Earnings call transcript: Storrskogen’s Q4 2023 sees record cash flow

Storrskogen, a prominent player in the industrial sector currently trading at $5.04, reported its fourth-quarter earnings for 2023, showcasing a robust financial performance with key highlights in cash flow and operational efficiency. According to InvestingPro analysis, the company maintains a Fair financial health rating, with multiple ProTips available for subscribers looking to dive deeper into the company’s fundamentals. The company achieved its strongest quarterly cash flow to date, amounting to nearly SEK 1.7 billion, and sustained a leverage ratio of 2.3x EBITDA, the lowest since Q1 2022. While demand in certain markets remains muted, Storrskogen continues to make strides in digital services and operational improvements.

Key Takeaways

• Record quarterly cash flow of nearly SEK 1.7 billion.
• Reduction in business verticals from 14 to 7 for efficiency.
• Strong demand in automation and robot integration sectors.
• Anticipation of softer Q1 2024 but potential M&A activities in Q2-Q3.

Company Performance

Storrskogen reported total sales of SEK 34.2 billion over the past 12 months, with Q4 sales reaching SEK 8.6 billion. The company has focused on improving operational efficiency, which has resulted in a reduction of business verticals. Despite muted demand in some consumer markets, Storrskogen has seen stable conditions in the industrial sector and solid demand for automation solutions.

Financial Highlights

• Total (EPA:TTEF) sales (12 months): SEK 34.2 billion
• Q4 Sales: SEK 8.6 billion
• Q4 Adjusted EBITDA: SEK 849 million
• Q4 Adjusted EBITDA Margin: 9.9%
• Cash conversion rate: 97%
• Leverage ratio: 2.3x EBITDA

Outlook & Guidance

Storrskogen is targeting an annual margin above 10% beginning in 2025. The company expects Q1 2024 to be a softer quarter, but anticipates potential M&A activities in the second and third quarters of 2024. It plans to reinvest cash flow into both organic growth and acquisitions to bolster EBITDA.

Executive Commentary

CEO Christer Hanssen emphasized the company’s strategic progress, stating, "We are now seeing continued progress in organic growth improvements." He also expressed optimism about future acquisitions, noting, "We believe that we can start doing acquisitions again within the next couple of quarters."

Risks and Challenges

• Muted consumer demand in certain markets could affect sales.
• Economic conditions in Germany and the UK present soft market sentiment.
• The challenge of maintaining improved margins amidst economic fluctuations.
• Potential integration risks associated with future acquisitions.
• Dependence on automation and digital services could face technological disruptions.

Storrskogen remains committed to its strategic initiatives, focusing on operational efficiency and market expansion, while navigating the challenges posed by varying market conditions.

Full transcript - Store Capital Corp (NYSE:STOR) Q4 2024:

Conference Moderator: Welcome to the Storrskogen q four presentation for 2024. During the questions and answer session, participants are able to ask questions by dialing key 5 on their telephone keypad. Now I will hand the conference over to the CEO, Christer Hanssen and CFO, Lina Glaader. Please begin your meeting.

Christer Hanssen, CEO, Storrskogen: Good morning, and welcome to the presentation of Stooskoggen’s Year End Report for 2024. I’m Christian Andersen, and joining me today, as always, Liana Glader, Stooskoggen’s CFO. It’s been an intense yet rewarding years in stepping into the role as CEO. And I’m pleased with the progress that we have made across our operations over the past year, and I’m confident that we are moving in the right direction. Looking at the fourth quarter, it stands out as one of our stronger quarters since our IPO in terms of several key metrics.

And I’m eager to get into the details with you. So let’s begin with an overview of Stoorskogen before we take a closer look at the quarter’s highlights. Stoorskogen is a diversified international business group with sales of SEK34.2 billion over the last twelve months and adjusted EBITDA of SEK3.2 billion spread across our three business areas. I’m especially happy to note that services and industry track above 10% margin on annual basis. Following the several completed divestment over the past year, we now consist of 115 business units, each with an average sales of about SEK290 million.

