Karnell Group AB (publ) (KARNELB) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Karnell's Q1 2024 earnings presentation. We're really excited to have you all joining us today at our first presentation as a public company. And throughout this session, we'll be providing you a comprehensive overview of our performance during the quarter, highlight our key financial achievements, operational updates and strategic initiatives that we are driving our business forward. Let me quickly introduce our presenters. It's myself, Petter Moldenius, the CEO here at Karnell. And with me, I have Lars Neret, who is our CFO. And at this first quarterly report, we thought that we should spend a few minutes, first of all, to introduce Karnell as a group, then we'll reserve some time at the end, after the presentation for a Q&A session, where you will. Have the opportunity to ask your questions. So who is Karnell? We are an active long-term owner of industrial niche companies. And we have a clear thematic approach: seeking small- to medium-sized companies that hold a strong position in their respective niche markets. We have divided the group into 2 business units based on their respective business models. We have, first of all, the product owning companies. And these are companies that possesses their own intellectual property, their own IP, often in a form of a patent or technical type and focusing on developing clever products that add significant value to our customers while maintaining a competitive edge. The second business unit is our niched manufacturing companies. And they focus on specializing in specific subsets within manufacturing, allowing them to add substantial value to their customers. And our criteria for success in this unit is the ability to achieve some 20% EBIT margin consistently. Karnell has a strong track record of acquiring about 2 platform companies per year, and we maintain a highly selective approach, targeting industrial leaders within their respective niches and rather pass on an opportunity than to buy a mediocre company. Currently, Karnell comprises of 12 companies located in Finland, Sweden and the U.K., and collectively employing about 600 employees. Our financial overview, as you can see in short, is for 2023, pro forma view, so adding up to 12 companies in the group: net sales of SEK 1.3 billion with an accompanying EBITA of [ SEK 880 million ]. We strive to be as transparent as we can possibly be, and that means sharing detailed numbers that sometimes may sting in the short term. However, we firmly believe that our commitment to transparency will benefit us as a group and our shareholders in the long run. By providing a clear insight into our financial and operations, we aim to foster trust and confidence in our decision-making processes and our strategic direction. And on that note, it is important to highlight that we have chosen not to adjust our financial figures for the IPO costs or external advisory fees in the quarter. At Karnell, we believe in presenting the numbers as they are without resorting to adjusted figures that may obscure the true financial picture. And with that said, we'll share the detailed numbers that actually reflects our operations and financial health. And by doing so, we aim to build trust among our stakeholders and demonstrate our commitment to long-term value creation. So without further ado, let's jump into the details of our Q1 performance. it has been undoubtedly a very transformative quarter for Karnell. With the very successful completion of our IPO, along with the acquisition of both a platform company and an add-on acquisition, we've navigated through significant milestones. Despite the prevailing headwinds in the market, I'm pleased to report that we have achieved a modest organic growth during the quarter. Cash flow from our operating activities amounted to SEK 12 million, which is an improvement from earlier Q1s where we typically have a bigger buildup in inventory to meet demand that comes in Q2. To give you an even better understanding then of the reported SEK 20 million, we have high costs during the quarter, mainly driven by the IPO. So our reported EBITA from our subsidiaries amounted to circa SEK 36 million for the quarter, reflecting the operational performance across our business units. Group costs, excluding IPO and acquisition-related expenses totaled SEK 6 million. These costs encompass various administrative and operational expenses incurred at group level. During the quarter, we incurred expenses totaling SEK 7 million attributed to the IPO process. Additionally, there were acquisition costs accounting for SEK 3 million related to our strategic acquisitions. Excluding IPO and transactional costs, our EBITA amounted to SEK 30 million, and that will translate into an EBIT margin of 10.6% during the quarter. And with that, I'll let Lars go through the financial details.

