Lagercrantz Group AB

STO:LAGR B

Earnings Call Transcript 2024-Q1

[Jörgen Wigh, executive]

Yes. Good morning, everyone. Welcome to Lagercrantz presentation of our Q1 report. We will run this as we normally do for 45 minutes or so and me speaking is Jorgen Wigh, CEO of the group. Together with me here, we also have Peter Thysell, our CFO. The presentation, as always, is you can download it from our website, lagercrantz.com and we will try to -- yes, if we feel very comfortable and easy to have it like that and you can download it there and we would try to make sure that everyone knows what page we're on along the way as we go through the presentation.

So with that, I will start off with going into the presentation. The presentation has 3 parts really. First, I'd like to give a short introduction here, all of those of you that are new to the group for a couple of pages. And then after that, we will go right through the Q1 report as we release the numbers in the report this morning. And after that, we will also make some highlights on other things that is going on in the group and looking at a little bit as we normally do in this presentation.

So we will start off on Slide #2. What is Lagercrantz today then, well, Lagercrantz is a tech group, one of the serial acquirers with no exit horizon making acquisitions every year, and the scope we've defined for ourselves is the B2B tech taking industrial companies within the B2B area. We are, as you see from the slide there, we are present in the Nordics and Northern Europe, but we also have some footholds in other parts of the world as our businesses are more and more increasing their share of exports. We also set up some hubs and some export activities in China, in India and also in the U.S., as you can see all the way over to the right on the slide there.

We have some revenues approaching the SEK 8 billion and we have some 2,600 employee. We have a very -- we are firm believers in the decentralized way of working with all the subsidiaries acting quite independently under their own name and then we add more companies to the group and follow up and work with the companies along the way, driving business development and growth in the businesses as we work through our -- the Board work in our subsidiaries.

We have organized ourselves into the 5 divisions. You can see there, the Electrify, Control, TecSec, Niche Products and International divisions. That is a new organization we've had for some 2.5 years now. And you can see where the different companies fit in and how many we have there in each of the subsidiaries -- in each of the divisions.

M&A has always been a very central part of what we're doing in our business model, and we continue to do and in the last 12 months, we have made some 11 acquisitions here, which has been improving our growth -- in adding on to our growth and also our earnings along the way. We feel that it's a very important growth engine for us. We have been on the stock exchange since 2001, where we were previously part of the Bergman & Beving Group, we have been separate listed companies in 2001 and currently on the Large Cap segment and Stockholm. So that's a short introduction. Looking into the interim report, jumping right into there.

We can see on Page 3 that we added another very strong quarter for us, adding to the good trajectory that we've had for some years. You can see that it's been picking up here in the last 2, 3 years where we've seen some strong underlying organic growth, but also some really good acquisitions coming into the group and thereby, the growth rate has been significantly higher here in the last couple of years. But it's been a good long journey for many years. We started out in 2005 around there, where we felt that the numbers were not sort of good enough for us. We wanted to especially to improve our margins and grow the business and that we've been doing, as you can see the left scale to the right scale is proportional.

And that means you can see how the margins are improving along the way here as we see times go by. We have been pushing different things along the way. We have been doing quite a lot of decentralization in the beginning. We had worked quite hard during the financial crisis of '08 and '09 but then, since then we've been gradually improving operations, finding some operational leverage along the way and then doing more and more acquisitions, especially of proprietary product companies.

And then in the later part, we have pushed organic growth and even done even more acquisitions. And now here, the last couple of years, it's been the theme around towards the SEK 1 billion which we have now reached, as you can see there. We started out 2.5 years ago with the SEK 500 million. But now you can see that we have surpassed SEK 1 billion there to the right on the right scale. And that is really satisfying. Of course, you see that we have reached that goal basically 3 years ahead of time or close to 3 years ahead of time. And that has been a very strong development over some years now.

Looking into the interim report of Q1 on Page 4, we have communicated here this morning that I mean, we saw here that the market situation remains stable on a good level for most of our businesses. We have been really expecting or seen that we are expecting some worse times ahead. But so far, so good. And we have said that from maybe 6 to 9 months now, but it's still been holding up very strong for us. I think that has to do with that we are sort of positioned ourselves in different -- very broad-based in different markets, different segments, but we have a long way also been positioning ourselves in areas where we see some structural underlying growth with the green transition with other types of niches and areas where we see some underlying good growth.