Moving on to the highlights for the fourth quarter. We reported sales of about SEK8.6 billion, an adjusted EBITDA of SEK849 million and adjusted EBITDA margin of 9.9% for the quarter. Cash flow, organic EBITDA growth and profitability have been our top priorities over the past year and will remain so going forward. This quarter reaffirms that we are on the right track on several levels, including achieving the strongest recorded quarterly cash flow in our history at almost SEK1.7 billion. Our cash conversion rate at 97% continues to be well above our target, reflecting the great work of our companies over the past couple of years.

Operationally, our efforts have yielded continued margin improvements in addition to sequential improvements throughout the year in terms of organic EBITDA growth. Our leverage rate has moved towards the lower end of our target range, reaching its lowest level since the first quarter of twenty twenty two at 2.3 times EBITDA. Lastly, I want to highlight a leadership transition. Alexander Bjargor will be stepping down from the management team. As Head of M and A and Corporate Development and one of Stolskogen’s cofounders, Alexander has been integral part of reshaping our strategic direction.

He will now serve as a Chair of the Investment Committee overseeing investments and capital allocation. He will also continue as Board member of Sushkorn. At the same time, I’m pleased to welcome Johan Ekstrom to the management team as Group Head of M and A. His extensive experience in M and A makes him a ideal successor to Alexander. In Q4, we delivered positive organic sales and EBITDA growth alongside significant margin improvements in both trade and services.

Our 9.9% margin is an improvement of 2.1 percentage points compared to the same period last year, marking the strongest quarterly margin since Stoskogen’s IPO. In 2024, sales and margin followed the usual seasonally trend, a softer Q1, a stronger Q2, a slightly softer Q3 compared to the historically stronger Q4. And we expect a similar pattern for 2025. The decline in reported sales was primarily due to divestments, accounting for 6% reduction, slightly offset by organic growth, acquisitions and FX. Our meaningful year on year margin improvements to 9.9% reflects the strategic initiatives we’ve implemented to drive organic EBITDA, also demonstrated by the positive organic growth recorded by all three business area.

Divestments of low performance also had a positive impact. That said, our ambition is to continue to work hard to reach our newly commuted margin target of above 10% on annual basis starting in 2025. Looking at the past two years, I’m very pleased with the result we have accomplished in terms of cash flow in both 2023 and 2024 with over SEK 3,000,000,000 each year. This is a testament of a lot of hard work and processes put in place and it will benefit Stushkogen as we move forward. So let’s move onwards to take a closer look at the business areas.

For Services, in the fourth quarter, Services reported lower sales but achieved a significant increase in profitability. The 12% decline in sales was largely driven by divestments, which accounted for 11 percentage points. On the profitability side, adjusted EBITDA grew with 32% year over year and with 4% for the full year, reflecting the success of our ongoing efficiency measures. We are especially happy with this in addition to the margin expansion, which improved from 8.8% in Q4 last year to 13.2% for Q4. Divestments and the increased focus on organic EBITDA growth have had a positive impact both in the quarter and for the full year.

In addition to working with efficiency measures, we have prioritized projects with strong profitability. Similar to Q3, we observed underlying improvements in most areas, but especially for business units offering digital services, logistics and installation services. However, the market for companies exposed to construction remains soft. Looking ahead, Q1 is seasonally softer quarter, though overall, we are continuing to see positive signs of improved market sentiments, and we are cautiously optimistic. For Business Area Trade, organic sales grew with 5% in the quarter.

The impact of divestments resulted in decrease of 7%, which generated a total sales decline of 2%. More importantly, adjusted EBITDA grew with 21%, were up 15% organically. Consumer demand remains muted, but we are seeing signs of recovery, both in gradual improvements and in sentiment. When demand picks up, we see potential for stronger profitability supported by the operational initiatives that we have implemented throughout this year. Looking ahead, as with Services, we anticipate a somewhat softer first quarter but in line with historical patterns.

Industry sales for the fourth quarter was in line with last year’s figures, while full year sales declined by 2%. Adjusted EBITDA and margins also remained in line with previous year’s fourth quarter with a margin at 10.5%. Overall market conditions remain stable with order books at healthy levels. Businesses focused on automation, especially those offering robot integrations, continue to see solid demand, while those with exposure to consumer demand in addition to various businesses with exposure to Germany and UK have a softer sentiment than those with exposure to The Nordics. Global uncertainties persist, of course, making it difficult to predict when demand will recover fully.

