Lagercrantz Group AB

STO:LAGR B

Earnings Call Analysis

Company Maintains Solid Performance and Pursues Growth

The company reported a solid quarter with net revenues increasing by 6% and an EBITA growth of 9%, improving the EBITA margin from 16.6% to 17.2%. Despite a slight organic decline of 2%, they've completed 4 M&A deals and continue to pursue their new financial target of reaching SEK 2 billion. With a strong cash flow of SEK 367 million and a trajectory of profit growth, they are well-set for future expansion.

Lagercrantz Group Continues to Grow Through Acquisitions Amid Market Softness

Lagercrantz Group reported solid results in its Q3 2023/2024 earnings. The company has focused on acquisitions to fuel growth, achieving 8 acquisitions since March. Notably, they have demonstrated a robust M&A strategy with an expenditure of SEK 2 billion annually to acquire 8 to 12 firms—showcasing their strength in cash flow management to support this objective. The inclusion of a Swedish supplier of drone safety and noise barrier systems into the Electrify division is poised to contribute to growth, acquired at an attractive EV/EBITDA of 6.5x.

Solid Financial Performance With Increasing Share of Proprietary Products

Financially, the company has seen its EBITA grow by 20%, with the international division reaching above a 17% margin. The commitment to proprietary products is evident, with 76% of the current portfolio, up from previous years, and noticeable progress in internationalization with increased revenues outside their traditional Nordic market.

Positive Outlook Tempered by Cautious Earnings Guidance

The company foresees a moderate easing of earnings, signaling a SEK 12 million normalized level for 2024, indicating a temporary peak in growth. Yet, they remain confident in maintaining a 14% margin in the TecSec division, with Finnish acquisitions bolstering their offerings in generator sets and backup power solutions.

Robust Cash Flow and Margins, Enhanced by Strategic Acquisitions

Earnings per share have grown by 18%, surpassing the target of 15%. The strategy leans more on acquisitions in the face of a slower market, managing to maintain a robust cash flow and margin improvement. Significant focus is on converting strong cash flows into strategic acquisitions, as evidenced by a 46% increase in cash flow.

Strategic Divisions Set for Sustainable Growth

Lagercrantz Group has outlined clear growth ambitions across its five divisions, aiming for sustainable positions in growth segments. They plan to balance organic growth and acquisitions, with a third expected organically and the remainder through 8 to 12 annual acquisitions. Their focus on proprietary product companies continues, with an ambition to reach 85% proprietary products, signaling a strategic leverage on their specialties.

Financial Ratios Indicate Strong Profitability and Efficiency

The return on equity stands at an impressive 28%, with an equity ratio of 38%, signaling financial stability. Profit over working capital also reflects efficiency, having improved to 77% compared to 73% last year, providing confidence in the group's operational and financial management.

Nine Month Summary: Acquisitions Propel Revenue Growth

For the first nine months, net revenue increased by 15%, largely driven by acquisitions contributing 11 percentage points, with organic growth at a modest 0.5% and currency impacts contributing 3 percentage points. EBITA surged by 21%, illustrating the company's successful integration of acquired entities and sound financial health.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to Lagercrantz Group Q3 Report 2023/2024. [Operator Instructions] Now I will hand the conference over to CEO, Jorgen Wigh; and CFO, Peter Thysell. Please go ahead.

[Jörgen Wigh, executive]

