Storskogen Group AB (publ)

Good morning and welcome to the presentation of Storskogens third quarter of 2024. I am Chris Dransson 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 Storskogens 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 seasonally weak a 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 .8% we are inching closer to our target of 10% and significantly higher than the .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 to the business areas, services reported lower sales but notably higher profitability in the third quarter. The sales decrease of 9% was driven by divestment that contributed to the decrease with 11%. However, this was offset by positive organic sales growth of 3%. 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 the mention that Q4 is seasonally strong in quarter. Looking at trade, for trade business area, we saw a sales decrease with 4%. Divestments contributed to decrease with 6% which was offset by organic growth of 4%. 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 to increase and the potential for even better profitability as demand gradually improves and as the effects of interest rates cut materialize. Looking ahead, as with services, we anticipate a seasonally strong fourth quarter though we remain mindful of ongoing market uncertainties. Industries 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 remain 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 a 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 key examples of how we are driving organic growth. We have a few examples from our business group of these efforts. Starting with services. This e-commerce digital agency has over the years helped many of the Storskogens portfolio companies in building their e-commerce platforms. As a result, they have developed a Vio storefront, a plug and play solution tailored for trading companies. Dan Boring, this Danish company that offers horizontal drilling services, has begun to collaborate with the Swedish business units NDS and Tofta Gård 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 ByWii. The improved Nordic reach of ByWii recently contributed to winning the global brand Olaplex with retail sales in Sweden, Norway and Denmark. Recently, we also noted the win of a key account Nikita Hair, a chain of hair salons in Norway, and Sweden. What we have achieved with ByWii is something that we are now aiming to emulate through having merged five Storskogens 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 Babelott, Nike and Blizzard. 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 Stål-Rörmontage. This is a leading supplier of qualified construction in stainless steel. 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 1800 square meter facility, built in part with internal resources, which will deliver a cost efficiency with a fast payoff. Lastly, Brænderup, a manufacturer of various types of trailers, acquired its Norwegian peer, Tysse, approximately two and a half years ago. Since then, Brænderup has achieved multiple synergies. One example, one recent example, at the time of acquisition, Tysse had more advanced offering for the professional segment, which was limited to the Norwegian market. Currently, Brænderup 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 growth. With that, I'll now pass over to Lena Glader for a closer look at our financial performance.

Thank you, Krister. 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 provident loss statement. And on the next page, they're reported. So this is adjusted for items affecting comparability. We already mentioned a net sales decline of 4% to 8 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 .5% in Q3 this year. Operating profit in the quarter was of course helped by the divestments, partly of the nine unprofitable businesses, but also like Krister 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 cost around 60 million Swedish krona 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 .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 -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 -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% -on-year to 604 million. And looking at the -to-date result, we had a total of 970 million affecting EBITDA. So that's the items affecting comparability on EBITDA level, and more than a billion SEC affecting net profit for the nine-month period. And these relate to capital losses, impairment, and write-downs that were communicated and done in conjunction with this portfolio divestment in Q2. So as a consequence, obviously, reported EBITDA declined by 58% to 814. Then we have the Q3 sales bridge right here. On the next page, where we 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 the sales decline, the largest divestments being the portfolio divestments that we made this summer, as well as Cranlift 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% on the 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 years, 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 3% to the year on year EBITDA growth. There you go. And then over to the cash flow statements on that next page. For the third quarter, so first of all as a backdrop, a reminder, cash flow and cash conversion is 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 capital was with this as a backdrop then minus 142 million in Q3. 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 period in cash flow from operating activities. CapEx to sales was .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 gives us a cash flow for the period of minus 213 for the 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. And 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 I'm sorry 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 -on-quarter development since Q420 to here. The dotted line shows the 12 month performer EBDA which is used in our leverage definition. After a period of declining EBDA stemming from divestments and organic development we've now had a flat RTM EBDA 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 three billion less compared to what it for 2022. And the yellow bars below is cash and cash equivalents that has been pretty stable during the last 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 a 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 CBO 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 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 we are implementing 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 Storskogens 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 stay on November 27th. And with that we are ready for questions.

