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

Good morning, and welcome to Karnell's Q3 2026 Earnings Presentation. I'm Petter Moldenius, the CEO of Karnell Group, and I'm joined by our CFO, Niklas Svensson. As we announced with our preliminary figures from October 12, the third quarter is the strongest in Karnell's history in terms of profits with broad-based growth in both business areas. As usual, I'll begin with an overview of the quarter. Niklas will then take you through the business areas, our value creation per share, our cash flow and the balance sheet. I'll close off with some information about the acquisitions work that we are on doing and the key takeaways before we then open for questions. For those of you who are joining us for the first time, Karnell is an active long-term industrial owner. We acquire and develop small- to medium-sized industrial technology companies with strong positions in their respective niches. We operate with a fully decentralized model. Our companies run their own businesses, supported by a lean central team, focusing on M&A, capital allocation and ownership. Today, Karnell comprises our 20 companies across Sweden, Finland, the U.K. and Italy, and we are employing around 860 people. And with that, let's turn to the quarter. Net sales grew with 33% to SEK 582 million, out of which 18.8% was organic. EBITA rose 73% to SEK 120 million with an organic EBITA growth of 42.6%. The EBITA margin was 20.6% compared to 15.9% a year ago, and this is the highest quarterly margin we have reported as of yet. Net debt to EBITDA, excluding IFRS 16, is down to 1.4x from 1.9x at the end of the second quarter. What I'm most pleased about is how broad the growth was. Several companies in both business areas made significant contributions by gaining market share and through new customer relationship that we have been working on for some time. The high demand from a single customer that we have commented on earlier this year continued in the third quarter. The company increased EBITA organically by around SEK 10 million, and that's roughly 1/3 of the group's organic EBITA increase in the quarter. That's clearly a lower share than in the first half year. But that shows that the growth is becoming more broad-based. These orders have short lead times and our visibility is limited, and we still don't consider these demand levels sustainable in the long term. In our product companies, we had a few larger deliveries and price adjustments that took effect ahead of our cost increases. Adjusted for these temporary factors, the underlying development is still good. Q3 is also our seasonality's strongest quarter. So the results should not be seen as a new normal level. In terms of markets, we continue to see mixed conditions with some improvements in Finland, but I would say that the largest contribution is growth our companies are creating themselves rather than any broad market recovery. Zooming out of it, looking at how our margin has developed over time, since our IPO, the rolling 12 months EBITA margin has moved from around 11% to 16.7%. And the last quarter, we passed a target of 15% for the first time. And this quarter, we moved further above that level. The 12-month figures, including this year's temporary effects. So, I would also focus rather on the direction than the exact level. And our target is defined over a business cycle, and it's sustaining it what matters. For the first 9 months, our EBITA grew 68% to SEK 286 million, and that was organically EBITA growth of 41%. Cash flow remains strong. Operating cash flow was SEK 135 million in the quarter compared to SEK 46 million a year ago and SEK 256 million of those were for the first 9 months compared to SEK 89 million last year. And with that, I'll hand over to you, Niklas.