Thank you, and welcome, everyone, to our Q3 report conference call. We released our figures this morning. And together with me here is Peter Thysell, our CFO, as well. We will usually go over the numbers in our report here this morning for another approximately 40 to 50 minutes or so, with also the Q&A at the end of the session.We -- as you know, we have a year ending end of March, so we, today, this morning, released our Q3 figures. And we normally -- and we normally go over this in a short presentation, a short introduction to the Group. And after that, we'll jump right into the reporting, and then, we try to highlight the few things that we felt -- feel are important for us going forward, as well at the end. And then, we open up for Q&A at the end of the session.So let's get going. Well, to give you all of those that are new to the Group, a little bit of an interaction just briefly, I mean, we are an industrial tech group with leading position in expansive niches is what we -- we have around 70, 75 companies within the group, and they're organized in these, as you can see here, the 5 divisions. It's an industrial group. We are looking at companies that have a good performance for many years, as we -- when we acquired them and we tried to build and develop them along the way, usually looking for companies that are very strong in terms of cash flows and performance. And through that, we generate our own cash to acquire more companies and build the group.Over to the right, you can see where we have our needles and where we're present. It's in Northern Europe, mainly, but you can see all the way to the right also that we are more and more working with exports, and we have some footholds also in other big markets around the world, in China, India and especially the U.S., as you can see there over to the right.We have some revenues of approximately SEK 8 billion and are some 2,700 employees. We are very keen in driving our companies with a high proportion of [ autonomous ] in a very decentralized structure, where each company are working under their own name, with their own markets and their own customers, and we follow up and work with them in business development and board work in order to develop all the companies along the way, challenging them and also helping them in growing the businesses, both in domestically, but also more and more over exports.Acquisitions is, of course, very central. We view ourselves, as a serial acquirer without an exit horizon. And M&A is very important to us, where we have tried to acquire some 8 to 12 companies per year, as we grow the business over the years.I think we posted -- and along the way, as we now see that we're working both with M&A and organic, I think that currently, the organic side is a little bit weaker, but we compensate that with strong cash flows from the organic side and generating even more acquisitions along the way, which I think is good for us at the moment, where we are growing the business quite significantly on a total level, but along the way, also now currently more through M&A maybe then through organically.We've been listed on the stock exchange in 2001. We were one of the companies that came out of the old Bergman & Beving Group and have been doing what we've been doing, as a separate company since 2001, but the heritage goes back all the way since 1906. And we've been on the stock exchange in one form or the other since 1976. So we've been -- we are very established and been working the way we're working for quite some years now.Looking a little bit into the interim report, I think it's great to see that we had another solid quarter, I would say. We posted some record earnings and record profits, and we closed some 4 M&A deals in the quarter, which I think is very good to see. You can see here the trajectory we've had over many years. And you can see, we posted another strong quarter with both sort of top line growth and also profit growth along the way.For those of you that have been with us, you know that we raised the bars in years -- 3 years back, raising the bar to doubling from SEK 500 million in terms of profits to SEK 1 billion. But now here lately, we surpassed that in here already this summer. And now here in -- during the fall, we launched a new program then raising the bar to the SEK 2 billion, which I will talk about a little bit later here during the presentation. But I think the numbers were strong and solid along the way here. So that is highlighted here on this slide.Yes. So we move in -- looking a little bit in how we commented the business conditions. I think all in all, we felt that the market situation remain stable for most of our businesses. I think that we are -- we have some 1% negative organic growth in the previous quarter and now it was 2%, no drama there really, no dramatic changes. I think the order intake for comparable units has been in line with net revenues for the last couple of quarters, and that continued during this quarter as well. So it's been holding up very well for us better than most, I would say. So I think we're okay on that front.We see that we are, in many instances, very well positioned with the security and safety in the segments we're in, with the security and safety, the electrification, the infrastructure segments that we are working with. And we also saw that those main segments continue to do very well for us. We saw that the bigger companies of the group, with the Elpress, with the Tormek, with the PcP in Denmark, they all performed very well during the quarter and continued having good market conditions.While we see some smaller units more related to construction and a couple of companies also within the electrified more addressing the wind power turbine manufacturers and those segments that they were affected by some [indiscernible] structural changes in those markets, but also to weaker business cycle. No dramatic things there either. It's been something that we've been talking about for the last couple of 2 quarters, 3 quarters now.We feel that we have a very strong broad-based sort of set of companies within the group with many different end customer segments and geographies. And I think the focus that we have within electrification, where we have our main companies, the infrastructure, the security and safety and other specialized niches that we are providing some good resilience and continued good growth opportunities within -- as we are developing the Group along the way.Down to the bottom there, we are -- we, usually comment also on the sort of content of what we're having, and the proprietary products, you can see that is at 76%. It's been growing there, and it's been the key thing for us along the way. And we can also see that we are gradually -- slowly, but gradually becoming more international with more sales outside the Nordics, as you can see, the revenues by geographic market over to the right here. So it's a couple of things that -- no dramatic things, no dramatic changes, but still gradually sort of moving in that direction along the way.Yes. Looking at the numbers, Peter, maybe you should comment on the figures here.