During the quarter, we saw the strongest demand in the division of Electrify, Niche Products and International, where it held up with good organic growth figures in all those 3 divisions. Also the others did fairly okay, but this ones stood out a bit. The order intake was then in line with previous year and in line with net sales during the quarter. I think that has been holding up very well for us, and it's been basically the same type of level that we've seen in previous quarters. We see the growth that come down a little bit, but not very much, but still can come down a little bit here during basically since Christmas, but it's been holding up here in the last quarter quite nicely, we feel.

So it's not been worsening anything during the quarter really on the same level as previous quarters. We strongly believe that our broad focus with many different end customer segments and geographies where we see some good emphasis on electrification, infrastructure, security and other specialized products in niches to provide very good resilience and good growth opportunities going forward. So we feel that the market has been holding up very well for us, and we've seen a good quarter in terms of the market development.

Looking at Page 5, we can jump into the numbers then for the Q1, the net revenues increased by 28% to a little bit over SEK 2 billion. As you can see there, the organic part of that growth was 6%, acquisition added from 19% and currencies in 4%. The EBITDA then increased by 35%, and the EBITDA margin was at an all-time high, which is also the EBITDA related SEK 357 million for the quarter is all-time high and the EBITDA margin of 17.5% is also an all-time high. The organic EBITDA growth was 11%, where we saw some especially good development within the Electrify, TecSec and International divisions that contributed the most.

We also felt that cash flows were really good. The SEK 286 million. We had a somewhat really bad quarter last year. So the comparisons were quite easy there but we feel that the cash flows have been strong here during the quarter. Profits after financial items increased by 19% then. We see that interest rates are picking up, and we also have some currency exchange rate effect on our foreign exchange loans that also affected the profit financial net during the quarter. But 19% is, I think, a really good number in terms of the growth in profit after financial items. The return on equity was at 28%. You know that we have a target of 25%. So we are above that and the equity ratio was at 38%.

The profits/working capital, which is the internal measurement we use within the group was at 72%. You know that we have always been benchmarking ourselves towards 45%. So the 72% is a really strong and good number for us as opposed to the 68% that we had ending the same quarter last year. During the year, during the last 12 months, we made some 11 acquisitions. But here during the quarter, it was 3 that added about SEK 280 million in annual net sales. I'll come back to that, but it's a Danish company into U.K. companies that you can see there. The earnings per share then increased to SEK 3.83 as opposed to SEK 3.70 in the fiscal year ending last quarter and the proposal for the dividend for the Annual Shareholders Meeting, which will be held at the end of August is SEK 1.60 per share as opposed to SEK 1.30 last year. So a strong good quarter and adding to the trajectory that I pointed out earlier.

Looking at the outcome by division, we see on Page 6, you could see how that looks in the different divisions. And I think it's good to see that we have 5 really strong divisions, providing real good margins. We especially see that in 4 of them, the Electrify, TecSec, Niche Products and International divisions. And we see the improvement that we have seen along the way in the International division is holding up here and continuing in the quarter. We also see the Electrify, which had a very strong quarter here also with some project-related business during the quarter. But otherwise, the main companies within Electrify also had a very strong quarter.

The Control division is lagging behind a little bit. We are struggling with a couple of units there. And we also see some component shortages and other things affecting some of the companies within the Control division. We also had a very good quarter last year with some project-related business that especially our company [indiscernible] had last year that wasn't really repeated this year, and that is also affecting the comparison towards last year versus last year. So that's also behind the numbers. But good margins and good profit growth in really all the divisions except Control, which I'll come back to here just in a minute.

We look at Page 7, we made some comments by division. And in the Electrify division, the revenues increased by 21%, and EBITDA increased by 34% a really good level of SEK 87 million for the quarter and a very strong EBITDA margin of 18.1% as opposed to 16.4% last year. The larger units, the Elpress and [indiscernible] , several of the Finnish companies performed very well while we are still struggling a bit with -- or yes, a little bit lower volumes at Elfac in Denmark, not struggling, but still on a lower level than last year and that has to do with lower volumes to the wind power industry, a key customer segment for Elfac. As I'm sure you've read about in other way. The Cue Dee then delivered a very strong quarter with some project deliveries through an international network operator during the quarter, which is also boosting the numbers a bit here in the quarter.

