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

Good morning, everyone, and welcome to Karnell's Q4 2024 earnings presentation. My name is Petter Moldenius, and with me today, I have our CFO, Lars Neret, and we will be walking you through our financial performance for the quarter and discuss our strategic initiatives and providing insights into our recent acquisition. So we thought that we'll give you a brief introduction to our Q4 and full year 2024. Lars will then give you a more detailed view of our business units and their performance, and I'll then give you a short introduction to the acquisition we did here at the end of January, Männistö, and will also, as usual, reserve some time for Q&A at the end of the session. This is now our fourth presentation as a public company, and we have decided to slim it down as the audience of this call knows us really well, many of you at least. And we are also happy to schedule introductionary call with institutional investors that don't know us that well. Just reach out to us at [email protected]. Then as a short and quick reminder, Karnell is an active long-term owner of industrial technology companies, focusing on acquiring small- to medium-sized companies with strong position in their respective niches. We have a very disciplined acquisition strategy, prioritizing quality and leadership within industrial niches. As of now, Karnell comprises of 16 companies across Finland, Sweden and the U.K. And all in all, we approximately employ 700 people. And we strive for transparency even if it means sharing numbers that in the short run, might sting us, but we believe that benefits Karnell and our shareholders in the long run. And with that, let's turn to Q4 report. In short, as you can see, we had a net sales of SEK 403 million. That's an increase of 32%, which was organically driven on 6.1%. EBITA, SEK 50 million, up by 42%, and that's then an equivalent of an EBITA margin of 12.5% with a cash flow of SEK 86 million for the quarter with low leverage of 0.9x. To give you some more context and flavor, we started off Q4 really strong. October, November performing well. December was a bit softer than we had expected due partly -- or to a large part to the extended holiday period this year or '24, which then had a pronounced effect on some of our businesses. Overall, we are very content with a solid Q4 as a group, though there were notable shifts within our business units. Our product companies continue to perform well, benefiting from a more stabilizing construction environment, and that has improved the visibility for some of our businesses. And we still see some positive signs at the end of the tunnel, even though we believe it is quite some time before we see full growth recovery in some of these sectors, encouraging early positive trends are emerging with larger requests and higher levels of engagement with our customers. In contrast, our niche manufacturing companies experienced a softer market, impacted by reduced demand and a bit more cautious market sentiment. And this has put some pressure on our margins, and that goes particularly for the customers with capital-intensive products, who are then tied to the later stages of the construction and investment cycles as a whole. Turning then to the full year '24. Summarizing that, it has been a very transformative year for Karnell and was marked by our successful IPO and the completion of 4 acquisitions that we did during the year. And as you saw on the last slide, we are closed the year on a solid note, resulting in a full year net sales increase of 27% to SEK 1.4 billion, and this growth was driven by a combination of organic development and our strategic acquisitions. Having a bit more detailed look on our EBITA performance, we increased 21% compared to the same period last year, reaching SEK 166 million. This improvement was primarily driven by acquisitions and strong operational execution with our product owning companies. However, our niche manufacturing segment faced challenges during the softer market conditions. The EBITA margin declined from 12.4% to 11.8% due to the IPO-related costs during Q1 as well as the ongoing expenses being associated with being a public listed company. I would like to emphasize the positive organic top line growth, even though we experienced margin compression. This outcome stems from deliberate choices that we've made based on the belief that our employees are our most valuable assets. In some of our companies, we have consciously prioritized gaining market share by remaining personnel despite increased price pressure and lower margins. We believe that positioned us very well to capture growth and high-margin customers when the market eventually recovers. Turning to cash flow. Furthermore, I would say that the -- following the IPO, actually, we had then existing shareholders was diluted, and the outstanding shares increased to close to SEK 53 million from SEK 42 million. Despite our dilution, operating cash flow per share rose by 3.7% to SEK 3.27 even before the full impact of the acquisitions done during 2024 was realized. We remain focused on executing our growth plan, identifying opportunities in niche markets and delivering on the promises we've made to our shareholders. Despite the broader market challenges, our disciplined approach towards acquisitions and our emphasis on sustainable long-term growth continue to propel Karnell forward. And I would like to also emphasize that we maintain the low leverage and a healthy M&A pipeline. With that, I'll hand it over to Lars, who will walk you through the financials more in detail.