[Peter Thysell, executive]

Yes. Thank you, Jorgen. I believe our Q3 can be summarized by increased earnings, improved margins, strong cash flows and several very exciting acquisitions. So first, the net revenues increased by 6% and acquisitions contributed with 7 percentage units and organic growth was slightly negative, 2% and currency contributed with 1%. The EBITA increased by 9%, and the EBITA margin improved from 16.6% to 17.2%. The cash flow was, I believe quite strong. It was SEK 367 million compared to the SEK 439 million last year, which was exceptionally strong last year. Our profits after financial items increased by some 13% in the quarter.And as mentioned, we signed agreements for 4 acquisitions that add about SEK 595 million in annual net sales, and Jorgen will come back and describe these acquisitions a little bit in more detail later. And out of these 4 acquisitions, the last one, the Nordic Road safety is by far the biggest, and we have not gained access to that acquisition yet. So if we summarize the financial year so far, the first 9 months, the net revenues have increased by 15% and acquisitions have contributed with [ 11% units ], and organic growth has been slightly positive, a little bit more than close above 0.5%, and currency has contributed with 3% units.EBITA has increased by some 21%. And the cash flow is probably one of the stronger points here has increased by 46% to SEK 951 million. Our profits after financial items have increased by 17% to SEK 818 million. And our earnings per share increased to SEK 4.13 compared to the SEK 3.70 that we had in the last financial year.Our return on equity was 28%, and our equity ratio was 38%. And our profit over working capital has improved to 77% compared to 73% last year. And we have so far, this financial year completed or we have made 8 acquisitions that contribute with some SEK 900 million.If we look into the divisions, it's as Jorgen mentioned, quite broad-based improvements. And I think what's the most important in this slide is to notice that all our divisions are now above 17% EBITA margin in the quarter. That's quite broad-based and quite good, we feel. If I should mention one is the International division, which has for a long time lag behind the other divisions that is now catching up, and we find this very, very satisfactory. And for the Group total, as I mentioned earlier, it has improved from 16.6% to 17.2%.And maybe Jorgen you should comment a little bit about the business in each division.

[Jörgen Wigh, executive]