And the recent acquisition of Tykoflex that we did here in December of last year, had a strong demand and made a good contribution to also the outcome of the Electrify division. The Control division, their revenues grew by 5%, but the organic growth was minus a little bit, but because we are dealing with some acquisitions here. The EBITA then was at SEK 21 million and the EBITA margin at 11.4%. We see some challenging market situation in some of the companies there with seasonalities effects also in Radonova, which is an important part of the business. We see some positive development in other areas with Direktronik, Leteng, Load Indicator and GasiQ.

So some of the companies are really doing well in Control stealth but we also see that Precimeter had a very strong quarter last year, and that was not repeated this year. And the recent acquisitions, Stegborgs contributed very well even though it's a fairly small company. So it doesn't really add much to the numbers, but still for that company, it was a good add on to what we are doing to that division.

Looking at the rest of the divisions, the 3, the TecSec. The TecSec was standing out a bit with the revenues increasing by 60%. EBITA grew by 70% to SEK 95 million and a very strong EBITA margin growth over 1 percentage point as well. We see that the PcP acquisition we made last summer had a very good quarter.

And on top of that, we also see R-CON, ISG Nordic and Frictape performed particularly well here during the quarter and the strong Q1 with 6% organic growth in the division. We also see the new cumbers with, as I mentioned already, PcP, but also Door & Joinery and Fireco in the U.K. delivered good contribution to earnings according to plan. Those we made here. Door & Joinery we made last summer, but Fireco came in during the quarter here, but had a good start within the group. The Niche Products division. Here, we saw revenues grew by 12%. EBITA grew by 17% to SEK 104 million and the EBITDA margin was at 21.6%, a very strong margin and doing it very well margin-wise in the Niche Products division. And we feel that the business situation remains stable and favorable for several business of the business unit.

We see a particularly strong development within Asept that was lagging behind a little bit last year, but is pushing their numbers quite a lot this year and doing it very well. Also, the one of the bigger companies within the whole group, the Tormek continue to do it very well during the quarter. And SIB and Sajas, in Finland and Sweden, we did well and Thermod as well. Waterproof Diving that we acquired here during the fall last year, also continued delivering according to plan.

The International division, last but not least, grew revenues by 39%, EBITA with 50% and the EBITDA margin reached 15.5% for those of you that have been following us for a long time, you know that International has been lagging behind a bit on terms of margins but are now picking up and have made some really good acquisitions along the way. We are building the marine sector there where the company is addressing that segment.

And we also have a couple of other companies, the Schmitztechnik in Germany is also doing it very well for us, and that is adding to the numbers and the margins within the International division. You can see I added -- yes, we put that in text as well.

The recent acquisition that Tebul, which is adding to the marine sector in Finland, and Supply Plus that also came here into the group during the quarter, delivered good earnings contributions according to the plan that we had originally for the company. So those are the comments by division. I'm sure you have some add-on questions on that. We'll take that afterwards.

So those are a little bit of reporting on the Q report. I would like then to come back to the Lagercrantz towards the One Billion and that we reach that goal now, and we're on page 9. It's been a great thing for us. I think that we had this program that strategic platform that we've been working with for. We launched it in March or was in April of 2021. And now it's been a little bit more than 2 years, 2 years in a quarter, and now we've reached it well ahead of time. And what we did there was really to clarify some of the packages and financial goals that we wanted to work with. We also reorganized into the 5 divisions where we see some sustainability and an angle to sustainability with some clear growth ambitions where we see a structural underlying growth in those markets.

That's where we would like to be with that group. And I think the resilience that we see in some of our companies is due to that. That we see, that we are more structurally directed to the right sort of segments where we see some growth. We are within the electrification. We are into the green transition. We are into more of where we see infrastructure investment in criminal detention centers, for instance, is one area. And we also are in some areas within the Niche Products division, or you also see some underlying structural growth due to the change of the whole society and where we see growth different type of investments, and that's good to see.

In the program, we also wanted to increase the capacity within M&A, and we have done so by adding some M&A resources to the divisional level with the ambition that we can run multiple M&A processes at the same time simultaneously. And that has been also good for us that we have picked up in M&A growth rates along the way. We have also increased our geographical scope so we are more working especially within the U.K. You see a couple of new deals that came from the U.K. and that we are having some extra ambition there to grow in that market, which we feel is very interesting, and it's proven to be very interesting along the way as well.