Thank you, Petter. If we look a little further into Q4 then and start with the breakdown of net sales on the left-hand side here. As Petter mentioned, the total increase was 32%, which organic growth was 6%, which we continue to be very happy with considering the current market. Acquisitions were 25% of the increase and a small currency effect -- positive currency effect. EBITA increased by 42%. Most of that came from acquisitions at 8%, but we also had an organic growth of 3%. Just a small currency effect. The EBITA margin increased from 11.6% to 12.5%. If we look a bit further on EBITA, we had reported EBITA from our operating companies throughout our 2 business segments of SEK 58 million for the quarter, and then we had central costs of SEK 8 million and no transaction costs or other special costs in the quarter. Over to our business segments then and starting with our product-owning companies. We had again a strong quarter with an increase in sales of 53% to SEK 211 million. Most of that came from acquisitions, but we also had an organic growth of 16%. EBITA increased by 72% to SEK 32 million. Most of that also came from acquisition, but at the same time, we had a strong organic growth of 32%. EBITA margin improved from 13.5% last year to 15.1% this year. And this quarter, again, continued the recovery from a weaker year last year and almost all companies within the segment performed better with higher sales and higher margins. We also see continued stability for our companies within the construction sector in Finland, and hopefully, the recovery will continue within the sector. For our niche manufacturers, sales increased by 15% to SEK 192 million. And here, the full increase came from acquisitions, and we had a slightly negative organic growth of minus 2%. EBITA decreased by 9% to SEK 26 million. And here, we had an organic decline of 33%. EBITA margin decreased from 17.1% last year to 13.6% this year. So again, our niche manufacturers had a very strong quarter last year and this year shows some -- still shows some lower activities, especially from our larger industrial customers and especially in the Finnish markets. Sales is holding up pretty well, as Petter mentioned, but we see a continued margin pressure in several of our businesses. If we combine our 2 business segments, the EBITA declined organically by 7%. Moving on to cash flow and cash flow from operating activities increased by 31% from last year. And for the quarter, it increased by 2% compared to a very strong Q4 last year. And the increase is due both to higher profits and to reduce working capital and especially inventory and accounts receivable. And here, Q4 is usually our strongest cash flow quarter and so also this year. And then our capital structure and net debt. So we didn't make any acquisitions during the quarter, and we had cash flow, which caused our net debt to decrease substantially as well as our leverage. As of December, we had a net debt of SEK 174 million, excluding IFRS leasing, and leverage of 0.9x. And then we still don't have the full P&L effect of our latest acquisitions. And as usual, we also exclude earn-outs and liabilities for put/call options in our calculations. You can see these numbers here on the table on the right. And if we would include all of these, our leverage in Q4 was then 2.1x. Back to you, Petter.

Thank you. Yes, we are happy to announce the acquisition of Männistö. And that was then, as Lars mentioned, not in the quarter, but actually the last day of January. Männistö is a manufacturing that specializes in pipe support systems for the marine industry and has proprietary products for HVAC and insulation applications. Männistö was founded in 1955 and it's based in Rauma, Finland. It's a family-owned business with annual sales, as you can see here, approximately a little bit more than EUR 6 million with strong profitability. The acquisition is expected to have a positive impact on Karnell's earnings per share on an annual basis. I think Männistö represents very well the exact type of company we are looking forward in executing our acquisition strategy. It's a family-owned business with strong niche offering, a market leader within its field, and it has a proven track record of delivering high-quality specialized products. The former owners, Teppo and Minna, they have retained 9.6% stake in the company, ensuring that their continued involvement and commitment to the company's success. Teppo will continue as a CEO and provide continuity and leadership as the company embarks on this new chapter with Karnell. And with, as all our acquisitions, our goal is to support Männistö's growth while preserving the core values and expertise. This exemplifies our strategy of acquiring and developing family-owned niche industrial companies with strong market positions with healthy profits. Moving on to wrap up. Solid performance in Q4, supported by organic growth and the resilience, even though it was challenging market conditions. Despite the dynamic market environment, Karnell closed '24 with a strong growth and strengthened portfolio through 4 platform acquisitions. While some of the industrial segments remain uncertain in the short run, the market outlook remains stable for our group companies with lower inflation and gradually decreasing interest rates boosting investment confidence, especially in the interest-sensitive sectors like constructions. We have a strengthened M&A team to further accelerate our acquisitions and support our 16 portfolio companies. We have extended the team with 2 investment directors, 1 based in Finland, in Helsinki and 1 here in Stockholm at the headquarters to reinforce our local presence and execution capabilities. With low debt levels, robust cash flow and a solid M&A pipeline, we are well positioned to advance our growth strategy and leveraging our proven acquisition and ownership model to identify and acquiring promising industrial technology companies. We are excited about the path that lies ahead. We eagerly anticipate continuing our growth journey and further solidifying Karnell's position as a leading industrial technology group. And with that, we open the floor to any questions that you may have.

[Operator Instructions] First caller is Max Bacco at SEB.