Thank you, Petter. So let me walk you through the financial details for the quarter and starting off with the group. Net sales increased 33% to SEK 582 million with organic growth of 19%. Acquisitions contributed 15%, while currency effects were neutral. On the right-hand side, you can see that EBITA increased 73% to SEK 120 million in the quarter. The organic EBITA growth was 43% and acquisitions contributed 31% and currency was a marginal negative 0.5%. As Petter mentioned, part of the result reflects temporary factors and the third quarter is seasonally our strongest. But at the same time, the improvement was broad-based, and we have significant contributions from several companies in both business areas. Acquisition costs during the quarter were limited. It was SEK 0.9 million compared to SEK 1.9 million last year. Moving to our segments, Product Companies delivered net sales of SEK 310 million, up 25%. Organic growth was 12% and acquisitions contributed 13% points. EBITA increased 54% to SEK 71 million, and organically, EBITA grew 30% and acquisitions contributed 25%. The EBITA margin improved from 18.4% to 22.8%. And Several companies grew organically by gaining market share, and the margin was also supported by temporary effects, such as larger deliveries and price adjustments coming through ahead of cost increase. And at the same time, a few companies developed weaker than last year. The recent acquisitions have continued to perform in line with our expectations. Turning to Niche production companies. We had another exceptionally strong quarter where net sales increased 45% to SEK 271 million organic growth of 28% and acquisitions contributed 17%. EBITA increased 87% to SEK 64 million and organic EBITA growth was 57% and acquisitions contributed 29%. The margin reached 23.6%, which is up from 18.4%. The high demand from a single customer continued, but as Petter mentioned, the growth is now clearly more broad-based than before. Together, the 2 business area remains evenly balanced and product companies represented around 53% of group net sales in the quarter and niche production companies the other 47%, which is in line with the year-to-date split. Before we go into the cash flow in more details, we have added a new slide this quarter, showing how our development translates per share and in relation to the capital that we employ. On the left, you see operating cash flow per share on a rolling 12-month basis, and it reached SEK 7.2 compared to SEK 3.3 a year ago. So we've more than doubled while the number of shares have been largely unchanged. On the right is our return on capital employed. And from this quarter, we used an updated definition EBITA in relation to the average capital employed over the last 4 quarters. The change is made so that the key ratios better reflects the return on the capital tied up in the operating activities. And on that basis, return on capital employed reached 16.4%, up from 14.7% last quarter and 12.5% a year ago. Rolling 12 EBITA has grown from SEK 221 million to SEK 349 million over the past year, which is clearly faster than the capital that we employ and it shows that both our organic development and this year's acquisition are generating good returns on the capital that we invest. Turning to cash flow. Operating cash flow for the quarter came in at SEK 135 million compared to SEK 46 million in the same quarter last year, and the increase is mainly driven by higher earnings but working capital also contributed positively with SEK 19 million compared to negative SEK 20 million last year. For the first 9 months, operating cash flow reached SEK 256 million, up from SEK 89 million a year ago, and working capital has tied up SEK 20 million so far this year compared to SEK 86 million last year and this reflects our continued focus on core working capital and our work to smooth cash flow more evenly across the year, moving away from the old pattern, where most of our cash flow landed in the second half. On a rolling 12 basis, operating cash flow reached SEK 387 million, an increase of 121% compared to SEK 175 million at the same point last year and is the strongest level we have reported to date. And that corresponds to a cash conversion of 111% of EBITDA. Finally, our capital structure. During the quarter, we made an extra repayment on our revolving credit facility and interest-bearing debt decreased to SEK 726 million from SEK 771 million at the end of the second quarter. compared to SEK 370 million at year-end. The increase reflects debt drawn for this year's acquisition OBA Tf and flex7 cash equivalents stood at SEK 188 million, giving us a net debt excluding IFRS 16 of SEK 537 million. EBITDA excluding IFRS 16 on a rolling 12 basis was SEK 390 million, resulting in a leverage ratio of 1.4x, which is down from 1.9x at the end of the second quarter and well within our financial target of normally not exceeding 2x EBITDA. The decrease is driven by strong cash flow and by this year's acquisition now contributing with more months of earnings in the rolling 12 figures. Total financial debt was SEK 867 million, including lease liabilities under IFRS 16, put and call options and contingent liabilities. And with that, it concludes the financial overview. And I hand back to Petter before we open up for questions.

Great. Thank you, Niklas. So a few words on acquisitions. The 2 companies we acquired this year, OBA Tf in Italy and flex7 in the U.K. are developing in line with our expectations and contributing positively to our group's profitability. We have not completed any new acquisitions since April. We have had several interesting processes that did not, in the end, materialize, which is a natural consequence of us staying disciplined on valuation and the companies we choose. With that, let me close with a few key messages from the quarter, Q3 is a record quarter. EBITA grew 73% to SEK 120 million. And EBITA margin reached 20.6%, the highest in Karnell's history. And with that, our rolling 12 months margin is now 16.7%. Again, growth was broad-based with strong organic development across companies in both business areas. Part of the result is temporary and the Q3 is seasonally our strongest quarter. So this should not be seen as a new normal level. But the overall underlying development is good. Value creation per share continued to build. 12 months EBITA per share is up 57% and operating cash flow per share has more than doubled and the return on capital employed has reached 16.4%. Our markets remain mixed, but our decentralized model, geographical reach and sector diversification allows us to keep building the businesses regardless of short-term fluctuations. We are well positioned both from an organic development standpoint and to do new acquisitions. Thank you for joining today's presentations. And with that, let's open the floor for your questions.

[Operator Instructions] So no incoming calls, but we have some questions here. It relates to the temporary volumes in Q3 of SEK 10 million on adjusted EBITA or EBITA and is that level also applied in Q1 and Q2.

Yes. So I guess the question was from Max Bacco with SEB. Yes, the I mean, again, we have had questions from analysts and media around sort of this extraordinary effect. Therefore, we thought it was good to communicate roughly what that was this quarter. I think those SEK 10 million, again, are a smaller overall share of the SEK 120 million and what we've seen in the first half. But in absolute numbers, this is roughly the contribution per quarter in the first half as well. Second question, I guess, concerns cash flow. Very strong cash flow during the quarter. Should we expect the same for Q4? Niklas, perhaps you want to answer that one?

Yes. And it -- as I said before, we have seeing this year a slightly different pattern in relation to the previous years, where a lot of the cash flow has been released in the fourth quarter. And now we have seen a more steady cash flow generation over the year. So I wouldn't say that we would expect, without giving any forecast here, but I wouldn't expect the same release that we had in Q4 last year, which was extraordinary. But we are working focused on steadying the cash flow over the year, and we expect to continue with that going forward as well.