Last but not least is the focus on sustainability, where we set some clear ambitions, some clear goals in sort of the 2030 perspective and also the 2050 perspective. And that we've also driven our sustainability report that was received in our annual report here just a few weeks ago or just a week ago or so, where we can see more of that. We'd like to look into that, not a good rate there in. To comment on a few of these things to touch back on the clarification of strategy and goals. I think it was very important that we highlighted that we wanted to grow by 15% per year that we wanted to really double the size of the group every 5 years. Now we've done it significantly faster.

And I think that has to do that we've seen some good underlying market growth, but we also highlighted that we would like to say 1/3 of our growth would come organically and the rest through 5 to 8 acquisitions, adding about 10% of the full group every year in terms of acquisitions. And to clarify that has been helpful in working internally with this and especially the organic growth has been better here in the last few years than previously, where we also cut out some low-margin businesses and did some pruning but along the way, we feel that we have a very strong and broad-based portfolio of companies within the group now and that we definitely have some greater ambitions when we talk about organic growth along the way.

Now we will see what will happen with the business cycle. Maybe we will need to see some lower sort of growth rate. But on the other hand, I think that will be good for us to work more with being up cash flows and making more acquisitions instead. So that's really how we would like to compensate if that would happen. But in long term, we definitely have a greater ambition in terms of organic growth. Return on equity then we should do this in a very profitable way. So the return on equity should exceed 25%. This is the goal that we work with externally. But then we also, as I pointed out earlier, we have transferred this internally to the profitable working capital, which we will exceed the 45%. You saw that we were above 70% here. So we are well above on the internal or profitable working capital goals along the way.

In this strategic platform on Page 11, we have also highlighted along the way. And I think that's the really key thing about us is that we really are pushing for more proprietary products. We see when we work with proprietary products that we have a stronger -- building stronger market positions, that we see higher margins and we see also better opportunities for growth, especially within exports. So we are basically translating the group from being more back in the days where we're more import related but along the way, we're becoming more and more export related due to the proprietary products where we can sell them into any market we would like to.

And we see along the way that this has been very good for us. We see that margins are higher. It's pushing our margins. It's also pushing our organic growth and when we stated off in the different type of products, different type of companies that we have. We see some differences there that the proprietary product companies grow faster and have higher margins than the average of the group. So this is very good. The 75% was now achieved here again in the first quarter. I think we're pushing it a little bit. So it's been increasing a little bit, and we will continue this journey and we are now revisiting our financial goals, and I think that we will see a higher ambition here in the near future. But since we now reached the 75%, but that was our aim for some years.

We would also like to highlight the continued focus on value add. That has been very important to us over the years. And you can see here on Page 12, how that's evolved over time. It's good to see that we have been struggling a little bit. We have been had a very good trajectory here over a long period of time. We were struggling a little bit here when we saw raw materials prices pick up and that we needed to compensate ourselves in terms of pricing. You can see here in Q1 that we had a very strong number here again, and that means that we have been pushing through some raw material prices also towards customers here lately and improving our margins a little bit again, reaching really a new all-time high in terms of gross margins. So that's also very good to see and important for us.

I was also talking about the acquisitions that we are increasing our ambition within acquisition. And as said already, the level we made 11 acquisitions here in the last 12 months, adding some SEK 1.3 billion in revenues. And you can see what companies that are over to the right and it's been very important to us to increase the rate of acquisitions as we see that it's the smaller ones that meet our targets usually in terms of price tags and so. So we would like to make more acquisitions along the way, and we are also working more and more with it in a decentralized manner.

We will make some exceptions. We will make a few bigger ones as well, but we would like to continue doing what we've been doing very successfully over many years, having company one by one, adding them to the group and giving them a lot of love and care and initiating some energy into the companies and get that to grow within our group. And that's how we work with the acquisitions that we make over time. And as already pointed out here, during the quarter, we added 3 more and I'd like to go over them a little bit briefly here. We're starting out with the Glova Rail. The Glova Rail is just to give you an example, I give you a sense of what type of companies we're looking into.

Glova Rail is a Danish company that provides components and solutions and products, vacuum, toilets for trains. Very niche-oriented company, very specialized in doing that in a very well -- in a good manner. And if you see down to the right here, we usually put in some numbers and the fact sheet. Really what we've been acquiring and you can see the very good EBITA margins and a good company really, very niche oriented. They're very known for their quality and they also known in the market for the ones that can supply control panels and technical modules for many competing products or many competing brands in terms of spare parts and stuff like that, they can also provide for other competing solutions.