In the meantime, we are committed to counter uncertainties by focusing on areas that we can affect to maintain continued operational resilience. Since becoming the CEO, I’ve emphasized the importance of organic growth as a key driver to improve our leverage ratio and to focus on long term success of the group. And I think that we are now seeing continued progress in organic growth improvements. Improving sales, optimizing pricing, having cost controls are part of the daily operations of our business units year round and across business cycle. However, from a Stolskogener perspective, we can always improve, especially by identifying best practices in certain areas and replicating them across the group.

To illustrate our progress of the past year, I want to turn your attention to the next slide. Looking at this bar chart, it illustrates the sequential improvements in organic sales and EBITDA growth quarter by quarter throughout 2024. We started the year facing tough comparables against Q1 of twenty twenty three. This prompted the launch of target initiatives to focus on driving a recovery in organic EBITDA growth. And as you can see, while sales have remained relatively stable of the year, we have seen steady improvements in organic EBITDA growth, reflecting our ongoing focus on operational efficiency and profitability.

And I want to highlight the 12.8% organic growth in the fourth quarter. Before wrapping up, I want to revisit another familiar theme from our past few quarterly presentations related to the sum of our prioritized areas. Our main focus at hand under today, Heather, has been on driving organic EBITDA growth, pursuing cash flows, improving our leverage ratio and reviewing our portfolio. And in sum, we have made significant progress across all of these areas and remain committed to further improvements. Looking ahead, we are approaching the key triggers that will allow us to return to more normalized situation, one where we can reinvest our cash flow into balanced mix of organic and acquired EBITDA growth.

In sum, our efforts are moving ahead in the right direction. And with that, I’ll now hand over to Ligana for a closer look at our financial performance.

Lina Glaader, CFO, Storrskogen: Thank you, Christer. Let’s start with a closer look at the financial summary here adjusted for items affecting comparability. And on the next page, I’ll show the reported numbers. First of all, I echo what Christa just said. We’re happy, of course, from the financial standpoint also to see that our focus on efficiency across all areas, operational, you mentioned already, but it also has to do with financial efficiency, tax efficiency, etcetera, have all resulted in notable improvements in the past three quarters.

We mentioned the net sales decline already, 5% in the quarter. This is driven by divestments, whereas organic growth was flat for both the fourth quarter and the full year. But despite the sales decline, our adjusted operating profit or EBIT grew by 33% to $655,000,000 in the fourth quarter, and it grew by 3% to 2,400,000,000.0 for the full year. This was, of course, helped by divestments of the nine unprofitable businesses earlier in the year, but the improvement is also backed up by operational efficiency improvements, most notably in business area services, but also within trade. In addition, group EBIT was positively affected by lower central costs in terms of lower personnel expenses.

As for adjusted net profit, it increased by 228% to 376,000,000 in the fourth quarter and by 22% to 1,100,000,000.0 for the full year. This is adjusted, of course, then. Net profit is helped by both lower tax and, especially in the in the fourth quarter and by lower financial costs. Now financing costs is an area that we paid particular attention to during the year. With lower debt now and some relief in the base rates towards the end of the year, we started to see positive effects already in the fourth quarter with a decrease of financial items by 31% year on year.

But given that most of the base or the rate cuts were done during the fourth quarter and also in the beginning of this year, we expect to see more visible positive effects on this line as of the first quarter this year, of course, also helped by a lower gross debt. Turning to the financial KPIs in the table below there, Christo, you already mentioned the adjusted EBITDA growth of 20% and the EBITDA margin of 9.9 in q four, ’9 point ’4 percent for the full year. Adjusted return on equity was 5.6% and our adjusted return on capital employed was 7.6%. Net of goodwill, this adjusted return on capital employed was 17.7 percent. Even though both of these metrics, return on equity, return on capital employed, are still below acceptable levels according to us, we are glad to see a year on year improvement also in in this metric.

