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

Hi, and welcome to Storskogen and our quarterly presentation for the second quarter 2021. My name is Daniel Kaplan. I'm the CEO and Co-Founder of Storskogen. Together with me, I have Lena Glader, CFO. Today, we'll, as usual, have 3 sections, presentation of the quarterly report. We'll go deeper into our business area Trade together with Christer Hansson, who's heading that business area as well as with Jonas Cedås, who's the CEO of Båstad-Gruppen, 1 of our business units. So how do we perform in the second quarter? We had a very strong quarter. We had a 32% organic EBITDA growth. We did 25 acquisitions. And the focus for the quarter has been truly the organic growth. We've had a high acquisition activity in general, both internationally with a significant increase in deal flow. We also conducted, like we told you in the last quarterly report, a capital injection during the latter part of spring. And in the end, it turned out to be SEK 3.7 billion in new equity being brought into the company. We're continuing our international expansion, setting up our teams in DACH and the U.K. and through the acquisitions, we're currently active in -- with 7,000 employees, in 21 countries. So things are really moving along. If you take the quarterly numbers, we had a turnover of SEK 3.8 billion. And an EBITA of SEK 383 billion (sic) [ SEK 383 million ] adjusted. And this actually brings us up together with all the acquisitions, including a few that are not yet closed but signed up to SEK 2.25 billion in run rate as we would -- if we would have owned all of these companies for 12 months. Moving ahead, Lena.

Thank you, Daniel. Well, as you heard already, it was a very active quarter for Storskogen to say the least. Activity was seen basically in 2 areas. One is the organic operational activity that resulted in -- with strong pent-up demand among customers, strengthened market positions in almost all business segments, and then work with cost control and cash flow management that resulted in very strong cash flow and solid profitability as well. And you can see this in the organic sales growth that was 21% in the second quarter compared to the second quarter last year. We had, as Daniel said, a total revenue of SEK 3.8 billion in Q2. And in the last 12 months, our owned period, the revenue was SEK 11.5 billion. And the work with the cost control and profitability and the strong tailwind that the companies had also resulted in a solid EBITA margin -- adjusted EBITA margin of 10% in the second quarter. It might seem here as though the margin actually fell compared to last year, but bear in mind that last year was -- the profit last year included some government grants related to COVID-19 that actually represented approximately 1 percentage point of margins in Q2 last year. So actually, fundamentally, it was a margin improvement compared to last year. And then finally, we had very strong cash flow, as you can see here. We have worked hard with cash flow throughout this year and last year and resulted in a cash conversion rate of 175%. Now this is an exceptionally high cash conversion in Q2. Looking at the last 12 months, the cash conversion was 111%, so that's also very strong and stronger than I would say a normal year. So overall, good growth, organic growth in revenue, organic growth also a 32% in EBITDA solid margins. And then the other part of this activity is the M&A activity that Daniel mentioned here. And this can be seen in the RTM column here to the right. Now RTM is as you said, that is as if Storskogen had owned all subsidiaries during the entire last 12-month period. And so here, we can actually see what the acquisition activity has resulted and this is the run rate of Storskogen earnings capacity. And that run rate is for the end of Q2 revenue of SEK 18.6 billion, and an EBITA level of SEK 2.1 billion as if we had owned all these companies. And just as you said, we've made some acquisitions also after Q2. And if we add those, then we would add another SEK 1 billion to revenue and we would have an EBITA of roughly SEK 2.25 billion. And then finally, the net debt to EBITDA, which has remained on a comfortable level at around 2.6x the RTM EBITDA. So that's been kept under control despite these acquisitions, thanks to share issues and that Daniel, I think will come back to you later. Now on this page, we show the quarter-on-quarter performance or development of the revenue. To the left, where you can see that the bar to the right there has grown significantly from Q1, and that's partly thanks to acquisitions, obviously, but also to the strong organic growth. And the EBITA margin has been kept at around 10% throughout the period. And to the right here, we show the LTM EBITA, that's our owned 12-month period on a rolling basis. And you can see that the LTM is SEK 1.1 billion for the end of Q2. And as I just previously said, if we had owned all the companies the entire 12-month period, EBITA would have been roughly SEK 2.1 billion, as you can see here. Now that's almost twice as high as the owned period EBITA, so that's the earnings capacity of Storskogen today. So how are the operations doing Daniel?