Thank you, Petter. So first, an overview of the development of net sales and EBITA. And here, we have added some more quarters, historical quarters, for you to get the feel for the historical growth in Q1. So looking at net sales, we have had a CAGR of 54% from Q1 2021 to Q1 2024. And the increase from last year was 15%, and we ended up at SEK 286 million. For EBITA, if we exclude IPO and transaction costs that Petter mentioned during this quarter, then the CAGR from 2021 was over 100%, and the increase from last year was 6% and we ended up at SEK 30 million. If we look at the breakdown of net sales, on the left here, we had organic growth of SEK 5 million or 2%, which we are very happy with in these market conditions. Acquisitions were 13%, and we had a small currency effect as well, 1%. EBITA was affected a lot by the IPO and transaction costs again in the quarter of a little more than SEK 10 million. So if we exclude these costs, we had an organic growth of 1.5%. But including these costs, we had a decline of 36% or SEK 10 million. Acquisitions represented 7% and a small currency effect again of 1%. Now looking at our business segments, starting with our product owning companies where we had a very good quarter with an increase in revenue of 27% to SEK 117 million. And most of that came from acquisitions, but we also had a nice organic growth of 8%. EBITA increased by 73% to SEK 11 million, and all of that was from organic growth, 87%. And we actually had a negative acquired growth in the quarter, and that is due to the latest acquisition of Sähkö-Jokinen. And Sähkö-Jokinen has some seasonality in its earnings, and Q1 is the weakest quarter. This is according to plan, and we expect Sähkö-Jokinen to contribute to EBITA in the coming quarters. EBITA margin improved from 7.1% last year to 9.7% this year. And in general, Q1 has seen some recovery from a weaker Q1 last year from the product companies and several of our companies performed much better with higher sales and much higher margins. In the segment, we have some companies that operate in the construction sector in Finland, and that is still very cautious or even weak. For our niched manufacturers, revenue increased by 9% to SEK 168 million. Most of that came from acquisitions, and we had a small negative organic growth of 2%. EBITA decreased by 8% to SEK 25 million. And here, we had an organic decline of 19%. The EBITA margin decreased from 17.5% last year to 14.9% this year. Our niched manufacturers had a very strong quarter last year where some of our companies showed record sales and margins. This year shows a little lower activity in general, and we have especially seen a little lower activity from some of our larger industrial customers. And this has led to slightly lower sales and some pressure on the margins in the segments. Moving on to cash flow from operating activities. We have had a very strong cash flow for the quarter as well as for the last 12 months. And this is due to both increased operating profit as well as positive net working capital development. And we have some variations in cash flow as we have in revenue and earnings, which is why we usually view cash flow on a 12-month rolling basis. So Q1 is usually the weaker quarter, but we have a positive cash flow in the quarter as well. Then on to our capital structure and net debt. We think we have a very strong capital structure. It was strong even before the IPO, but obviously, even stronger now after the IPO and the [ niches ] that were made. At the end of Q1, we had a net debt of SEK 77 million and a leverage of 0.5x. And that is excluding IFRS 16 leasing. This was further improved in the beginning of Q2 where we received the remaining of the cash from the IPO, the over-allotment option or the green shoe, so we added SEK 37 million. In our definition, we also exclude earn-outs and put-call options, the liability for put-call options, but we have included them here on the chart on the right, if you want to make your own calculations. Back to you, Petter.

