Storskogen : Transkribering

Corrected Transcript

16-Aug-2022

Storskogen Group AB (STOR.SE)

Q2 2022 Earnings Call

	Total Pages: 20
1-877-FACTSET www.callstreet.com	Copyright © 2001-2022 FactSet CallStreet, LLC

Storskogen Group AB (STOR.SE)	Corrected Transcript
Q2 2022 Earnings Call	16-Aug-2022

CORPORATE PARTICIPANTS

Daniel Samuel Kaplan	Fredrik Bergegård
Co-Founder & Chief Executive Officer, Storskogen Group AB	Executive Vice President & Head-Industry, Storskogen Group AB
Lena Paulina Glader
Chief Financial Officer, Storskogen Group AB

.....................................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Carl Ragnerstam	Herman Eriksson
Analyst, Nordea Markets, Corporates & Institutions	Analyst, Danske Bank A/S (Sweden)
Dan Johansson	Karl-Johan Bonnevier
Analyst, Skandinaviska Enskilda Banken AB	Analyst, DNB Bank ASA (United Kingdom)

Robert Redin

Analyst, Carnegie Investment Bank AB

.....................................................................................................................................................................................................................................................................

MANAGEMENT DISCUSSION SECTION

Daniel Samuel Kaplan

Co-Founder & Chief Executive Officer, Storskogen Group AB

Hi and welcome to Storskogen and the Presentation of our Second Quarter. My name is Daniel Kaplan and I'm the CEO and Co-Founder. And together with me today, I have Lena Glader, CFO.

So, first, a brief introduction to Storskogen. We are an infinite compounder. We buy small and medium-sized companies. We have an infinite ownership agenda. We are really long-term in the way we view things. We have approximately SEK 36 billion in turnover rolling 12 months and SEK 3.7 billion in EBITA.

And the people doing all the work, more than 12,000 people distributed across 28 countries. We have four market areas and nine investment teams globally working to support our companies and to acquiring new.

So, we have three business areas: Services, Trade and Industry. Services headed by Peter Ahlgren, seven verticals and 61 business units and almost 5,000 - more than 5,000 employees, actually, and about a third of our entire turnover. We have Trade headed up by Christer Hansson, 34 business units and 2,000 employees, 28% of our sales in the last 12 months. And finally, we have Industry with Fredrik Bergegård, 37 business units and almost 5,000 employees.

Giving you an overview on our financial targets, we have an organic EBITA growth target of a real GDP growth of 1% to 2%. This is, of course, in the medium-term. And we had a very strong last year with 36% EBITA growth. This year, we have minus 3%, which is a decent result given the complex macro environment and reflecting the strong comparison numbers of last year.

	2
1-877-FACTSET www.callstreet.com	Copyright © 2001-2022 FactSet CallStreet, LLC

Storskogen Group AB (STOR.SE)	Corrected Transcript
Q2 2022 Earnings Call	16-Aug-2022

If we're looking at our growth, including acquisitions, these are to be align with historical levels. This is 60% to 70% over a business cycle with the assumption that we have access to capital. Currently, we are at 121% EBITA growth year-to-date. This is, of course, quite extraordinary. If we're looking at our EBITA margin target of 10%, we're currently at 9.3%. And this is, of course, a challenge, challenging times, reflecting the challenging times that we've had and of course, it's a target for us to reach. It's going to be a challenge for us this year but we are, of course, working towards it.

Then, of course, we have the cash conversion target of 70% approximately. This year, we've had a voluntary and intentional inventory build-up to manage the supply chain disruptions, so we're currently at 32%. However, it is also one of our key targets moving forward to get this back. As we see supply chain disruptions diminish, we have the opportunity to decrease stock levels as well.

And finally, our leverage target, it's interest-bearing debt through EBITDA, and it's 2x to 3x. We're currently at 2.5x which is a very comfortable level for us. It's exactly where we want to be. Of course, we will always monitor this one and adjust it and calibrate it towards the business cycle as well.

Looking at the second quarter, we had a SEK 9 billion in turnover, 16% organic sales growth year-to-date, SEK 877 million organic in EBITA, 129% growth compared to last year. Like mentioned before, the organic EBITA growth year-to-date has been minus 3%, reflecting the complex environment. It's decent but, of course, we are, of course, always working to improve that. And finally, our EBITA margin at 9.7% compared to 10% last year, this is the number which we are quite happy with as the second quarter is seasonably stronger, of course, on the first quarter, but it is the result of hard work from our companies this quarter.

