Storskogen Group AB (publ) (STORB) Earnings Call Transcript & Summary

Welcome to Storskogen and our presentation of our fourth quarter and 2020. My name is Daniel Kaplan. I'm the CEO and Co-Founder of Storskogen. And together with me today, I have Lena Glader, CFO. This presentation will actually be in 2 parts. The first, with myself and Lena presenting our fourth quarter and how we're doing. And the second part, we will meet Peter Ahlgren, who is Head of our Business Area Services; Thomas Larsson, Segment Manager; and also Petra, who's the CEO of one of our business units. So let's get started and see how we're doing. If we're looking at 2020, the full year, it's been actually an extraordinary year. We had a 78% growth, EBITA growth, which we're, of course, happy with, especially considering COVID-19. We had a turnover of approximately SEK 8.9 billion and a 10% margin, which we're satisfied with. It's actually our target margin, you might say. We did 27 acquisitions during the year, out of which, 9 we did in the fourth quarter. And if we look specifically at the fourth quarter, we grew our EBITA with about 50%, which is also a satisfying number for fourth quarter. If we're -- and out of this growth we had, 1% was organic and the rest was through acquisitions, which is also along the lines of our financial targets, you might say, in -- especially in a tough year with COVID-19. If we look in more detail on how we're doing, I think 2020 has really been a year of a proof of concept for our business, our way of doing business. We had a good deal flow of interesting acquisitions despite that COVID-19 made the year a difficult one when it comes to acquiring companies with volatile learnings in the target companies, of course, which makes it more difficult to agree on, on the basis for valuation. That said, out of our 58 business units, we were -- 56 were profitable, which was about 97%. And considering the volatile year and the strange -- well, it was a strange year in many ways, I think we're very happy with that. If we look at our various business areas, we start off with trade, we could see that some of our companies, particularly aiming at home and private individuals working at home, those companies actually did well. We had the hair distributors. We had the wholesaler towards [ shoe ] stores, selling pet details and pet -- well, and pets actually as well as -- I mean those companies, they performed very well, whereas if you take Båstad-Gruppen, one of the biggest business units in this field, aiming with protective clothing and protective shoes for the professional industry, those were reasonably hard hit of -- during COVID-19. That said, decent profitability and overall a good performance from trade. If you look at -- in our industry sector, I mean, obviously, those companies were actually mostly affected during the first half of the year and had significant volatile environment where big customers, such as Scania and Volvo, basically discontinued operations for a while. On the other hand, we had a very strong industrial sentiment during the second half of the year, and they basically recovered. And in the end, we're happy with the performance of our industrial part, especially a few of our big business units, such as Swedstyle and ARAT Group -- and ARAT Gruppen is an automation company targeting the timber industry, I mean those were very successful during the year, and they also look well geared to have a good 2021 actually. If you take our service sector, we had a pretty even and strong demand during the entire year. They were less affected by COVID-19. A few companies, though, of course, suffered. That said, by the end of the year, we're having a cold winter, which is, of course, affecting our fourth quarter and also I think the first quarter now with a very cold ground which makes our contracting companies -- it's basically difficult to conduct infrastructure projects. That said, good profitability in the trade -- in the services sector and also a very rapid growth with a lot of acquisitions. And so we're looking forward to a strong 2021. That said, with 27 acquisitions this 2020 and we also -- the same number we had last year and more than 100 -- actually, going towards 200 businesses in our company. This means, obviously, that some companies underperform. So what do we do when we have problems? Well, first of all, we have to consider the strategy. Are we correctly positioned? Are we targeting the right customers with the right pricing models? Sometimes, we have to change leadership, change the CEO or add a CFO or something like that. Sometimes they have ESG issues and need to get their things together and get order in the company. And sometimes, it's cost reductions and stuff like that. However, we never give up. We have never sold or we've never discontinued a company. And out of our 58 business units, 56 were profitable last year, which is not due to luck, but rather hard work, as you can see. And, well, I think we're looking -- we're feeling very confident now about our ability to handle those problems that will arise. If we look a little bit about the acquisitions we've made during the fourth quarter, we did 9 acquisitions. Three were platform acquisitions, which are basically independent companies. One is MJ Contractor, which is an infrastructure company working here in Stockholm, a very successful company with a strong market position. We have Svenska Grindmatriser, who are doing integrated circuits. And finally, we have IVEO, which is a digital agency and e-commerce specialist and a great add-on acquisition to our new segment, digital services, our third acquisitions in that segment. So -- and then, of course, as always, lots of add-on acquisitions, a few like Ljus & Comfort i Åhus and Sunteam, they're on our sun protection part; Nordic Drilling Systems i Gävle, a specialist in drilling -- underground drilling infrastructure solutions. It's a segment we believe a lot in. So we're also working hard to enhance our company's market positions through add-on acquisitions. So if we look historically, we've had a very strong growth, 76% EBITA growth per year. And obviously, we're hoping to have a continuous -- nobody knows what the future holds, but we -- of course, we try to put the prerequisites in place to have the capacity for future growth. And if you look at what we're doing there, I mean, first of all, this year, we are in practice doubling the M&A organization. We are putting feet on the ground both in the Nordic countries, but also in our -- in Germany and Switzerland and Great Britain. So we have Philip Löfgren, CEO in Great Britain; and Mikael Neglén, Head of the DACH, the German-speaking Europe, you might say; and with also German CEO coming in next week with -- doing his first day. And hopefully, when we're looking at the Q1 report in a few months, I'll be happy to tell you a little bit more about the acquisitions on their way in the Nordics and in our new geographies. We're also always moving into new segments, getting an increased diversification and tapping new, exciting business areas. And we're also -- I mean, obviously, if we're buying a lot of companies, we have to take care of this. Our vision is to be the very best owner we can possibly be for these types of companies, which means that the business area organization has to be strengthened gradually, adding more industrial expertise and more also functional expertise. So that's a very exciting development. So, Lena, over to you.

