Stockholm Nordtech Group AB (NTECH) Earnings Call Transcript & Summary

[Operator Instructions] I will now hand over to CEO, Nils Bergman. Please go ahead.

Good morning, everyone, and welcome. I'm Nils Bergman, CEO and Co-Founder of Nordtech, and with me today is Per Asplund, our CFO and Deputy CEO. This is our first report as a listed company, so a special welcome to everyone joining us for the first time. A quick word on how we'll run today. Since many of you are new to Nordtech, I'll start with the company in brief and the 12-month trend. Then the highlights of the quarter and how we measure value creation, how we take the financials, more did. So the group, our segments, cash flow and balance sheet and the financial targets. And after that, I'm back on acquisitions and how we built the group from there, and then we'll open up for your questions. For those of you new to Nordtech, we are a long-term home for niche B2B software companies in the Nordics. So our companies make the systems, customers use to plan, monitor and stay compliant with. So software that sits on the core of how they operate. We acquired and accelerate profitable, high recurring businesses. So 86% recurring revenue, and we developed them under decentralized ownership, keeping the autonomy that make each company work while adding a shared structure, it couldn't be low. We're building the owner, we ourselves would have wanted as entrepreneurs, which is why we will never centralize the brand and the customer relationships for instance. And these are niche leaders, top 3 often #1 with must-have, not nice-to-have solutions. And since 2021, we bought 24 companies into the group. We are around 430 people today across 3 segments with no single end-market dominating. Taken together, these businesses have grown and stayed profitable through more than 2 decades and several downturns. That's the kind of company we look for when we acquire. The strategy is simple but disciplined, grow the companies, generate cash, reinvest it. Over time, that is what strengthens cash flow per share and our adjusted EBITDA share per target with strong cash conversion is how we hold ourselves to it. Before we get into the quarter, I want to start where we always start ourselves, the rolling 12 months. Individual quarters will move around. The trend is what we manage. And on a 12-month basis, the trend is clear. Net sales of SEK 705 million. Adjusted EBITDA of SEK 199 million, up 58% on the year before and a margin of 28%, up from last year. Revenue growing, earnings growing faster and all of it underpinned by recurring revenue. That's the right-hand chart. The ARR base has grown every quarter from the companies themselves and from the ones that we add. And that's what makes this trend durable. So that's the backdrop. Now let's look at the quarter. This was one of our strongest quarters yet, and importantly, the strength was broad. Growth, profitability, cash generation, all at levels we're pleased with. And the IPO added balance sheet strength on top. And this combination is the whole idea behind Nordtech. In June, we listed on NASDAQ Stockholm broadening our ownership base, strengthening the balance sheet for continued expansion. It's a milestone on our journey, but it doesn't change how we build Nordtech. Net sales rose 50% to SEK 198 million, 9% growth was organic. The rest was acquired. And the organic growth strengthened from 7% in the first quarter on resilient business critical demand in the niches. ARR grew 45% to SEK 678 million, and adjusted EBITDA grew 45% as well to SEK 53 million. And adjusted EBITDA grew meaningfully faster than net sales organically. So high gross margins and a cost base that grows more slowly. Recently acquired companies, they pulled down the quarter's margin down slightly. But as I showed you on the 12-month view, the underlying margin trend is up and same for the 6 months of the first 6 months of this year. One thing you will see in this morning's report, our reported operating profit and earnings are down in the quarter, and that's mainly the listing costs, about SEK 15 million in the quarter, SEK 30 million for the half year. those are one-offs and behind us, and Par will give you the full ones. Everything else here is the underlying business. Cash conversion after CapEx was 95% over the last 12 months. And after the IPO, net debt sits at 0.4x. So plenty of room to act, and we did. So on acquisition and add on the quarter. And the growth we just saw it comes with right quality. We track that in one combined number, the return on the capital we invest, plus the organic growth on top. Together, they come in just over 22% above our over 20 target. It's a measure that we watch over time, not necessarily quarter-to-quarter, and it tells us something simple. The companies we own, they become more valuable, not just more numerous. And on that note, I'll hand over to Par, who will take you through the numbers.

