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

Good morning, everyone, and welcome to Karnell's Fourth Quarter and Full Year 2025 presentation. I'm Petter Moldenius, the CEO of Karnell. And with me today, I have our CFO, Lars Neret. As usual, I'll start with an overview of the quarter and give you the key developments during the year. Lars will then walk you through the financial and segment performance in more detail. After that, I'll return and summarize the year and the outlook before we open the floor for any questions you may have. For those of you who are joining us for the first time, Karnell is an active a long-term owner of industrial technology companies. We acquired a small to medium-sized businesses with strong positions in niche markets and develop them through a decentralized model combined with disciplined capital allocation. Today, the group cost is of 18 companies across Sweden, Finland, U.K., and we have roughly 750 employees. With that, we will turn to the fourth quarter. The fourth quarter showed continued profitable growth and strong cash flow generation. Our net sales increased 14% to SEK 461 million, including around 7% organic growth, which is an improvement compared to the full year level. EBITA increased 24% to SEK 62 million, corresponding to a margin of 13.5% compared to 12.5% last year. Both businesses or both business areas contributed positively. Niche production delivered a particularly strong quarter with improved profitability, while our product companies showed stable performance supported by the recent acquisitions. Cash flow from our operating activities was SEK 131 million, a significant increase from last year, reflecting higher earnings and a release of working capital during the quarter. Net debt to EBITDA remained low at 1.2x, providing continued financial flexibility. Overall, the quarter confirmed strength of the business model, combining organic growth, margin improvement and strong cash flow generation. Taking a step back, looking to the full year 2025, I would characterize it as a year of strong execution. Our net sales increased 20% to SEK 1.7 billion with an organic growth of shy of 5%, namely 4.6%. EBITDA grew 40% to SEK 233 million with a margin improvement to 13.8% compared to 11.8% last year. Cash flow from the operating activities amounted to SEK 220 million, reflecting strong earnings quality across the portfolio. During the year, we completed three platform acquisitions. We are satisfied with the quality and the strategic fit of these transactions. And as always, our focus remains on disciplined and selective execution rather than transactional volume. Overall, the development during 2025 shows continued progress toward our financial targets while improving profitability and a strong financial position. And with that, Lars will go through the financials more in detail.

Thank you, Petter. If we then look a little bit further into Q4 and start with the breakdown of net sales on the left here. Net sales increased by 14% to SEK 461 million, of which organic growth was 7%. Acquisitions represented 11% of the increase and currency effects were a negative 3% in the quarter. EBITDA increased by 24% with an organic growth of 11%. And if we exclude the central costs and only account for our two business segments, we had a combined organic growth of 17%. Acquisitions accounted for 28% of the growth and currency effects at negative 3%. And the markets have continued to stabilize, and we are happy to see both the strong organic growth in the quarter, as well as a solid contribution from our acquisitions. And the EBITDA margin increased 1 percentage point from 12.5% to 13.5%. Looking at our business segments and starting with product companies. Sales increased by 19% to SEK 252 million. The increase came from acquisitions with 21% and organically, sales were pretty much flat compared to last year. EBITDA increased by 19% to SEK 38 million, of which 27% came from acquisitions, and organically, EBITDA decreased by 7%. The EBITDA margin was at the same level as last year at 15.1%. And product companies had a relatively stable quarter compared to the very strong Q4 last year. The development was mixed within the segment with some sectors outperforming last year and some developed a bit softer. Our latest acquisition continued their strong performance in the quarter. For our niche manufacturers, sales increased by 9% to SEK 210 million. The organic increase was 14%, and currency effects were negative 5%. EBITDA increased by 37% to SEK 36 million and organically by 45%. Currency effect impacted with minus 8% and the EBITA margin increased from 13.6% last year to 17.1% this year. And for niche manufacturers, the market showed some higher activity in the fourth quarter, and we saw both sales increase and profitability improvements, which resulted in a good development in the margins. Moving on to cash flow and cash flow from operating activities was strong in the quarter, an increase from last year on a rolling 12-month basis, as well as for the fourth quarter year-over-year. For the quarter, we had higher profits than last year and also a release of working capital that affected the cash flow positively. As you have seen, we still have seasonality in the cash flow, where we generally build up working capital during the first three quarters and then see a release in the fourth quarter. And as we have mentioned earlier, working capital is a focus area for us, and this is something we will try to even out over time. And since we are also summarizing the full year, we have had an extra slide showing the development of cash flow from operating activities, as well as EBITDA from 2021 to 2025. And here, we can see that even if we have the seasonality in the cash flow quarter-over-quarter, the cash flow generation year-over-year is well in line with the EBITDA growth for the group. And on to our capital structure and net debt. So net debt has increased compared to last year due to the acquisitions we've made, but compared to Q3, it decreased almost SEK 100 million. The leverage remains low at 1.2x, which gives us a lot of headroom for additional acquisitions. Back to you, Petter.

Thank you, Lars. So let me then conclude. 2025 was a year of strong execution, double-digit growth improving margins and solid cash generation. Both business areas performed well, with particularly strong profitability development in niche production. Our financial position remains strong with a net debt to EBITDA of 1.2x, providing good capacity to continuing and executing on our acquisition strategy. The market condition remains cautious but stable, and our focus is unchanged. Operational improvements in existing companies, combined with disciplined capital allocation and selective acquisitions. With an active and expanding M&A pipeline, we entered 2026 with good momentum and a solid foundation for continued earnings growth. Thank you for joining today's presentation. And with that, we will open the floor for any questions you may have.