This company is located in Odense in Denmark and has some sales that there were about DKK 60 million. This company is part of the division International and strong from April 2023. So it's a good example of the type of companies we're looking for, and are happy to add to the group. The Fireco on the other hand, is another company, which is the U.K.-based company that was also adding here during the quarter. They are providing different types of products for fire doors and fire door hardware. And you can see that main power up to the right there with the Dorgard, which is one of the key products a few different versions around that.

Have a very strong market position in the U.K. and the company is based in Brighton south of London in the U.K. and a very good company coming in as well. They had a bit of a weaker year in 2022 but we see good improvement opportunities within the group that they can approach -- soon approach the 15%. That is really the goal for the full group. And this company will be part of the TecSec division from -- is part of the TecSec division from April here in 2023.

The third company that we acquired during the quarter is the Supply Plus is another U.K.-based company providing high-quality ladders and hose reels for firefighting and emergency rescue services. You can see the products to the right there. Some of them are mounted to the vehicle while others are more loose that you can carry around.

But a very specialized and very high quality and this is really important products for firefighters that is work in the right manner and that they have a lot of trainings around them and they have a very strong market position in the U.K. around these products. The company is located outside Cambridge in the U.K. and have revenues of approximately GBP 9 million. And we also see some good improvement opportunities in this company. And we see that in fairly near term with this year already at the 17%, as you can see over there to the right in the packages there.

So really good companies, very niche-oriented companies, very good specialized doing good at what they're doing. And I think that when we come in as new owners, we have the opportunity to work with the teams that are in the companies.

And we usually try to add some energy and some structure and to get these companies to grow and make sure that they're making the right amount of money around the way. So that's the intention we have with these acquisitions. So looking a little bit ahead, I think it's good to see that Lagercrantz closed another very strong quarter. We have seen a stable market development over the quarter, and we see that we have a strong set of companies, many of them making a very broad-based success in any of the companies. And we see along the way that we are addressing the different segments, which we have here on Page 17. I think that the new divisional structure that we have is proving to be the right one for us.

We see that Electrify addressing that market, the TecSec growing quite significant Niche Products as well as International. Control, I think we have great ambitions. We have a number of also M&A activities going on there. And we also have some companies that we need to turn around and fix there. So they're lagging behind a little bit. But in the long term, I'm very confident that this is the right structure and the way to go forward with finding markets and segments with underlying structural growth that we will also be able to use that to balance also and that will prove to be resilient, I think, also if the downturn gets more severe for us along the way.

We don't expect that really, but still given what everything that we said in the market, it's fair to say that, of course, we are very observant of what's going on in the market, even though we did very little or basically nothing so far in our businesses as of now. I think it's also a highlight to also look at the net sales by market segment. This was released here in our annual report that is on Page 18. And you can see that where we have dependencies. And I think it's good to see that we are in very many good segments, and we also have a very broad base when it comes customer segment in many different markets, both geographically and product-wise, and also a very broad base in many sense.

So to round off, we're looking at the financial overview. You could see here, for those of you that like numbers, you can see here that the rolling 12 months, we're over to the right on Page 19 is, yes, adding a new quarter and a new all-time high M&A aspect, the 16.9% in EBITA is an all-time high. The EBITDA as well at 1,297 is also an all-time high, and you see the EBT then above the 1 billion I talked about an EBT growth in the last year, 28%. So it's we're having fun at Lagercrantz along the way. With that, I'll think I'll round off Peter, before we open up for Q&A, would you like to add something or...

[Peter Thysell, executive]

No. I think you said the most important things. And I think it's time to open up for questions.

[Jörgen Wigh, executive]

Yes. Let's do that then.

[Operator Instructions]

[Unknown Analyst]

So I have a couple of questions. First of all, the organic growth in the quarter, should we estimate that it's mainly price-driven?

[Jörgen Wigh, executive]

Yes. I think the price as pointed out I think in previous calls, we don't measure that. We are a company with many different companies, right. We can't really measure the price component. But given from what we know and what we hear in the company is my expectation is that I think most of it is price, even though the price component has come down compared to previous quarters. We have not raised prices as much this quarter as we have done in the previous 3 to 4 quarters because we also see some raw material prices coming down a bit now.

Are you talking about methods and other types of raw materials. So I think most of it is probably price but not fully, not all. A little bit, maybe a percent of, I think, would be sort of underlying growth.