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The

next question comes from Carl Ragnestam from Nordea. Please go ahead.

Good morning it's Carl here from Nordea. 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 we've had a few if we isolate to those divesters you announced or the portfolio divested what impact did it have on 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 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 EBITDA growth of organic EBITDA growth in Q3 was slightly on the positive side. We had a plus three percent contribution from lower central costs and then the rest is pretty much related to these divestments.

Okay that is very clear and when we... Sorry again that's just

the largest contribution is from the investment made this summer so smaller contribution from the electric installation companies and whereas Crown Lift had a very limited impact.

Okay so it's the majority of the portfolio. When we enter Q4 I mean was it two-thirds that is deconsolidated in the quarter right of the portfolio? I'm sorry no just

one third. I'm sorry one

third of course sorry yeah so 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 of the period? Meaning that would you see an even bigger?

Exactly no yes they were actually not loss making during the one month that we owned them in July. Had a slight profit actually but they were largely loss making in Q4 last year. You remember we had a quite a weak Q4 last year and a large part of I would say a large part of the that was actually stemming from these portfolio companies I would say.

Okay 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've been tapping first half 24 and that orders are a bit sluggish currently or how should we look at the 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 a healthy level still but a little bit slower in Q3 and 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.

Have you seen the slowdown accelerating during 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 EBDA but on the cashless side you're as you said tying up work working capital a bit. If we deduct cap actually 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 what is we had this discussion last year as well right with leverage you have the ambition to take it close to times or a little bit above that. What is the ambition here? What is the leveraging journey I think? Because the stickiness at least 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 Carly is that we really need to work continue to work on the operating part getting our EBITDA up again and that is our total focus and that is why it's been sticky as Lena showed on with the EBITDA going in the negative way that has been kind of what has 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 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 so 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

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keypad. The next question comes

from Andreas Koski from BNP Paribas Exane please go ahead.

Thank you and good morning. I

just want to follow up on 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 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 coming 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 Christo you've talked about that 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 gave out in or published in June so that's part of that. So it's a mix and that part of course you should not expect us to continue to do that was a one-off but the kind of investments in systems or ERP systems and software and trades trademarks and real estate we will continue to make to some extent.

To some extent but there could be the level of it might be lower than this going forward.

Yeah yeah but it's just to maybe clarify it sounds like we should expect this sort of step up compared to what we have seen in the previous quarter so 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 should 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 in the related to the divestment of the portfolio this year but a capex level is and has been at around 1.5 to 2 percent it was a bit lower the capex part of it this quarter but I mean we don't expect that to to come up in any material way we expect that to remain to remain at the kind of normalized 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 you 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 guide us for the normal seasonality? Thank you.

Yeah we have to have that that that is it we have said and we are sticking with that that Q1 and Q3 are seasonal weaker and Q2 and Q4 are seasonally stronger and we stick with that. Yeah

it's just the CFO being Yeah

no nothing with

that.

Understood thank you very much. Thank you.

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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.

It's good morning everyone just two quick questions firstly on on the rolling 12-month EBTA pro forma could you possibly mention what the pro forma adjustment was there for the divestments 12-month perspective that gross adjustment for the divestments and secondly is it possible to put a round number on the on that reversal you did in Q3 on the incentive program on common cost thanks.

Hi Johan the contribution from the divested portfolio is they were in fact slightly that was 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 that 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 kronor that is reversed so that's kind of costs that we have booked on an ongoing basis and now that this program started in 21 it's now maturing or falling due in November this year so that's why we have concluded that and that resulted in a reversal of provisions of around 12 million SEC

to our favor.

Okay 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 continue great day so thanks from us at Storskogen.