Yes. Let's do a little bit of a deep dive here into the different divisions and look how it's looking. And looking at the Electrify, the EBITA there increased from SEK 71 million to SEK 80 million, an increase of 13% over the years. I think that we still see some good favorable market situations, driven by the investments in electrification and infrastructure for many of the companies and especially the bigger ones when we're talking about Elpress and a couple of others, Norwesco, and a couple of months, did a very good quarter here.But we also saw that some of the companies had some more project-related volumes last year, not that big, but still affecting the total growth figure, and we also saw that some deliveries related to the construction sector in Finland was slightly lower. And we also saw that the wind power industry and the wind power turbine manufacturers, those volumes were still lower this year than last year. So that is affecting that.Within the infrastructure part of Electrify, we saw that Swedwire and Cue Dee delivered strong profits and especially Cue Dee, did very well without sort of project deliveries this year.The recent acquisitions, Tykoflex and Letti that we acquired here in August and Tykoflex last year, both reported good results with -- or even slightly above expectations. And we're also continuing building the electrification, Electrify division. So in December, we also signed the Nordic Road Safety, which adds another SEK 350 million to the division on an annual base. The acquisition is subject to some approval from authorities, and we expect to close that with -- or yes, complete that deal starting from 1st of March in 2024. So that has not affected the numbers that you can see here so far. That is ahead of us.The Control division then posted actually the same amount of revenues this year as last year. The EBITA was slightly lower. They have struggled a little bit over the year here, but it's -- we feel that overall, it's been a stable market situation. We see some slowdown in demand in some business units. The Precimeter, which is a very important part of Control were affected by the reduced aluminium production in Europe due to increased energy prices that has affected their end market. They're addressing -- they're also present in the U.S. and also in Asia. So that is holding up good for them. But the European market has been decreasing over the year during this quarter -- affecting this quarter.Also, the Vanpee companies were affected by weaker construction market, which [ they ] are smaller units, but still affecting the total here. That is in Norway and in Denmark that is -- that they are related to.At the same time, several businesses could reported a positive development. We see Radonova, which is also an important part and Direktronik is also an important part of Control, holding up and developing very well here during the year. So we -- and Load Indicator, a smaller unit did very well here during the quarter, as Stegborgs and Leteng did as well.The third division is maybe the best performing division is the TecSec. They increased the EBITA by 27%, reaching almost SEK 100 million. They were some of the smaller divisions a few years back, but has increased in size and importance to the full Group. I think they're very well positioned with driving sort of more security and safety type products and have found some good acquisitions along the way. Revenues were up 14% and organically also some growth there. So a lot of good things happening within the TecSec division.We saw a broad-based that the PcP had a strong good market and a good -- posted a good strong quarter. ISG Nordic, ARAS, Idesco and also very much Door & Joinery in the U.K. performed particularly well. The CW Lundberg was impacted by negative seasonal variations and weak construction market, which is affecting them. They're also very much related to the summer sales over the spring and summer sales. But we see some effects of the business cycle there in the CW Lundberg along the way.The new acquisition, Fireco in the U.K. also delivered increased earnings according to plan. And now in December, the division also closed another one, which was Suomen Diesel Voima in Finland was acquired -- which is a leading supplier of generator sets for backup power solutions and also have a sprinkler solution pumps, which we had earlier on in R-CON in Sweden, and this is a similar company. So some operational opportunities between the companies, as we are now also addressing in the Finnish market through the Diesel Suomen Diesel Voima company along the way. So TecSec is really good for us.The Niche Products division has been very strong for us for many years. They posted a somewhat weaker quarter here. I think the order intake has been holding up very well from these products, but they were not able to really translate that into good profit growth here along the way. So the EBITA was actually down a little bit here, but still on a very good level. And here you see the EBITA margin there is still a slight improvement there, still doing it very well in most of the businesses.The business situation, there's a lot of different parts of this, but overall, it remains stable for most entities. We saw some good earnings improvements in Tormek, in Asept and SIB, where we -- especially our Tormek company, which used to be our second most important company after Elpress now is really looks at heading for another strong and record year and might be the most important part of the Group, as they're growing quite a good year for some time.Generally speaking, the North America, and we also saw -- we saw some good performance in North America, while -- which we have a number of companies within the Niche Products in there. Wapro has doing very well there, but also Asept is doing very well in North America. So it sounds, why we saw some business -- a weaker business cycle in the Nordics