We've done 20 acquisitions, half of those have been add-on acquisitions showcasing our ability to support our companies in their strategic work to improve over time. And finally, a few strategic initiatives which we'll go through a little bit later on our Case Assessment Tool and the knowledge-sharing platform that we launched in the second quarter.

Looking a little bit at the market development. Well, we've seen a fundamentally strong demand in all business areas in the second quarter. Like mentioned before and like you all know, it's been still effects from COVID, supply chain disruptions and accelerating inflation. So, it's been a complex environment. But as we've seen the quarter progress, we've actually seen an increased price stabilization, diminishing supply chain disruptions.

So, these disturbances are gradually being phased out, enabling us to focus more and more on long-term issues rather than managing the short-term volatility. And therefore, we actually have a reasonable outlook in a turbulent market in the next half-year going forward. Then, of course, we have a forecasted recession in 2023 and we are preparing for that potential market development in lots of different ways, everything from keeping our receivables in check and inventory levels and our leverage to give us a good - being prepared for future market developments.

So, if we're looking at the transaction market in the second quarter, it was a very active quarter. We see that the deal flow is declining due to the volatility and results but also before the recession that might be coming. That said, we have nine investment teams. We have a tremendous deal flow that has actually for - on the specifically for us, it has been growing quite a lot. And this gives us the opportunity to be really, really selective and to allocate capital between industries and markets in the best possible way, a part of the Storskogen model. We've also seen declining acquisition multiples both in the second quarter, actually significantly lower than historically at least the last year but also going forward, reflecting the higher cost of capital, of course, that we see in the market.

	3
1-877-FACTSET www.callstreet.com	Copyright © 2001-2022 FactSet CallStreet, LLC

Storskogen Group AB (STOR.SE)	Corrected Transcript
Q2 2022 Earnings Call	16-Aug-2022

If we're looking at our three business areas, we have Services. We normally have a weaker first quarter, a stronger second quarter for Services. And we've seen that as well, solid organic revenue growth but suffering from shortages of supplies. It's difficult to recruit people. We have, in fact, a somewhat slower business cycle, might benefit some of our Services companies who have difficulties finding the right people, so it's actually benefiting for them.

Digital Services, Logistics have been doing really well in the quarter, whereas Installation and Infrastructure have suffered more from cost inflation and supply chain issues. We did six acquisitions, half of them add-ons. And if we're looking forward, I think we can see that the high inflation environment, potentially salary inflations or wage inflation over time, might dampen our profitability in the long term.

We did an exciting acquisition and an example of the acquisitions we've made, Swedwise. It's a reseller of various information management systems. It's providing general consulting in all kinds of information, process automation for larger corporations and public sector. It's not a big company, it's SEK 76 million in turnover. But as you can see, quite an extraordinary EBITA margin. And the way we think when we do an acquisition like Swedwise that is what see a very strong team. We see high margins, of course, but also a business cycle resilience. We have a customer base that - lots of government customers, for example, that will have a significant need, the demand for these services over time. So, it's a very good contribution to our Services portfolio.

If we're looking at Trade, we had a continued strong sales growth, but we did have a significant negative impact from component shortages and delayed deliverables, for example, from Asia. And we've done a strategic step-up of our inventory levels to manage sales and through the season that comes along. And this has, of course, taken an impact on our cash conversion as well in the short term. We did 10 acquisitions, 5 add-ons, about half, of course, in this case. And we can see now that material costs, supply chains disruptions, they're decreasing, but they're still at a high level. But it makes life easier for us and easier to plan, of course, when it comes to price increases and purchasing when you have a more stable environment from a price perspective.

If we're looking at one of the most exciting acquisitions this quarter, Scandinavian Cosmetics Group, it's a leading Scandinavian brand management company. It's high-end skin care and cosmetics. It's more than 80 brands. It has a super-automated modern warehouse and more than SEK 1 billion in turnover as you can see, with a decent margin. So what were our thoughts before this acquisition? Well, as you know, we have our Health and Beauty vertical. It's a fast-growing vertical for us, actually more than SEK 2 billion in turnover at the moment. We are market-leading now in the Nordics and this is complementing our great companies in hair care, for example. And this is a company with good margins and stable margins over time. So, that's Trade.