And we will continue to work towards improving them by growing our profits, of course, and maintaining a healthy balance sheet also as we begin to add M and A growth. Finally, the earnings per share adjusted for items affecting comparability grew by 321% to 0.19 krona per share in the fourth quarter. And the growth was 26% on the full year to 0.57 per share. And then just a quick comment here on the reported profit and loss statement here. Items affecting comparability, which is the the difference between this and the previous P and L that I showed, were quite small in in the fourth quarter.

Total effect on net profit only 12,000,000 in items affecting comparability, and this largely has to do with a capital gain from the divestment of a Swiss entity in q four and also partly refinancing costs. But for the full year, we had larger items affecting comparability, obviously related to the divestment of the nine unprofitable businesses that we announced in the second quarter. The effect on EBIT from that was SEK $947,000,000 and the effect on net profit was SEK 1,000,000,000. And we explained these items in more detail during our Q2 earnings call. But including these items, of course, the reported full year net profit was positive SEK 116,000,000, whereas our reported earnings per share attributable to the parent company shareholder was a negative SEK0.03 per share.

Right. Then we have a closer look at the Q4 sales bridge here on the next page. We illustrate on this slide the contribution from organic, structural and currency changes to the fourth quarter’s sales growth of minus 5%. Organic growth flat. We already mentioned that in the quarter.

It was positive in trade and industry and negative in services as a result of a clearer focus on profitability in projects and assignments, as Christo described. Rest divestment represent minus 6% of the sales decline. FX effect on sales growth was a positive 1% in the quarter stemming from a weaker Swedish krona. And we had no acquisition or no effect from notable effect at least from acquisitions. And on the following page, we have we’re showing sales and EBITDA bridge again in the for the fourth quarter, but here divided by business area.

And let’s start with the sales bridge to the left. What I’d like to bring your attention to here is that business area services, their sales decline, both organic and from divestment, represented the largest by far largest share of the group’s sales decline, obviously, but this also includes divestments, of course. However, to the right there in the EBITDA waterfall, you see the opposite effect on EBITDA. So you see that the divestments made in services actually lift group EBITDA and that this contribution represents more than half of the total profit growth in the quarter year on year, whereas lower central costs contribute positively around four percentage points of that. And the contribution from trade is also positive 5%.

And let’s move on to the cash flow statement for the fourth quarter and the full year. The fourth quarter is typically strong in terms of cash flow when inventory and receivables are reduced after typically building up in the third quarter. But this quarter’s strong cash flow is not only due to seasonality, it is also a result of a continuous improvement in our subsidiaries’ working capital management. Cash flow from change in net working capital was a positive $621,000,000 in the quarter. And the largest contributor here was reduction in receivables.

We also had some reduction in inventories, but they were more or less offset by lower payables. But summing up cash flow from operating activities, mind you, this is after paid interest and paid tax. We arrive at 1,700,000,000.0 for the fourth quarter and 3,100,000,000.0 for the full year. Cash effects from M and A was a negative 108,000,000 in the quarter and minus $372,000,000 for the full year. This item includes paid earn outs as well as buyback of minority shares in existing subsidiaries.

And those items, in fact, make up most of that minus $372,000,000 in the full year. Cash flow from financing activities was minus 745. So in other words, that stems from loan amortizations and minus 1,700,000,000.0 for the full year also due to loan reductions or debt reductions. So adding it all up gives us a cash flow for the period of $599,000,000, that’s almost 600,000,000 in the quarter and $3.00 9,000,000 for the full year, which gives us a cash balance of SEK 1,900,000,000.0 at the December. In addition to that, we had the unutilized credit facilities of SEK 3,000,000,000.

So the total available liquidity for Swiss Moving Group at the end of the year was SEK4.9 billion, which is a comfortable level, obviously. Next (LON:NXT) page then, where we are showing the operating cash flow and cash conversion on a rolling twelve month basis. This is the EBITDA based operating cash flow for the past ten quarters that we see here. So we’ve gone from a cash conversion rate of 50% to being at or around 100% for the past six quarters now, and that is on a rolling twelve month basis. Again, this is well above our communicated target of 70%.

For the isolated fourth quarter, cash conversion was in fact 140%. Over to Stoskogen Group’s condensed balance sheet on the following page. The total balance sheet amounts to 43,200,000,000.0, which is 2% lower compared to a year ago, largely a result of divestments, reduced working capital and consequently reduced debt. I’ll show how net debt items and leverage have developed in more details on the following pages. But I look at the equity ratio here.