[Unknown Analyst]

Okay. Super. And a question on the International division. They had a very strong organic growth. Could you just elaborate a little bit on what the underlying market demand is?

[Jörgen Wigh, executive]

We see good development in more of industrial-related type end market. We also see good conditions in the marine sector. So we see a few of the really all 3 of the marine-related companies with the ISIC, with Libra and also with Tebul in Finland, they're growing quite nicely with what we see in the market at the moment. The marine sector. And I think it's also a bit related to the military sector, even though we don't have very much there, but it's a little bit related to the military as well for defense.

[Unknown Analyst]

Going into the control division, we are seeing a negative organic growth out 3 last quarters. What would trigger a positive growth in this, positive sales growth in their Control division.

[Jörgen Wigh, executive]

Yes. I think in the Control division, we have 2 or 3 companies that are really important to us. It is Radonova, right? And it's Precimeter and it's Direktronik is the 3 main ones there. I think that Direktronik has been growing quite nicely. They're doing it well. But we also have some smaller units, especially in Norway with the Vanpee and the Leteng and also the Vanpee in Denmark are struggling a bit, and that is hampering the numbers. I think also the Precimeter, the Radonova, I think you're aware of, it has a very sort of has strong seasonality towards the winner in their business. So we usually, if you look at the numbers, you can see that the margins and the division are doing much better in the Q3 and Q4.

But what held it up last year really was the Precimeter. Precimeter is addressing the aluminum molding or aluminum sector. And there, we see some lower volumes especially in Europe, where we feel that the aluminum industry is suffering a bit from the higher electricity prices and therefore, we're reluctant to invest more. We have sales also in other parts of the world in the U.S. and in Far East. But the Precimeter did a very well -- a very strong quarter last year and did it manage to repeat that this year. So those are important sort of factors within the International division.

[Unknown Analyst]

Okay. Super. And just to clarify, you said that GD had a strong freight deliveries in this quarter, and that has a positive effect on the margin in Electrify division?

[Jörgen Wigh, executive]

Yes.

[Unknown Analyst]

Yes. And does that also drive -- have a positive impact on the cash flows and make it seasonally strong this quarter or?

[Jörgen Wigh, executive]

Yes, I don't know that the project-related business, I don't think that affected the cash flows that much, but it will really in the next quarter that it is the long payment times on that one. So it's -- but it's not huge. It's important, but it's not huge.

[Max Bacco, analyst]

This is Max Bacco, SEB. First of all, very well done. I'd like to see you reaching the target 3 years ahead and very impressive. Just a few follow-up questions. On the QD here on the project deliveries, did it have a positive impact on the margin? Or was it quite in line with the segment?

[Jörgen Wigh, executive]

Yes, yes, it's in line with the margins that we have there.

[Max Bacco, analyst]

Okay. Perfect. And Yes. And in terms of the order book, how long is it? And how much visibility do you have here in the second part of 2023.

[Jörgen Wigh, executive]

It depends. I mean we have some 70 businesses, right? And it's, and therefore, it varies quite a lot between the different companies. Some of the companies have very short order books while others have very long order books. We usually say that we have 3 to 4 months visibility on a group level.

[Max Bacco, analyst]

And that is the case now also, I guess.

[Jörgen Wigh, executive]

Yes. 2 to 3 months, whatever, yes. I think that I mean we're approaching summer, right? So I think that September will be an important month for all companies really to see what's going on and whether the things sort of pick up after summer as they should we expect or what will happen. So I think that the September will be important, and that goes for all companies, I would say. Yes, not only long accounts. I mean Yes.

[Max Bacco, analyst]

And one final question. I mean, the cash flow was really strong here in the quarter. Although the impact from net working capital, which was negative, is that more a seasonal effect that the net working capital that you saw continued buildup in inventory and so on? Or is it an organic growth that drives it?

[Jörgen Wigh, executive]

Yes, a little bit of both, I would say, but it's more the seasonality effect. We usually have a weaker cash flow in Q1 and to some extent, also in Q2 even though we weren't satisfied at all last year. So you shouldn't look at last year because that was not good enough. So we are definitely driving the drivers of the cash flow. But from a seasonality perspective, it's somewhat slower or weaker in the summer than any winter time.