Thank you, Nils. Let's go through the numbers a bit more in detail. Net sales grew by 50% in total, of which 9% was organic and 41% acquired. All 3 segments grew and the vast majority of companies grew year-over-year. Growth in recurring revenue in the first half of 2026 was primarily volume driven. It came largely from new customers, while the price effect was marginal. Adjusted EBITDA came in at SEK 53 million, up 35%, with a margin of 26.5% in the quarter, down 0.9 percentage points year-over-year. Our more recently acquired companies are coming in well, supporting the growth of the group. And comment on margin development, we often see mix effects in the EBITDA margin from newly acquired businesses. On average, we acquired companies with strong margins in the low to mid-20s, which can be below the group average. Then looking at our companies over time, our group companies over the last couple of years have had a margin of a bit over 30%, excluding central good costs. We focus on year-to-date and LTM figures where the underlying margin development is up year-over-year. Organically, gross margin does to work here. So revenue growth carries high incremental margins, while the cost base grows more slowly. And before we go into the segments, the details Nils referred to, reported operating profit is down in the quarter. The difference to adjusted EBITDA is around SEK 80 million of items affecting comparability. Roughly SEK 15 million listing costs, which are one-off. And after an estimated additional SEK 2 million in Q3, this will be completed and around SEK 3 million mainly from revaluations of contingent considerations. These are noncash and they can move in both directions. So reported SEK 35 million plus these items take you to SEK 53 million of adjusted EBITDA. And as Nils mentioned, we managed to group companies in 3 operational segments, each group in companies with similar business models and comparable peers. So operational solutions, workflow and automation software, some with hardware content, then we have business platforms, commercial, financial and administrative systems, and lastly, public infrastructure offerings aimed at public sector. On a full year 2025 basis, the split is roughly 38% business platforms, 37% operational solutions and 25% of it infrastructure, though the mix is shifting as the segment grow at different rates. And the segmentation lets you benchmark each company against the right comparables. So we'd encourage looking at the development within each segment as compared to between them. In Operational Solutions, made up of 8 companies, net sales grew 8% -- 80% in the quarter with 115% growth in adjusted EBITDA. The margin strengthened almost 4 percentage points, driven by both a strengthened underlying margin and higher margin profile on a recent acquisition. ARR grew 70% and hence somewhat lower than net sales. And Operation Solutions has the most companies offering hardware components often sensors within their software offering. And when these companies win new customers, often large contracts, where the installed base of sensors is an important part. Operational Solutions also have several companies with an ongoing internationalization agenda, for example, be systems, BM Systems, MCD and FinMeas. Business platforms is made up of 6 companies where Idus is the most recent addition from the first quarter of this year. The integration is completed through our 100-day program, and Idus contributed according to plan in the quarter. Net sales here grew 31%. ARR grew 27% and adjusted EBITDA, 29%. The growth in the segment being very much recurring revenue and not one-off. Lastly on Public Infrastructure. This is made up of 5 companies with products and services aimed towards the public sector. The add-on acquisition in Q2 was completed within this segment, as Nils will come back to shortly. Net sales grew 41% in the quarter and ARR grew 45%, with adjusted EBITDA growing 7%. The margin declined around 7 percentage points, mainly the M&A mix effects that I mentioned earlier and partly investments in the segments companies. A few points on cash flow. So operating cash flow grew 16% in the quarter and 58% year-to-date, excluding the listing costs. Cash conversion measured as operating cash flow after CapEx over EBITDA was 91% in the quarter and 95% LTM according to plan. The new share issue in the IPO contributed with SEK 400 million in financing activities, which was offset as we used the proceeds to repay outstanding debt before activating the new debt facility. And for Q3, we have planned outflows for earn-outs and good call options of approximately SEK 54 million. Part of this could flow into Q4 depending on the exact time line together with the respective sellers. And following the IPO, net debt to adjusted EBITDA is 0.4x, and that includes then earn-outs, minority commitments and IFRS lease debt. This is a conservative definition, which is deliberately from our parts. The new acquisition facility has no amortization and materially better interest margins. So we see that, that will benefit cash flow available for investments from Q3 and onwards. And rounding up with the financial targets. So ROIC plus organic growth and leverage you've already seen. The third one is adjusted EBITDA per share on an LTM basis, which is at 53% above the target of 20% over time. It's calculated on the average number of shares. So the June share issue, and we partially entered this quarter's average, and the per share figures will normalize in the coming quarters as those shares are fully counted. And also on the dividend side, Nordtech will prioritize reinvesting cash flow into acquisition opportunities over dividends in the medium term. So to summarize, all 3 targets met or exceeded. And with that, back to Nils on how we keep it that way.