Exactly. And the answer is they're doing quite well. If you look at our 3 business areas, I think, in general, they have been -- they were very proactive during COVID, being very careful with cost control and cash flow -- monitoring cash flows, which you've seen on our great cash conversion. We bring that with us into 2021. In addition to that, we can see, of course, that demand is increasing, and you have a good sentiment in almost all subsectors. So if we look at Trade with SEK 3.5 billion in turnover, we see a very strong organic growth, 51%. Trade, we actually delivered even last year. They had a decent growth even then. And this year, I mean, the companies are well positioned. They are really appreciated by their customers, and they have a strong market position in most of their areas. So it's a healthy growth, and we'll go into a little bit more about the fantastic work that's being done out in the business units to create this organic growth. And of course, one of the deliverables of this one of the results is, of course, the higher EBITA margin. And in addition to that, 11 acquisitions, lots of add-on acquisitions strengthening each and every company significantly. If we look at Services. Services had a 29% EBITA growth during the first half of the year, which is very strong being services companies. We see a mixed performance where some aspects, some segments such as installation have more difficulties and -- but as a rule across digital services, education and HR, logistics, engineering, most of these areas go very, very well and perform extremely well. And with a total of 9 acquisitions, it remains also our biggest business area with almost SEK 5 billion in LTM revenue. If we take Industry. Industry, of course, had a poor performance last year in the second quarter, even though we actually had an organic growth on the total. But with SEK 2.9 billion in turnover, an extremely good, strong organic growth compared to last year, not only because of the comparison to last year, but also because a lot of the companies are performing really well. Once again, the product companies, especially, I think, are growing very well. We've done a number of acquisitions. We'll get into that later. But 5 acquisition, but significant acquisitions. So industry is growing very quickly and very strong margins as well. So going into, deeper into the acquisitions we've made. 25 acquisitions, 32, if you include the ones that we have signed but not necessarily. We'll close them in the second quarter, a few of them at least in the third quarter, sorry, or fourth quarter. We have an increase in deal flow, a significant increase, especially internationally, we just started off, but already more than 1/3 of our entire deal flow is from our new geographies. And I think as we're really getting our teams into place now, in the U.K. and DACH, I think that will increase significantly over time. I think we've shown that we are more and more able to handle complex transactions. We've done a few significant and bigger acquisitions. We talked last quarter about Wibe Group. This time, it's Brenderup another great company with a market-leading position. We did our first German acquisition of Roleff. And then we followed up with the acquisition of Artum. And Artum is basically Storskogen based in Switzerland and Germany. So we're getting a full team with 10 years of experience and it's a strategic game changer for us in that region with -- they have a very strong brand name. And culturally, they are very similar to us. So we're really looking forward to this partnership together with Artum. And of course, a portfolio of great companies that we already see that are performing. So that's fantastic. And in addition to that, we bought another portfolio, which we will close in October. So how come we are so successful? Well, it all boils down to culture. And I think as we grow when we recruit a lot of people, the cultural fit is the key. And what has driven our success so far. I mean, it's -- if you talk about our core values, it's entrepreneurship, it's looking and finding opportunities, driving profitability, but also as a consequence -- daring to make decisions without necessarily having all information, and being curious and developing the business. In addition to that, we believe that one of our core strengths is that we are respectful, respectful of the entrepreneurs and the CEOs and the management teams a part of our decentralized model and also towards each other being careful and humble in our approach towards the challenges that we faced. We are truly long term. We don't -- we have done 142 acquisitions. We've never divested any. We have never discontinued operations. We don't give up easily. We see to that. And almost all of our business units are, in fact, profitable. So we have a great responsibility when we buy a company, we intend to fulfill that for our employees and society as a whole and, of course, to our shareholders to create value. In addition to that, and this is where it becomes interesting, I think the friction between the different valuers professional to always hunt for that operational excellence to improve just a little bit every day, measuring, reporting and being a big company and the small one as well. And I think that combination, if we managed to see the opportunities we put in the hard work, and we are really long-term -- prioritizing long-term decisions and being respectful of the challenges in each other, I think that will be the continuous the ground for continued success. If we talk about strategic developments. Well, as you've seen, we've grown from 12 countries of operations to 21. We are significantly a bigger team, both in Stockholm, U.K. and DACH. So a lot of our work now is about consolidating, understanding and running, managing our international organization. So that we can continue to scale operations and do acquisitions and be successful with quality. We're looking at a calmer third quarter as always. It's seasonal. We don't do as many acquisitions during autumn. And this will give us time to really focus on our companies and operational improvements going forward. We talked about the private placement we did. These were necessary for us to enable us to do the acquisitions that we've done with a decent net debt to EBITDA multiple. So it's very important for us, and we thank you for that support. Most of that capital injection actually came from company sellers in addition to big investors. Unfortunately, employees and current shareholders were not invited, but this was in fact well, a must for us. So we couldn't do it else in other way. And we're continuing to evaluate the IPO opportunity and will continue. And if the market allows and so we'll go forward with those plans. So that was that about Storskogen this far. I think we're happy with another strong quarter, great operations, organic growth, great acquisitions. And I think the team in both in Sweden and internationally, are really performing.