[Anna Lindholm-Widström, analyst]

It's Anna from Handelsbanken. So my first question is, if we can go a bit into detail on the gross margin improvement. You did have some comments on new companies having very good gross margins on Slide 12. But could you maybe give us some comments if it's also related to the price increases that you have seen that you've done or some cost decreases that you've seen on some materials, prices or so on?

[Jörgen Wigh, executive]

Yes. I think it has more to do with the price increases and cost sort of working better with margins in the existing business than the add-on from acquisitions. Some of that, I think the acquisitions, I don't have that separated, but I would expect the margins in the acquisition will be on the level of the rest of the group. So I think what you see in the improvement is more related to the existing business, the legacy business. And then we've seen some price increases along the way. It's been taking some time before to push it through a little bit.

I also feel that we also have seen some raw material prices come down in other parts of the business and that is also affecting the margins a little bit in the positive direction. And then we also see, I think you also need to realize that there is something on the currency effect here as well. We are more export related along the way, and we have production in the Nordics and in Sweden and that is also affecting the numbers in the positive direction. While I don't have a split, but those are the components, I'll say.

[Anna Lindholm-Widström, analyst]

Okay. That's very helpful. And you did start to talk about the inventory levels. Could you maybe share what your view is on the current inventory to sales ratio? I think it's just about 16%. Where would you want to be currently? And do you have different views on different segments?

[Jörgen Wigh, executive]

Yes. We don't measure it in percentage of space like you have it there. That's not the metric we use in the inventory turnover rate. And that we have by company. So we have an inventory target for all of the company, for every specific company. And we are above the target in quite a number of companies, and we are definitely driving that down. I can't give you a number write-offs, but it's I think we definitely need to push down on our inventories along the way here. And we have been working a bit with it, and we do it in Q3 and Q4, we saw some improvement here in the last quarter, we saw a little bit of that went up a little bit again. And that, I think, has to do with the seasonality. We need to protect ourselves in terms of being able to deliver over the summer, especially in some of the Swedish companies, and therefore, they're building some stock before summer. But otherwise than that, we definitely are driving down the stock along the way.

[Anna Lindholm-Widström, analyst]

Okay. Great. And my final question is on your M&A pipeline. Sort of how you're experiencing companies' willingness to sell? And if you seem to have common views on price tax.

[Jörgen Wigh, executive]

Sorry, come it again, I didn't quite understand the question there.

[Anna Lindholm-Widström, analyst]

No, just when you were talking to M&A prospects, if you know that the companies have very high willingness to sell? Or if it's more if they seem to want to wait and so on? And if you seem to have a common view on price tax giving the volatility that we've seen in recent years.

[Jörgen Wigh, executive]

I think it's -- I think the market was sort of very sort of boosted and price hikes were very high from 1.5 years ago or maybe 2 years ago. But since then, it's been coming down. I think it's been reasonable here in the last year or so. And I don't see a change in that really in the last quarter or so. I think it's been very stable here in the last 6 to 9 months. We have been able to conclude deals. I think we are bidding at the right level, and we are -- yes, we see eyes to eyes with the sellers in terms of the price tag.

I think it's very established, and I think that we're bidding and working with them, but it's also about sort of a lot of soft values that they choose to come to us in terms of that they feel that this could be a good harbor for the company. And it's not only price. It's a lot of other things that as well. But I think that's been very stable for many years really. It's been going up a little bit in terms of the price tags and multiples. But currently, we're in the midst of the range that we usually been working with.

[Karl Bokvist, analyst]

It's Karl Bokvist here at ABG. So most questions have been answered. Just I apologize if you referenced it, but there's clearly a very strong performance in your underlying units. But in the past months or so, have you picked up any market indications in particular end markets that are either improving or weakening. You mentioned that the marine cluster is performing well, but any kind of flavor here that you could add?

[Jörgen Wigh, executive]

I always thought, not really. I think what we have disclosed in the report is really how we see things. I think it's been very stable. We see very little of a downturn. We don't see the sort of order intake or anything sort of deteriorating or any new trends there really. We see it's been stable. And we have communicated it's been in line with last year in terms of order intake, and it's been in line with sales. So I think it's been -- I think we have covered most of the sort of trends that we see. And it is holding up very well, and we see very little of any downturn so far.

[Karl Bokvist, analyst]

Understood. And then will it's clear that your organic earnings are driving underlying margins and the acquired growth still has a pretty stable margin profile. I'm just thinking about going forward here, usually, if we just look at kind of long averages, this quarter that we're heading into seasonal-wise should be a bit of a better margin quarter for you. I'm just thinking about what's happening with the units and the seasonality and in case you have anything that you wish to add on this.