Thank you. Thank you, Daniel. Daniel already mentioned, of course, the growth, profitability that were geared for future continued growth, et cetera. I will now try to dig into the numbers and trends for the fourth quarter primarily here. I'm trying to keep it -- I've been asked to keep it short, though. So starting off with the net revenue trend. As you can see in the bars here, there is a steady growth, obviously, in Storskogen mainly acquired growth. We had a particularly high growth in the fourth quarter, growing quarter-on-quarter by almost 20%, actually. And what is also clear here on the line that you can see is that the EBITA margin has been kept at a quite stable level of around 10% or slightly above 10% for the last past 3 quarters, Q2, Q3 and Q4. And that the profitability is, in fact, higher than the previous year despite difficulties relating to COVID, et cetera. What you can also see here is that the Q1 is seasonally, generally a weaker quarter both in 2019 and 2020, as you can see here. So this is proof of concept, again, of the diversification actually results in quite stable margins. If you want to dig deeper into the numbers, I recommend that you check out our Q4 report, which should be available on our home page in English as well, if not today, then tomorrow, I hope. So if we move on then to the EBITA level here. On these bars, we show on the 5 bars to the left, you can see the rolling 12 months EBITA. So that's the operating earnings before amortization. And we started off the year with an EBITA level of around SEK 500 million and we ended the year at around SEK 900 million. So that means that we grew by around SEK 100 million each quarter. And the bar to the far right shows the pro forma EBITA. So that's as if we'd owned all the subsidiaries the entire year. We now reach a level above SEK 1 billion. So that's kind of a milestone for us, closer to SEK 1.1 billion, actually. And if we then look at some key performance measures here. We've been growing, as you know. And we are profitable, as you know. And here, I'm trying to show that growth per se doesn't add much value unless you can actually produce a good return to investors and other stakeholders. And so on the top 3 rows here, we show how the subsidiaries have performed operationally. And starting off with cash flow, which is one of my key metrics, it shows that the Q4 is generally quite a strong cash flow quarter. But even looking at the entire year, the full year, we grew cash flow from operations by 90% approximately. And the cash generation or cash conversion rate is slightly higher than last year of about 67% for the full year 2020, close to 100%, actually, for the fourth quarter. So that means that almost all EBITDA operating profit turned and converted to pure cash flow in the fourth quarter. And then we also include here return on working capital. And as you can see here, the return on working capital was kept quite stable at around 82% in the full year 2020 compared to 81%. So approximately the same level in 2019. And this metric is important for us, especially during a demanding year such as 2020 with COVID-19, et cetera. So we've really worked hard with the companies to maintain a good capital efficiency and cash flow conversion. And it actually has proven that our measures are working and our subsidiaries are working quite hard with this. So on the bottom 2 rows, we show the group return, first of all, return on equity, which is obviously higher than in 2019 when it was 10%. As for a growing company like Storskogen, this return metric tends to be a bit dilutive because we make share -- quite significant share issues to fund our growth. And this metric was obviously also a bit diluted by the SEK 2 billion share issue that we did in 2020. And on the bottom row here, we have return on capital employed, which was kept stable around 10% in 2020. So finally, we have a look at the balance sheet here. On the blue bars show the balance sheet total and the light brown bars show the shareholders' equity. Obviously, the total balance sheet is growing as we are acquiring companies and funding them partially by external loans. And the line here shows the net debt to EBITDA, so the leverage basically of Storskogen. And we increased -- the net debt to EBITDA was increased slightly during the fourth quarter from 1.3 in Q3 to 1.8 in Q4, obviously, as we are growing and increasing our debts. But this picture also shows that there is still comfortably room for further acquisitions and further growth because not least, all acquisitions that we make actually do generate profits as well. So they actually strengthened the balance sheet. So there is still plenty of room for continued acquisitions, basically, that's the main point. Thank you.

