesters you announced or the portfolio divested, What impact did it have on let's say the group margin or segment margins for that matter?

Should I take that? Yeah sure. Hi Carl and good morning. Well as we haven't I believe disclosed in detail what the margin uplift was. But obviously the by far largest effect is on business area services. I believe that these companies have contributed or the divestment of these companies would contribute by more than a percentage point. I believe it's closer to 1.3 or something like that in services and a little bit less so in Q3 because we own the companies also for a month in Q3. But that's about the size of it and then also there is a margin contribution obviously positive in trade and less so visible in business area industry. But I believe that you can, if you have a look at the EBITDA bridge that we showed just now, you can have a look at that and also bearing in mind that the underlying EBIT growth organic EBITDA growth in Q3 was slightly on the positive side. We had a plus 3% contribution from lower central costs, and then the rest is pretty much related to these divestments.

Okay, that is very clear.

I'm sorry, again, that's just contribution is from the divestment made this summer, so smaller contribution from the electric installation companies, and whereas Klanlist had

Okay, so it's the majority of the portfolio. When we enter Q4, was it two-thirds that is deconsolidated in the quarter of the portfolio? If you look at the profitability of that portfolio divided by the month last year, would you say that they were more loss-making during the latter or former part of the period?

Meaning that we would see an even bigger... Yes, they were actually not loss-making during the one month that we owned them in July. uh had a slight slight profit actually uh but the they were they were largely lost making in q4 last year you remember we had a quite a week q4 last year and and a large part of i would say a large part of of the uh that was actually stemming from these uh portfolio companies i would say christie is that okay that's fair today okay yeah very clear thank you

And you mentioned that order books are stable in general in industry. Should we interpret that as you're sort of eating a little bit from the backlog you built up in first half 24 and that orders are a bit sluggish currently or how should we look at the order situation in industry?

I think we should look at it, Carla. It was strong, as we said, in Q1 and Q2, slightly less so in Q3, but on the really stable or healthy level still, but a little bit slower in Q3. And I think we have to wait and see the uptick when that is coming. It's a little bit slower in Q3 than compared to Q2.

And have you seen the slowdown accelerating during now November? It's obviously early days, but October at least, or is it same same?

It's too early, but no significant. No, we can't say that we have seen slower.

Okay, that is very clear. And on the balance sheet here, obviously great to see the margins coming up. organic EBITDA. But on the cash flow side, this is tying up working capital a bit. If we deduct capex leasing, I mean, it's not that much left to deliver, right? So we keep leverage at 2.6 or it's down 0.1 notch sequentially. So we had this discussion last year as well, right? With leverage, you have the ambition to take it close to two times or a little bit above that. What is the ambition here? What is the leveraging journey? I think because the stickiness at this surprised us a bit if we look from a year back and I guess you as well. So what's your thoughts on it going forward?

I think that we have been what our focus is that we really need to continue to work on the operating part and getting our EBITDA up again and that is our total focus and that is why it hasn't been sticky as Lena showed on With EBITDA going in a negative way, that has been kind of why it's made it so sticky. But we're taking it notch by notch and we are ready to have a good growth of EBITDA when demand is coming back. But this is a, we're going to continue to work hard with the operations in order to get profit up. And that's what we are focusing on.

And we are also, again, I just spoke about that, that the third quarter is typically cash flow wise weaker, whereas we typically, historically, this is no guidance, but historically we've had a stronger fourth quarter, quite substantially. So in terms of cash flow, we also typically have lower taxes paid. and so forth, and also better working capital situation in the fourth quarter. But again, that's no guidance for this Q4, but that would be the typical pattern.

Okay, that's very clear. Thank you so much.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Andreas Koski from BNP Paribas Exxon. Please go ahead.

Thank you and good morning.

I just want to follow up on the cash flow statement. I think you had net cash outflows of 275 million in non-current assets. You say that your net investment in tangible assets was 115 and you now in your presentation say that the capex to sales numbers was 1.4 but it looks like you have had a substantial outflow in some sort of intangible assets and I just wonder if we should expect that to continue in the common quarters or if we will go back to say a normalized level of between 100 and 150 million overall including investment in intangibles. Thank you.

Right. Good morning, Andreas Koski. A very good question there in that 275 is, I mean, capex 115, as you said, but there's also investments in intangible, which is, for instance, ERP systems that we've, I mean, Kristi, you've talked about that for a few quarters now that we're investing in production efficiency and productivity improvements in businesses, including in software systems. That's one part of it. Another part is actually real estate investments that we made in a few companies to also again make productivity and scalability improvements in those. So that's part of which is not CapEx because it's a real estate investment. And those kinds of investments you would expect us to continue to make as part of our kind of ownership deal. And then there's also a part that relates actually to the divestment of the nine unprofitable businesses earlier this year, where there is a shareholder contribution actually made to the holding companies, the new holding company of that, viewed as a loan or it is a loan in fact and this is all communicated actually in releases press releases that we we um uh gave out in or published in in june so that's part of that um so it's a mix and that part of course you you should not expect us to continue to to do that was a one-off uh but the kind of investments in systems or erp systems and software and um trades trademarks and um

and real estate we will continue to make to some extent to some extent but there could be the level of it might be a little lower than this going forward yeah but it's just maybe clarify it sounds like we should expect this sort of step up compared to what we have seen in the previous quarters I mean on average This line has been 140 million negative and it's only been above 200 one time before from what I can see. So we expect this to be a step up at least in terms of your cash outflows related to this.

No, that's not how you should read it. The one thing is this investment related to the divestment of the portfolio this year. But a CapEx level is and has been at around 1.5 to 2%. It was a bit lower, the CapEx part of it this quarter. But I mean, we don't expect that to come up in any material way. We expect that to remain at kind of normalized levels. normal levels going forward as well, right?

Yeah. Understood. Thank you. And then just to follow up to Carl's question and your answer, you talked about the typical pattern with Q4 being a seasonally stronger quarter than Q3. But I think you clearly pointed out that that was not the guidance. Does that mean that you don't expect the seasonal pattern to be visible this year? Or why didn't you want to sort of

We all have said and we are sticking with that that Q1 and Q3 are seasonally weaker and Q2 and Q4 are seasonally stronger and we stick with that.

It's just the CFO being smart, nothing more than that.

Understood thank you very much. Thank you.

As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments. The next question comes from Johan Dahl from Danske Bank. Please go ahead.

Good morning, everyone. Just two quick questions. Firstly, on the rolling 12-month EBITDA pro forma, could you possibly mention what the pro forma adjustment was there for the divestments? That is a 12-month perspective, that gross adjustment for the divestments. Is it possible to put the round number on that reversal you did in Q3 on the incentive program on group common cost?

Thanks. Hi, Johan. The contribution from the divested portfolio is they were in fact Slightly, very low or slightly positive even, I believe. Very marginal on EBITDA level, but negative on EBITDA level. So no major impact on EBITDA from the divestment of those on a 12-month rolling basis. And then the second question was on the central cost. Correct. Yeah, and that is the amount of that is 12 million Swedish krona that is reversed. So that's kind of costs that we have booked. uh on a like an ongoing basis and uh now that this program started in 21 it's now maturing or uh falling due in november this year so that's why we have concluded that and and that resulted in a in a reversal of provisions of around 12 million sec to our favor 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 all the questions and I want to thank you from our side that you have been listening to us and I hope that you have a continued great day. So thanks from us at Storskogen.