[Operator Instructions] The first caller is Max Bacco at SEB.

Well done in the quarter, very pleasant to see the cash flow, especially. So a couple of questions from my side. perhaps starting with the niche manufacturers, very nice organic sales growth in the quarter, both on top line and even more so on earnings. Would you say that, are there any specific subsidiaries or end market or any customer segments that is driving that? Or is it more broad-based and a recovery after a slower 2024?

Yes, it's more broader, I would say, across all companies are performing well in the niche production area. So it's across the base. And would agree that it's also partly a recovery from a somewhat tougher climate during Q4 last year.

Okay. Understood. And then moving on to the other segment, product companies. I mean, as you said, a quite stable quarter, 7% organic sales growth and minus 7% organic earnings growth, but in absolute numbers, minus SEK 2 million, so not that dramatic. But would you say that the organic earnings decline is more a question of timing, mix and I guess, to some extent, as comparables from Q4 last year? Or is it that you, on an aggregated basis, see a slightly softer market here in the end of 2025?

I think a particular quarter and just looking at SEK 1 million here and there is probably -- it's difficult, as we see rather small, especially if you divide the business units into quarters. So I think if you look at the full year, it's rather flat across the board for our product owning companies. While there is a spread in terms of some of them are performing exceptionally well and some has had a bit of softer markets. So it is a little bit varieties across the product owning companies. But in general, we're quite pleased still with the performance over the year with some top line organic growth, even though it's rather flat. So yes, it's difficult to give you one example because it's a bit divided picture between the companies and their end markets.

Okay. Understood. And on that topic, I mean, you stated here going into 2026 that generally you see improved market momentum compared to the start of 2025. The same question then, any specific end markets or customer segments that you are perhaps a bit more excited about or on the opposite that you see are a bit more challenging, just to get a better detailed understanding of the exposure.

So I would say, I mean, in general, we feel a more positive momentum going into 2026 versus 2025 when we're standing here a year ago. That is, of course, and you can see that in the numbers in the quarter, right, that the organic growth is strong for sure, and we are carrying some of that momentum with us going into 2026 on one hand. On the other hand, the M&A activities, we've been investing heavily in the team over the last 2 years. That is really starting to also pick up momentum, and we have a more healthy pipeline -- M&A pipeline than we had in quite some time. So -- and with the strong balance sheet we have and a 1.2x leverage, there's plenty of headroom to continue on executing our strategy there. So I guess that's sort of summarize the momentum we have going into '26.

Yes. Sounds promising. And on the topic of acquisitions, you actually mentioned it in the report that during the Q4 -- quarter, sorry, you decided to walk away from an acquisition. Why -- what's the background there? Interesting to hear.

So we're always -- I mean, we're trying to be very disciplined around M&A, and it's not about how many acquisitions we do. It's about that we're doing the right acquisitions. And in the end, in this process, which was a quite lengthy and in-depth DD from our side, but as it is with these due diligence processes, many times, we are not allowed to access customers and management team until the very later stages of the process. And that was the case here. And when we started to meet with customers and employees, we quite quickly understood that this company is not aligned with sort of what we want to see, the attributes we want to see when talking to customers and with employees about how things are progressing and where the momentum is going. So even though we spent close to SEK 1 million, it was better for us to back out of that transaction and take those costs, but it's better to step over those type of situations than continue. So it's important that we keep disciplined and that's what we did in Q4.

Okay. Sounds reassuring. And then two final questions on the cash flow. I think it was you, Lars, you mentioned it during the presentation, you also wrote it in the report that an ambition going ahead is to generate a bit more even cash flow throughout the year and perhaps not push everything to Q4. And of course, that is very much due to the nature of the different subsidiaries. Could you talk a bit about how you intend to do that, both the seasonality of it, but also in general, I mean, looking at the full year, I think you tied up some SEK 30 million in net working capital during 2025. Of course, you grew organically to some extent, that's quite reasonable. But overall, what activities have you implemented and plan to implement to perhaps improve the cash flow profile a bit?

Yes, absolutely. And as you mentioned, the buildup of working capital over the year is pretty much attributable to the growth -- organic growth for the year. And yes, so we still have the seasonality, which is due to a couple of entities within the group. So one item is, of course, sort of an organic change where the last acquisitions we have made, for example, don't have this kind of seasonality effect. So that will decrease a little bit due to more sort of nonseasonal companies that we acquire. But we focus in general, a lot of working capital and especially, of course, of the core working capital, accounts receivable and inventory where we try to be more efficient in handling those items. Those are -- there's a lot of different focuses, of course, for different companies, but those are the main focuses. So we have a couple of written questions. Where are you seeing more potential acquisitions coming in 2026, U.K. or Sweden or Finland?

Yes. So the pipeline is rather broad. It's broader than before. So I think we have a fairly good distribution. So we are having a healthy pipeline across the Nordics in Finland, as you mentioned here as well. U.K., for sure, but also Italy, where we're also, again, seeing more of the leads coming in and the work that we've been doing for the last two is starting to generate concrete leads and processes. And with that, we don't have any further questions. And we thank you so much for joining us today. And for your institutional owners or investors out there, you're happy to contact us at [email protected] if you have any further questions. With that, thank you for joining the presentation.