Thanks, Lena. So in conclusion, I think 2020 is obviously a very strange year and a tough year. But I'm very proud to say that the business unit CEOs, they have done an excellent job in producing an organic growth this year. When it comes to acquisitions, with 27 acquisitions, we're -- Storskogen is obviously doing acquisitions very systematically. And so it's no coincidence. We're doing -- if other companies do sales, we do acquisitions. So it's no coincidence with the growth. But that said, it wasn't an easy year to be successful on the acquisition front, and I have to say we've been so. And if we look at our companies and their -- I mean we have a good, consistent profitability across the board. We had a strong growth in profitability in -- overall. And I think -- I mean our agenda is to have as low as operational risk as possible in our business units, whereas we are on top as a -- when it comes to creating shareholder value, we want to present you a really strong EBITA growth, and I -- it's been a successful year in that way. I should say we've had a strong support from investors and you, shareholders. In the midst of COVID-19 in the second quarter, you really supported us. And actually, we have 500 employees and company sellers and CEOs who are shareholders in Storskogen and invested a significant amount of money. So that's obviously shows a great commitment and also improves their engagement level and their contribution to Storskogen in lots of different ways. So it's a truly strategic factor to our success. If you look ahead, obviously, we are now a big company, which means that we have to implement a lot of different policies, structured processes and also an organizational layers to do that professionally. On the -- in contrast to that, we need to retain the strong culture of entrepreneurship that permits the entire organization. So that's obviously a challenge. If we're taking our growth, this means that we have to recruit a lot of people. This -- we attract better and better people, but they have to understand and buy into the Storskogen culture. And we will have various -- it's the complexities of all parts of the organization growing together with our challenges, and that's a difficult part to get that right. So the other part is, of course, international expansion. As we're moving along now, we're buying companies abroad, potentially up to 8 countries by the end of this year. This means that we have to work across cultural boundaries and produce processes and organizational setup that works internationally. So that's a challenge as well as we move along. And finally, as we said, we're a big company. If we want to continue to grow rapidly and to capture this greater business opportunity that we see, we need access to capital. And this year will be the year where -- hopefully, where we can establish a platform both for getting equity into the company, but also complementing that with good side, with relationship with banks and banking consortium, but also other type of lending instruments where we can be successful to fund this capital into our growth. In conclusion, a fantastic year. I'm extremely proud of all my coworkers out there who have done an extraordinary job. It has not been an easy year to produce this kind of result, this kind of even performance across the board, it's something extraordinary. So thank you all of you, employees and the shareholders who've contributed this year to our success. Looking forward, of course, to 2021, which will be a truly exciting year. Thank you.

Indeed. Thank you.

Welcome to Storskogen's presentation of the fourth quarter. We're now going into the second section where we'll discuss together with Peter Ahlgren, who's Head of our Services business area; and Thomas Larsson, heading up our installation and painting segment today. So if Thomas, you can stand on the side. I'll ask you, Peter, first. Tell me a little bit about yourself.

My name is Peter Ahlgren, living in Stockholm, married, 3 kids. And in short, my background, I started off as a management consultant at Accenture where we met originally. And after that, I've been in general management, working for smaller and midsize companies as CEO and CFO and as well have an entrepreneurial period where I cofounded about 10 companies before joining Storskogen.

All right. So tell us a little bit about our business area services. It's our biggest business area.

Yes. Actually, it's about not really 50% of the turnover, but almost. And we have I think about end of December, we had 28 business units. And now already here in February, it's 36. So we have been quite busy in the first quarter here as well. We have a quite broad spectrum of segments from infrastructure and installation to digital services and education. So I think we have a pretty broad spectrum of companies to choose from. That is why we have had a quite a rapid growth as well. Yes.

So you mentioned you have rapid growth, you bought a lot of companies. But buying the company is the small part, taking care of it is the big part, and that falls into your lap.

Yes.

How do you do that?