[Jörgen Wigh, executive]

No, not really. We have seasonality in some of our businesses. We have a Radonova for the winter, right? We have Elpress and the ones that are doing more of infrastructural investments. Those are normally more in the summertime, where we don't have winter. So we have some seasonality. But all in all, it balances out. We usually say that the Q3 and Q4 is somewhat stronger than the Q1 and Q2. I think that the weakest quarter is probably the Q2 but that you see in the numbers. And if you say I don't -- I haven't even realized that the margins seem to be higher in Q2. Maybe that's true, but it's not significant, I would say.

[Karl Bokvist, analyst]

Understood. And just finally, it looks like another year last year where you were very disciplined on what you paid for companies. And well, common recurring question, but have you seen any kind of differences or changes in dynamics in terms of M&A discussions when it comes to what you -- what the sellers want to receive.

[Jörgen Wigh, executive]

No changes there, really. I think we have been paying sort of the price tag and the multiples over a long period of time that we're using. And we didn't really increase them when interest rate went down. And now when interest rates are coming up, I don't -- I mean, we have a hard time sort of arguing that you could be even lower. I think multiples of 4 to 8x EBITDA is quite good when we're looking at these very strong niche-oriented product companies that we're looking for. And if we can continue acquiring at that level, I think it's a good thing for our shareholders to just keep up the pace and go along with that. No new trends there really. Good one more? Okay. Let's round up...

[Niklas Sävås, analyst]

It's Niklas Savas here from Redeye. I just have a final question on that with regards to the growth you foresee ahead. I mean you have the target of growing 15% per year, and you state that a larger part of that will come from acquisitions, probably than usual. Meaning that, I mean, you see probably 5% organic growth as a reasonable target. I mean, I just wonder, do you have to add any resources to continue to scale acquisitions going forward? And what are the main challenges you see in this?

[Jörgen Wigh, executive]

I think we have been living in -- had a good sort of set up here in the last few years, where we have been surpassing or overachieving both on the organic growth and on M&A growth target that we've set. We should grow by 15% per year, and we've said that 2/3 of that should come from M&A and 1/3, which is the 5% that you're referring to PAM organically. I think that those are reasonable looking long term. I think we have been well above them for some time now. Maybe we will see a somewhat slower organic growth that we see growth rates come down a little bit. But on the other hand, I think it's important for us to be able to scale up the M&A growth. And that's we've basically been doing already. I mean we had some was it 14% was it in the quarter, then we have that number was 19%, right? That was added on the M&A here.

It's I think we have been scaling up the M&A activities. I think we will continue doing that by adding maybe some more research on the divisional level. But I think that came most of it has already been done, that we have set up a stronger M&A teams in the division, and that came really from the reorganization we made some 2 years ago. So we have been adding a few resources, and I don't think we will add very many more now. We will get this organization who work and hopefully be able to close some 6 to 12 weeks per year or something like that going forward.

[Niklas Sävås, analyst]

I mean you added feet on the ground in the U.K. and have been scaling nicely there. I mean, do you looking into adding any new resources in other countries? Or are you happy with the countries you're active in?

[Jörgen Wigh, executive]

Yes. I think yes, I don't think we will make drastic changes in the coming quarter. But looking maybe 2 years down the road, I think we will also be addressing other markets. We have been talking about Germany, we have been talking about the Dutch or the Netherlands. And that is the dark area. Those markets, I think, could be areas where we would like to add some feet on the ground. We have some companies in those markets. So we have some people working for us there, but they're more working in the company is more on an operational level. What we did in the U.K. was putting feet on the ground in terms of M&A resources, and that has proven to be very successful for us. And probably we'll do that in some other markets along the way. But I don't think it will come the next quarter, it will probably a little bit further down the road.

[Niklas Sävås, analyst]

Great. That's all for me. And congratulations to reaching the target and have a great summer.

[Jörgen Wigh, executive]

Thank you very much. You too. So do we have some final questions? Or should we round off there? Okay. Let's round off. Me and Peter are available for some one-on-ones, if you'd like to call us. In the website, you can find our phone numbers and also in the report. So if you'd like to ask something, please don't hesitate to call us. But thank you for listening in, and have a good day and a good summer. Thank you very much.