Exciting times indeed for the group.

Exactly. Thank you very much.

Thank you.

Bye. [Break]

And welcome to our presentation and deep dive into our business area Trade. I'm Daniel Kaplan, CEO of Storskogen. And together with me today, I have Christer Hansson, who's heading up our business area, Trade. Welcome.

Thank you. Thanks a lot.

So first, shorter introduction, who are you?

Well, I'm 49 years old. I'm married. I have 2 kids. Like sports, soccer coach, it's my daughter's team. And professionally, I've been here at Storskogen since 2015. First as an investor through my investment companies Scalata Invest and then as part of the team in 2016. I have a management experience, 20-year of management experience from different industries, mainly sales organization. And prior to Storskogen, I was part of the group management team of Dustin, where I first started a financial company, and then I was the country manager for a couple of years. And in the end, I worked mostly of expanding their service business, a lot of acquisitions.

Yes.

Yes. So that's a little bit about me.

Yes. And so tell me a little bit about the our business area Trade.

Well, Trade consists of 3 different subsegments. We have brands. We have distributors, and we have producers. About 23 business units, 1/4 is outside of Sweden. And if I go brands here, we have all the companies that we really think we can make an impact in investing in their own brand. We have Båstad-Gruppen, which we're going to talk about a little bit later, who are selling safety shoes and workwear under their own brand. So we're working with that kind of companies. We also have all our e-commerce companies in this subsegment. Then we have distributors, which has been our most successful so far. We have a wide range of different distributors, which are distributing external brands mostly. And we have professional hair care products. We have pet products, coffee machines. We have -- it's a wide, wide range of difference. So it's really, really diversified. And then we have the smallest one, which is producers. Here we have looking for companies which are producing products mainly for the consumer business.

Yes. I mean, this is a big business area. You did quite a few acquisitions this last quarter. Are you by yourself or you have a team?

I really have a talented team around me. We did an acquisition of Artum, a Swiss company just in the beginning of the summer. And Roger Kollbrunner will be part of this team as Investment Director. Then I have Jacob Sandström and Erika Butterworth, 2 Investment Director, where Jacob has a broad knowledge in brand and communication comes from D2B, which is one of the largest branding firms in Sweden. And Erika comes from a CEO position at a travel agency of Apollo, both Danish and Swedish. And then I have [indiscernible] which are working as Investment Manager, who comes from a consulting -- management consulting background and has a great tool box on that. So really, really talented team, and I think that's great that we can attract so talented people. It's going to be so important for us going forward.

Interesting. So how do you work with the companies that we own?