Yes. Foremost, we have an organization working with me with head of segments. As you mentioned, Thomas is head of installation. We have 3 more head of segments and we have as well 3 investment managers. So we have an organization working with all the companies. And foremost, when we come into a company, we agree on a business plan with the management to ensure that we have an alignment of interest and a common goal. And usually, that's on a 3-year horizon. So we try to look a bit further ahead than just here and now. And then we work with the company to fulfill that plan. And that could be by acquisition of add-on companies, as you will speak to Måla later on, which is one of our companies where we have done a lot of add-on acquisitions. And it could be the other things as well, but we are supporting our companies to make sure that we reach our goals basically there.

So obviously, when we buy companies, sometimes they're successful, sometimes they go less well.

Yes.

What are the typical challenges and upsides when it comes to services companies?

I think generally, if comparing to the other business areas and taking last year, as an example, with the COVID situation, I think there has been a greater stability basically in the services segment, not going down as much, not up as quickly as well. And I think one of the companies have projects with quite long durations, it could be 1 year or half a year, which make them pretty resilient to rapid changes as an upside. Taking the risks in the company -- I mean in service companies which were very HR intensive. And then we have I mean all kind of personalities which we need to attract talent and keep talent and make sure that a key individual stays in the company. Yes.

A short word on your various segments.

Yes.

You mentioned them, but maybe just a few more words.

Yes. We had -- the largest segment is the infrastructure segment where we have a group of mainly land contractors. There's about 16 companies there now. After that, we have the installation segment, which Thomas is heading up, which is next to the largest with -- we have electricians, plumbers, painters, more of that we will speak to later as well. And we have a group of logistics companies and we have an engineering service segment as well as the 2 latest add-ons in -- when it comes to segments, our digital services and educational and HR services.

All right. So if we look into the future, what do you see there for the services business area?

I think we will continue our growth when it comes to the -- on the acquisition side. We had, as I mentioned, a quite rapid growth last year with 18 acquisitions. And here in February, we have already concluded I think it's 11 acquisitions. So we are continuing on the same path there. When it comes to the economic climate, it's -- I think it's not really good. It's not really bad. It's somewhere in the middle. And we have had a pretty challenging start from one of the companies when it comes to the pretty cold winter we have had here in Sweden with -- for the land contractors, it's pretty challenges to -- challenging to pursue their work in an efficient way. But I think it's -- we're looking forward to a good year.

Thank you, Peter, for your contribution today. And now we'll continue to drill down into the services business area, and we'll meet Thomas Larsson. Welcome.

Thank you.

So Thomas is the head of one of our business segments, installation and painting. Tell me, who are you?

My name is Thomas, Thomas Larsson. I'm working and heading up the installation business, as you mentioned. Born and raised here in Stockholm, Sweden, 2 kids, marriage pending, still discussing whether we should aim at investing in the house or getting married, we'll see about that.

Okay. So -- and what's your professional background?

Basically, this is my third step in my career. My first was basically working as a management consultant for a number of years within Deloitte consulting and Centigo, which is a Swedish-based business. And for the second part of my career, I've been working as a CEO in a little start-up that is actually in the vicinity of the installation services business and with roots from where you and Peter also had this business incubator back in the day, so that's where I met you guys.

So I've actually been the Chairman of the company for 10 years and Thomas was the CEO. So we know each other pretty well.

We enjoy working together.

Yes. I hope. Yes. Exactly. I guess we wouldn't do it this for another 10 years, if not. So that's great. So our installation and painting business, tell us about that.

Yes. It's growing. So I started here pretty much exactly 1 year ago in connection with you acquiring Måla, you will meet them later. And by that time, you also already owned a couple of installation businesses. And you -- I think you felt that it was an interesting area for Storskogen to invest in. So I basically spearheaded that initiative. And we've been growing it from there on. And as of January this year, we basically are running a SEK 1.7 billion business, and we are -- we've got pretty much 1,000 people employed within the installation service and painting, painting being the biggest one.

Wow. That's cool. Yes. So if you tell us a little bit more about the companies...

So basically, we -- in installation services, we have pretty much 3 parts. Måla is one of them, and you're going to meet them later. And we have basically plumbing services and pipeline replacements with Tepac and Rörexpress based here in Stockholm. And we have our electricity businesses in Elcom, we just mentioned. And we have Växjö Elmontage, Vetlanda El & Projektering. And we have a nice setup on the West Coast with Agnesbergs Grävtjänst i Kungälv and recently acquired Örnsbergs El & Data, Tele here in Stockholm, a very successful company with electricity services, but also with BMS where they are very technically advanced with keeping real estate online. They are working closely with SISAB and maintaining 600 real estates.

Yes. So Internet of Things.