Yes. Thank you. So during April, so after the quarter, we released our sustainability report for 2023 which underscores our commitment to our responsible and long-term ownership. Our sustainability report serve as an important component of our corporate governance framework, highlighting our efforts to integrate sustainability into our business operations. It is noteworthy to also see that we have used Scope 3 emissions in our calculation this year. This is the first year we do that. And that expansion represents a significant step forward in our sustainability journey, enable us to capture and address indirect emissions across our value chain. And by incorporating the Scope 3 emission, we aim also to enhance our understanding of our environmental footprint and identify opportunities for improvement. We have also done a CSRD gap analysis across the whole group during the year to prepare ourselves for the upcoming regulations. And for those of you who want to read this more in detail, please go to our home page and have a look at the full report. Now to acquisitions. The platform acquisition that we did during the quarter, it's a company called Sähkö-Jokinen. It's a second-generation family business who was identified through our proactive search, and the initial discussions were held already in March 23. And that's typically how it looks in our proactive processes. They take quite some time. We bought this from the Jokinen family. It's 5 siblings, all of them active in the company. Sähkö-Jokinen specializes in outdoor lighting products in Finland and is perhaps most known for their pole bases and their collision-safe lighting poles called KAPU, and they also have a standardized poles. Sähkö-Jokinen exemplifies quite well what we're looking for, for companies. It's established. It's a family-owned/entrepreneurial business with growth potential and succession consideration, so a family who are then looking for a long-term home for their business. As you can see from the chart, it's a solid financial track record with a favorable market dynamics, and we believe that we can continue on that journey and support in increasing the company's business in Finland and not the least in exports to Sweden and other markets. We are really happy about this transaction and the faith that was placed in us by the family Jokinen to continue on with their legacy. So to sum up, we're very pleased with our results in Q1 despite the challenging conditions in the IPO market. We successfully navigated that process, which serves as a quality stamp for our group and our visions going forward. The IPO has provided Karnell with a long-term home, aligning our commitments to providing stable ownership to the companies that we acquire. The milestone has also equipped us with the resources needed to further pursue successful acquisitions of small- to medium-sized industrial technology companies, and each market leaders within their respective niche. Additionally, our recent acquisition and modest organic growth in net sales and EBITA, excluding IPO and acquisition costs, further underscore our positive trajectory. Together with our new and existing shareholders, we eagerly anticipate the continuation of growth and reinforcement of Karnell's position as a leading industrial technology group. And with that, we open up for questions.

[Operator Instructions] The first question comes from Max Bacco from SEB.

A couple of questions from my side, if that's all right. Perhaps starting a bit with the details. I mean, looking at Sähkö-Jokinen, I believe they had sales during 2023 full year of some SEK 100 million. Here in Q1 2024, I believe the contribution was some SEK 7 million on sales. Would you say that, that is in line with normal seasonality? Or has demand weakened compared to last year?

Excellent question. No, it's very much in line with our own forecast for the business. It is somewhat a seasonal business as these poles goes into the ground or the concrete bases goes into the ground. So construction is lower during Q1. So that is fully in line with our own forecast.

Okay. So I interpret that as it's mainly then driven by seasonality. And the next question also relating to Sähkö-Jokinen, the same question then but on earnings. Negative here in Q1, minus SEK 3 million on operating profit, I guess that also gets the same answer, in line with your forecast, to get better ahead here.

Yes. I'm sorry to say that's the same answer. Sähkö-Jokinen forecast that they have a weak Q1 as they're sort of building up to sell to customers during Q2, Q3 and early Q4.

Yes. Understood. And then moving over to the niched manufacturers segment. I mean the product owning companies is very strong, and niched manufacturers a bit softer. Organic sales down 2%, EBITA organically down 19%. Could you elaborate on that a bit, what you're seeing among your customers and what they are indicating ahead? And also, I mean, a lot of your companies within that segment is operating in Finland. Did you see any impact from the strike in Finland here in Q1?

Yes. Many questions at the same time, but yes, so starting off with niched production then. I mean, first of all, as I think we said during the call, I think last Q1 was really exceptionally strong, so it's very difficult to have that as a basis. But as you rightly say, it is also a signal that the market is a bit weaker. Nothing dramatic, but it's a bit softer in general, as I think you can see across many other public companies. And the last question was strikes in Finland. Yes, that has a somewhat marginal impact on us. Not that our company has had a big effect, but some of our customers, larger global industrial customers, have difficulties with their logistics, meaning that they have built up some inventory and we are waiting for new orders until they sort of get that shipped. So to some extent, but it's nothing material.