Finally, it increases to 48% from 46% a year ago. And then let’s move on to the interest bearing net debt and interest bearing net debt to EBITDA, so the leverage. Interest bearing net debt decreased by 1,200,000,000.0 during the quarter and is now below 10,000,000,000 Swedish krona for the first time since Q1 twenty twenty two. And our leverage ratio is also at its lowest level since then, coming down from 2.6 in Q3 to 2.3 in Q4. And it is, in other words, now in the lower end of the target range of two to three times that we’ve stated quite clearly as our ambition.

And here, essentially the same figures, but in more detail showing total debt, cash and EBITDA. The dotted line first there shows our twelve month pro form a EBIT development, which we use in the leverage definition. And after a period of declining EBITDA up until the first quarter twenty twenty four, we managed to stabilize it in the second quarter and in the third quarter. And now in q four, we can show a more visible increase in our EBITDA to 4,260,000,000.00 SEK. On this graph, you can also see that all debt items, interest bearing debt, leasing, and non interest bearing debt, all decreased while cash and cash equivalents increased.

As for the non interest bearing debt of 1,940,000,000.00, almost all of that is minority options liability, and we expect to buy back roughly between 400 and 5 hundred million during this year, which will be EPS acquitive, obviously. And, finally, on the next page, as we touched upon briefly at our Capital Markets Day in November, we will, as of q one this year, start reporting our profit and loss statement based on nature of cost instead of function. This is the table to the left. We believe that this better reflects how we manage and how we follow-up our business areas operationally. And I believe it will also make it easier for you to track important cost items, such as raw material and goods, personnel costs, and not least, depreciation and amortization.

I’d like to point out that all KPIs are unchanged, such as sales, EBIT, profit before tax and after tax, etcetera. And, of course, in this setup, we will also show EBITDA and EBITDA in the P and L statement as separate lines. To the right there, we will also, in line with our ambition, to streamline and to focus our operational steering, reduce the number of verticals from previously 14 verticals to seven. Our new verticals are shown in the table to the right, as you see there. There are no changes to the business areas nor to our reporting, only to the sub verticals.

Services will now have two verticals, business services and infrastructure services. Trade will also have two verticals, consumer products and professional products, whereas industry is unchanged, automation, industrial technologies, and product solutions. That was my last slide. Over to you, Krister.

Christer Hanssen, CEO, Storrskogen: Thank you, Liana. To summarize today’s presentation, our operational initiatives are yielding positive effects with a strong organic EBITDA growth in the fourth quarter, laying a great foundation for years ahead. We achieved the highest quarterly cash flow in our history, reaching SEK1.7 billion, while also delivering our highest margin since going public. I also want to highlight that our interest bearing net debt is below $10,000,000,000 for the first time since the beginning of twenty twenty two, also reflected in our lowest leverage ratio since Q1 of twenty twenty two. The steps we have taken reaffirm our commitment to driving organic EBITDA growth and maintaining strong cash flows.

This position us well for the implementation of our updated strategy and financial targets as outlined at our Capital Markets Day in November. With that, thank you all for listening and we look forward to take your questions.

Conference Moderator: The next question comes from Karl Johan Bonavier from DNB Markets.

Karl Johan Bonavier, Analyst, DNB Markets: Congratulations to solid development and excellent cash flow in Q4. And on the back of that level, I know you earlier talked about that you had an aim to get down maybe to the lower end of your two to three times net debt to EBITDA financial targets. Looking at how the solid cash flow is these days and I guess also as you pointed out that they’re now coming into maybe a lower interest rate cycle and so on. Do you feel that getting down to the lower end of the target before you maybe start to initiate more acquisition kind of those initiatives is too cautious or that you can maybe be complacent with what you have now in that respect?

Christer Hanssen, CEO, Storrskogen: Thank you for the questions. Well, we said at the Capital Markets Day that we believe that if we continue to develop in the way that we have been developed that we can start doing acquisitions in Q2 or Q3 of this year. And so we believe that this position as well to start doing that, and we feel comfortable with coming down to 2.3, which is the lowest that we have been in three years. So with that said, we believe that we can start doing acquisitions again within the next couple of quarters.