Thank you, Per. So with the listing behind us, our focus is back where it belongs on the basics, growing the companies we own and finding the next one to join us. That's the work that built this group, and it's where our time goes now. So growth in our model, it comes from 2 places. The companies grow organically in their niches, and we add new companies to the group. The runway here is long. In our size segment alone, there are around 1,100 niche software companies across the Nordics and new ones are founded all the time. around 800 of them met our selection criteria. That's the long list. And from there, it narrows sharply. So at any given time, we're in live discussions with only handful. Not all of them will land. Walking away is part of the discipline. We've averaged 4 to 5 acquisitions a year since started. Today, we found that pace with our own balance sheet. And from September, we're strengthening the team with an additional dedicated M&A resource so more capacity to work the long list. This quarter, we brought mid-school roll into Optiplan, joining 2 of Sweden's leading digital school choice operations. It strengthens Optiplan position and adds to recurring revenue and profitability. It's a strong business and a good example on how we build category leaders, the right add-ons that can make a nice leader to clear #1. Capital is not the constraint. Quality and price determines the pace. Good owners, they choose us a fair price matters, of course, but what they really choose is the home we offer and the journey we build together. And together, our work starts at the moment we come in as owners, always with a 100-day plan. A company first contributes its own cash flow, then we strengthen it step by step. Capital stewardship, pricing, commercial discipline and increasingly AI. On AI, there are 2 sides in the products as our companies build AI into what they sell. They solve more of the customer that supports pricing and deepens the stickiness these businesses already have and the share of companies offering AI functionality to customers have now reached 70% and several are already selling features as part of their offering. And then how we'll build. So we're moving the group towards AI first development. Our assessment is that the majority of the group will be working first by the year-end. So prompting code instead of writing code, the firsthand supporting faster development at lower cost. So a strong first report as a listed company and the growth was broad across all segments. Organic growth was resilient, led by volume of new customers and existing ones buying more. Organic earnings grew faster than sales. The balance sheet leaves us room to keep going and AI is increasingly a part of what our companies sell. We're delivering against all 3 financial targets today. What matters is sustaining them and that comes down to 3 things we work on every day: keep building the companies with profitable organic growth, keep adding acquisitions without overpaying and keep the cash conversion that funds it all. Demand in our niches has historically held up well through cycles. These are systems customers depend on day-to-day. And because much of the group joined us recently, most of the value we integrate is still ahead of us. That gives us a strong base for continued organic growth and plenty to work with on the acquisition side. So the companies grow and they generate cash and that cash flow funds the next acquisition, which compounds over time. resilient growth, high quality and the firepower to keep going. With that, we will open up for questions.

[Operator Instructions] The first question comes from Predrag Savinovic at DNB Carnegie.

Can you hear me?

Yes.

Very good, very good. I have a few. Well, let's start with the organic growth, improving in the second quarter, and you specifically state that it's volume driven and driven by new customers and so on. In which areas do you see these increasing customer wins? And what types if you can specify that?

I'll start, and maybe you can fill in. So overall, this is broad across the portfolio. So it's, as you say, this growth is led by volume largely from new customers and then followed by existing customers growing more. So a small dependency on price increases. And I think that's the way how we break it down in these communications.

All right. And then speaking of the pricing effect that has been marginal, could you quantify how much this has been and also what your strategy regarding pricing is going forward on an annual basis?

Sure. So I think in connection with the IPO, we disclosed these figures. Was it shy below 10% or a little bit above...

11%.

11%. And I would say that's a quite representative figure for how it looks today. So where we are right now and how we build our companies, we are focused on making our companies the absolute leaders in those niches. So taking market shares. And I think on the subject of pricing, it is a very fair question to ask. We don't want a line on it to have our growth because price increases are after one-offs, and it can also test the goodwill of customers. So it's there. We do have the price power and are able to use it 1 day, but where we are at now focusing with our customers, it's more on the sort of indexation of contracts rather than big price spikes.

Okay. Very good. Your sector colleague, [VTech] reported a few weeks ago, and they stated 2 things which we find interesting also in the context of your business. So first, they say that they saw an accelerated demand across some verticals in the second quarter compared to the first one. Are you seeing something similar across your space?

Par, do you want to take this one?

Yes. I think generally speaking, and as we mentioned earlier, the growth is coming from all segments, and we see that across the vast majority of companies. There are, of course, natural time effects quarter-wise in terms of when these customers purchase enterprise software, and I think that could be an effect. But overall, we would say that we see a strong demand as we've seen in previous quarters as well.