So perhaps starting with the cash flow, which was really strong here in the quarter and partly driven by working capital release. And I think you mentioned this partly during the presentation, Lars, that is this solely due to seasonality. Or is there something else in the numbers here in the quarter?

It is mostly seasonality. Q4 is our strongest cash flow quarter and both -- usually, we both see a reduction in inventory and accounts receivable. And I think that this quarter was -- it was strong, but quite normal, actually. And I think last year was extremely strong. So this was a more normal but strong quarter and more in line with what we expect pretty much.

Okay. Understood. And then also relating to the cash flow, I noticed here very detail-oriented question but that CapEx investments for you, at least quite high, some 5% of sales. Anything specific that you have done during the quarter here to know about?

Yes, there's a few investments that we've done in the machine park, especially in a few companies that we see a good growth potential in. So we have invested in the further strengthening our portfolio companies and capturing that growth that we see in those companies.

Okay. Understood. And then turning to the segments, focusing on the niche production companies. I mean as you highlighted here during the presentation, minus 2% organic sales growth is quite resilient on sales, but minus 33% organic EBITA growth, and it looks like the underlying margin in the organic units, I would say, comes down quite a lot here from a tough comparable. Is it -- I mean is it operating leverage? Is it mix? Is it price pressure? If you could elaborate a bit what's behind the margin decline here in the quarter? Or also, I mean, we have seen it for the full year, if you can add any flavor to that.

Yes. So go ahead, I think your question mainly relates to the niche production business unit. Is that correct?

Yes. Yes. Yes, exactly.

So there are numerous variables at play here. I would start by saying, as you alluded to yourself, that the comparables are extremely tough for Q4 last year was all-time high for some of these companies. So it was extremely tough. Second part, I would mention, again, as I mentioned during the call, October, November started off really strong. December was weaker than expected due to the longer or prolonged vacations that many took, and we could also feel that from a customer perspective. Second of all, it's been a bit tougher year in 2024, as in all for these companies, where we felt that it's been a softer market. I think it's a result of our customers. The ones, I should say, it's not a single customer, but it's our customers and we -- where we see the common denominator that many of those have products that are, one could say, CapEx intensive, that are now struggling at the end of the year a bit more. I think that's part of the investment cycle for larger companies that they also start to feel it's been a bit tough out there. It's just that they've hit the market or the decline has hit the market later on in that sector. I think we have made an active choice. As many of you know, we have 16 companies typically in rural areas where our key assets are our employees. And we have made an active choice in taking on a bit more lower margin type of business to see to it that our factories are still working at more or less full capacity, and that you can see in the top line numbers that those are more or less in line with last year's numbers, but the margins are down due to these choices that we've made. But that's also an investment going forward to see to it that we are in a position to capture the growth and especially then strengthening our market shares when the market starts to pick up again. And actually, that will have a time limit on how long we will do that because margin is key for us, but it's also key to manage and keep employees to the extent that we can. So I guess that's a bit more color to your question.

Yes, yes, indeed. And if I understood you correctly, I mean, right now or during Q4 since you have taken some lower-margin projects to keep utilization high. Could you comment on the length of those projects? I mean if you would see that the market turns up, how quickly could you replace the current low-margin projects with new higher-margin projects, if you understand?

I mean, again, typically in a more normal market, say that could go quite quickly because we typically, many of our businesses are -- again, we don't have volume production in more or less any of our businesses. So it's typically very customized and small products. So that could go rather quickly when the market starts to pick up again.

That's good to hear. And then the final one. I mean you mentioned here in the report, I mean, for the product company for the product segment, you have seen during the year and also in Q4, some early positive trends and for the niche manufacturers, a bit softer demand here during 2024 compared to 2023. So I mean if you have any comments, what you have seen here in the beginning of 2025 and what you hear in your dialogues with customers and so on, would be interesting to hear if you have anything more to add on that.

Well, a few things I could mention. I mean, as you know, we don't give any guidance. But again, to give you a bit more context, I think Q1, as we enter now, is the seasonality lowest quarter for us, and that's just the typical cycle of the industrial cycle, but that also makes it a bit more sensitive. We feel that some of the businesses have started off more in line with what we saw at the end of last year while some of the companies are doing very well and have a large interest and demand from customers. So it's quite a mixed picture out there depending on the customer and where the customer in turn have their markets. Yes. Thank you.

Thank you. There are no other questions.

Great. Then we thank you all for taking the time to listen to our presentation. And again, for institutional investors, please reach out to us at [email protected] or follow us at LinkedIn to see more of the updates that we provide to the market. With that, thank you for listening in, and have a good day.