Lina Glaader, CFO, Storrskogen: I’d maybe clarify. When we’ve talked about the lower end of the range, we’ve always pointed to the lower, like the between two and two point five. And when we talk about the lower end, we don’t mean two point zero.

Christer Hanssen, CEO, Storrskogen: So with that said, so we are we think that we are in a good position with what we have delivered during this year and especially during Q4.

Karl Johan Bonavier, Analyst, DNB Markets: And just also on the, say, the fewer verticals that you will show going forward to us, so to say, outside the company. Does it also imply any changes to the structure you how you are managing these operations in house and maybe rationalization to the structures there?

Christer Hanssen, CEO, Storrskogen: No, but the big structure, we have already reduced a lot of as we talked also about on the Capital Markets Day. But so we the big that we’re driving is trade services and industry. But we think this align more with the focus that we will have going forward on the investment themes and what we wanted to drive. But no major shift in kind of the headquarters here. We have already taken those steps prior to this.

So this is more how to align what we want to do and what we want to achieve going forward.

Karl Johan Bonavier, Analyst, DNB Markets: Excellent. Thank you very much and all the best out there.

Christer Hanssen, CEO, Storrskogen: Thank you. Thank you.

Conference Moderator: The next question comes from Andreas Koski from BNP Paribas (OTC:BNPQY) Exane. Please go ahead.

Andreas Koski, Analyst, BNP Paribas Exane: Thank you, and good morning. Just one question about the very strong margin in services. When reading the report, it sounds like you think this is a sustainable step up that we have seen and that it will even continue to improve from the levels that we saw in the fourth quarter. Is it possible to split the positive impact from the divestments and the efficiency improvements that you have done? And can you just confirm that you didn’t have any what could be considered as one off in this strong margin in the fourth quarter?

And also remind us of the margin seasonality for services as well and the 2025? Thank you.

Christer Hanssen, CEO, Storrskogen: I can start you can take the questions on Elena on the divestments. I think the margin improvements in services has been also we did that we had a great margin improvements also in Q3. So there are structural part of that. We have been really so much more focused on on taking on projects that are better profitability, actually have taken said no to projects that are not that profitable for us. So I think there is and also a lot of fewer FTEs driving this doing the services.

So in that sense, we think that we are on a strong level and we’ll have but 13.2% is really, really strong.

Lina Glaader, CFO, Storrskogen: Yeah. And regarding how much of the improvement is attributable to divestments, as as we’ve indicated, the divestment, especially of the portfolio in the summer, is has had the largest effect on services, but there’s also other positive effects in there. So roughly fifty fifty of the margin improvements is attributable to divestments and to kind of operational organic improvements. And

Christer Hanssen, CEO, Storrskogen: also Andreas, I can say you mentioned that if you look at the Q4 numbers, we’re growing the EBITDA level with over 30% in Q4 compared to Q4 last year and about 22% of those are organically for the quarter.

Andreas Koski, Analyst, BNP Paribas Exane: Yes. That’s why I’m wondering if this should be seen as sustainable or if there were any sort of things that could be considered one off in the quarter and that we might see margin coming down again in the coming quarters.

Christer Hanssen, CEO, Storrskogen: Amit, there will be seasonality, of course, in our year, but we think that the measures and the efficiency measures that we have taken in services will be sustainable.

Lina Glaader, CFO, Storrskogen: There were no material one offs in either direction in services in the quarter. Quite solid improvements throughout actually all verticals or most verticals.

Christer Hanssen, CEO, Storrskogen: Most verticals.

Andreas Koski, Analyst, BNP Paribas Exane: That’s great. Thank you very much.

Christer Hanssen, CEO, Storrskogen: Thank you.

Conference Moderator: As a reminder, if you wish to ask a question, please dial 5 on your telephone keypad. There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Christer Hanssen, CEO, Storrskogen: Thank you all for listening and I wish you all a great day and soon a great weekend.

Lina Glaader, CFO, Storrskogen: Thank you so much.

Christer Hanssen, CEO, Storrskogen: Thank you. Bye bye.

Conference Moderator: Bye.

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