Moving on to Industry where we will talk to Fredrik Bergegård very soon, we had a solid demand throughout Q2. Of course, we had a very strong development year-to-date. And even last year was quite extraordinarily strong, so they're doing a really good job at this point. Good development in volumes, in efficiency improvements, price increases that are finally coming through to our end customers. We can see that the onshoring trend kind of benefits a lot of our companies, for example, within Automation, helping our customers being more efficient and lean in their production in, for example, Northern Europe.

We did two new business unit acquisitions and two add-ons. And we can see that some of the material prices are moving downward, and we have a strong order books, et cetera. We still have a low visibility especially for 2023, so it's difficult to guide you on that one going forward. So if we're looking at one of the most exciting acquisitions that we did in the Industry at the last quarter, we have J & D Pierce based in Scotland, almost SEK 1.7 billion in turnover, with about a 10% EBITA margin.

	4
1-877-FACTSET www.callstreet.com	Copyright © 2001-2022 FactSet CallStreet, LLC

Storskogen Group AB (STOR.SE)	Corrected Transcript
Q2 2022 Earnings Call	16-Aug-2022

This is an industrial company doing steelworks, steel construction. They're superefficient, they're highly automated plant and then, of course, they set up these XXL sheds. They're also building - actually, they're rebuilding or helping to improve the Anfield Stadium now for Liverpool, so that's an exciting project as well. And they have a strong track record of top line growth. They have a very strong pipeline going forward and some of the best customers around. So, it's a quality company and we look forward to help to nourish it in the years to come.

And all in all, if we're looking at our portfolio, it's very diverse. And of course, it's a key component of our strategy to be in lots of different industries and different geographical markets, getting that resilience for a potential recession, for example. So anything that happens in the markets will affect us, but not at the same time and to the same extent in our different verticals. So, no single vertical more than 14%. Just to understand these companies, most of them have been around for quite some time. Our biggest 20 companies, they've been around for, on average, 47 years, have been both ups and downs. So, we feel very confident that our business model really is supported and will kind of show its value in the times ahead.

Significant events after the reporting period. We've done a few acquisitions adding SEK 38 million in EBITA and we have an LOI and preferred buyer pipeline of about SEK 200 million. This is for those [indiscernible] (00:14:18) somewhat less than we normally have. And as you know, from a seasonality perspective we don't do many acquisitions in the third quarter. That said, we are also, like I think we mentioned both in the presentation of the fourth quarter and the first quarter, seeing a somewhat slower acquisition pace going forward. We have deployed now most of the proceeds from the IPO in a good manner, so the money has been put to work and we're now into more a normalized acquisition pace going forward.

So, financial performance, Lena?

.....................................................................................................................................................................................................................................................................

Lena Paulina Glader

Chief Financial Officer, Storskogen Group AB

Thank you, Daniel. So, let's have a closer look at the quarterly numbers here. We had, of course, a strong sales growth in the quarter and we had a solid margin and profitability. So, let's talk a bit about that. Sales growth was 137% year-on-year in Q2 to just above SEK 9 billion. And this is driven by organic growth, obviously, in the first half of the year, throughout the first half of the year, as well as by - and the organic growth is again driven by both volume and price and, of course, largely also the sales growth is driven by acquisitions.

The LTM, that's the owned 12-month period sales, amounts to SEK 26.8 billion. And the RTM, that's the pro forma as if we'd owned all the subsidiaries for the entire last 12-month period, that sales is amounts to SEK 35.7 billion. And then a quick comment on EBITA, also grew by 129% in the quarter year-on-year to SEK 877 million in the second quarter. Again, the LTM, that's the owned 12-month period, amounts to SEK 2.5 billion in terms of EBITA. And the pro forma RTM number is SEK 3.6 billion that Daniel showed here, I believe, on the first page.

The margin was 9.7% in the quarter which is, of course, a significant improvement from Q1 when we reported a margin of 8.2%. Now, the second quarter is seasonally stronger. The margin was, however, helped by, of course, successful implementation of these price increases that we discussed then at the previous quarterly Q&A and session. These price increases have come through in Q1 but also in Q2. And we've made further price increases successfully in Q2 as well which has, of course, helped the margin. And an overall strong markets, good demand and operational performance has also been driving the margin improvement sequentially. We are just a little bit short of the 10% target and the 10% that was reported in Q2 last year.

	5
1-877-FACTSET www.callstreet.com	Copyright © 2001-2022 FactSet CallStreet, LLC