Yes. I usually talk about, I mean there, of course, are different ways and different companies have different needs. But I usually look at it as we have 3 main ways of working with our company if they are performing. The first one is if we really -- if we think that we can consolidate the market, we will try together with the management team to find add-ons. We have done that in several businesses. SGD, which is a flooring distributor, is probably the one that have done it most. Here, we acquired 3 companies from the beginning and then done 10 more add-ons together with the management team and have a great, great success story. So that's the first way. The second one is that when, if we believe that we can do an organic growth, we're going to, of course, support that kind of initiatives as well. We have [ wool master ] selling functional wool wearing clothing. Here, we are looking at their e-commerce platform, we're looking at the brand, et cetera. So I think they're going to have organic growth coming in the next coming years. And then we have the third way where we are acquiring company that doesn't necessarily need as much help from us. And that's fine with me. They can perform as they've done before, and continue that path. And of course, we go back and forth. But that's kind of 3 main ways that I look at how we support the company.

And what happens when they don't perform?

Then, of course, we take actions. It means sometimes we need to change CEO, maybe change the strategy. We might need to make a total makeover. So we do that as well, yes, of course.

So if you look at the entire business area, would you say that you have, what are the challenges facing the business here at the moment?

At the moment, I think, of course, we have the raw material issues. Some companies will hurt from that. We have an increase in wood and steel. We have [indiscernible] are building houses. Here, they will have an impact on that. However, right now, I think that the freight constraints are the ones that are -- the ones that we are working hardest with. I mean the container situation in the world is chaos. Prices has gone up 5x, 6x. And sometimes it's even hard to get goods from Asia to Europe. So here, we're working really proactively to put orders in advance, maybe put some larger orders. We allow for the inventory level to be a little higher right now. So we can have and help our customers with the demand they put on our products, which is really, really high at the moment.

So I mean, you're running a lot of acquisitions together with M&A and the geographical teams. One was perfect here, the first Swiss acquisition early for the first quarter. Tell us a little bit about that process. Does it work?

Yes, it's been great. I mean, perfect -- is working in an environment and a market that we know. We did our first acquisition in professional hair care products with Baldacci 2 years ago, done 2 more acquisitions in the same with distributors in this market. So we kind of knew the market, had a lot of help from our management team outside in subsidiaries that helped us with the right questions. Of course, we have a knowledge in our -- we have companies in Storskogen hat knows a lot about e-commerce. So we put together all our network here. And I think we did a good solid work. And now we're working really, really great with that company in expanding their performance, I hope.

Exactly. Exciting. So how are we performed this last quarter and this last half year?

It's been a strong, really strong half year. I mean we had a growth with double the size of turnover the last quarter, 75% growth last 6 months. And organically, we grew 17%, 18% on turnover and even better on EBITA level. I mean the performance here has been really terrific. We grew organically with 51% first 6 months. So it's been a really great year. And as we said, with a lot of acquisitions as well, we did 10 which is a record for our business area in the second quarter.

I mean, if you look at the portfolio, you can see that almost every single company is performing very well at the moment. How is that?

I think we did a -- in 2019, we didn't perform as well as I hoped. We did a lot of actions during '20 or actually during the end of '19 came into 2020 with a lot of confidence. And of course, the pandemic hit us. So Q2 last year was weaker, of course, as for everyone else. But we did a lot of initiatives, cost control, worked on pricing, took away a lot of discounts. So our team really, really did well. And we came in 2021 with a lot of confidence. And of course, now we have a demand in the world market, which is good. But I think we're also performing well.

I mean, you performed well during COVID as well?

Yes, we did. Yes, we did.

So it's not a coincidence. Thank you, Christer, and thank you for a great quarter and of course, even better 6 months.

Thanks, Daniel.

An extraordinary performance by you and your team, and thank you all for watching. Take care. Good bye. [Break]

Hi, and welcome to Storskogen and our deep dive into our business unit, Båstad-Gruppen within the business area Trade. I'm Daniel Kaplan, CEO and Co-Founder of Storskogen. And together with me, I have CEO Jonas Cedås of Båstad-Gruppen; and Christer Hansson, who we just met in heading our Business Area Trade. Welcome.

Thank you.

Thank you.