for some of the companies.And here, we also closed an acquisition here in December with MH Modules, a Swedish company, which will -- which I'll come back to later on, but that's also adding to the numbers a little bit here during the quarter, but only for December. So very little part.The International then, here, the EBITA grew by 20%. And as Peter already pointed out, the International has been doing it very well for some years now, growing along the way, and with some really good acquisition coming in. [ We are ] also pushing the EBITA margin used to be significantly lower in the International division, as opposed to the other divisions, but along the ways pushing now and reached [ above ] 17%. And we all -- as I said, we have about -- all 5 divisions [ above ] 17% now, which I think is very good.We see here some favorable market situation for the marine businesses. The Libra in Norway, ISIC in Denmark, but also for the German company, Schmitztechnik and E-tech in the U.K. -- in the U.K. also contributed with some strong earnings. We also some -- saw some other companies that were more -- a little bit more struggling and also had very good, tough comparables from last year, which is the NST and some of the ACTE companies that we have in different markets.We also saw that the Glova Rail and Supply Plus in the U.K. The Glova Rail in Denmark and Supply Plus in the U.K. delivered some good earnings contribution according to what we expected when we company -- acquired the company.And here, we also closed an acquisition in December, which was the DP Seals, which I'll come back to later then. So that was comments by division and a deep dive.As sort of another sort of way of illustrating, I think we've seen some really stable -- all in all, for Lagercrantz, it's been a stable market, and you can see how that's evolved also by segment. And you can see the differences here in the 9 months are very small as opposed to how it was for full year last year. So just for reference, you can see how that's developed over time, and you can see that where we have our dependencies.It is within the power and electricity distribution is the biggest segment. You can also see that the infrastructure is very important to us. We have some building and construction-related businesses, but it's mostly in residential sort of in commercial and industry, as you can see. And then we are scattered around in a number of other segments, which I think is sort of highlighted through how we talk about our business [indiscernible] saw these very broad-based and a lot of different segments, both product-wise, but also geographically speaking. So that might be good for you to see.And looking a little bit further, I think most of you have already heard, I think, that we are raising the bar to the SEK 2 billion. We set the bar at SEK 1 billion some 3 years ago. And now here during the summer, we surpassed that we should have done that in 5 years. We did it in 2.5 years. But now we're raising the bar to the SEK 2 billion that we will hope to reach within the -- or aim to reach within the 5 years.I think we have set up the Group in a very sort of dedicated way to reach that. We are very clear on what strategies and financial goals we're working with, both on a Group level, but also on a subsidiary level [ worry about ] now to set the targets and discuss what we are aiming for, for next year. We don't do budgets, but we try to keep it very simple, but still have great ambition on what to reach next year.We have also setup the 5 divisions with very -- 5 divisions, very clear growth ambitions, segments, where we would like to be, how we would like to grow. And that's -- that is, I think, been the key thing in reaching the SEK 1 billion, and it will continue to be that reaching the SEK 2 billion. So I think that is also very important for us.The increased capacity and scope within M&A is also important. We are building the divisional level, and we are increasing sort of the pace raising the bar from 6 to 10 to 8 to 12 acquisitions per year along the way.And the focus on sustainability, we are building that organization somewhat with someone really responsible for that. and been hired, and we are now working to meet the [ CSR ] directives for next year. So we are well underway with that type of work as well.Yes. And the building towards the SEK 2 billion then, well, it's about to continue to deliver on the targets we've set in terms of growing the EBT, earnings before tax with 15% per year. And we have highlighted that we expect 1/3 to come from organically and the rest through 8 to 12 acquisitions per year. When we see a slower market, we will compensate that with stronger cash flows from what we normally see. We've seen in many downturns that we see that the cash flows are even stronger in those periods, and that opens up for more acquisitions along the way. And you can see that we have closed 8 acquisitions already this in 9 months now. So we have -- and we expect some -- yes, 2/3 should come from that, and it should be around 10%, and we have also been well ahead of that goal, as well this year.The return on equity then, we should do all these things in a very profitable way and the return on equity, the bar is up there at [ 28% ]. And you saw here in the numbers that we provided, it's at [ 28% ] at the moment. So we are well above that as well. So I think that's key to highlight.I think we will continue then building the 5 divisions in the SEK 2 billion program. I think we have now sort of set focus through all of our divisions, building sustainable positions -- building positions in sustainable segments with underlying structural growth is how we talk about it internally and how we really would like to set out what we are aiming to do.I think we're very well positioned in the electrification with -- through our Electrify and the infrastructure companies that we have within Electrify. Here, we expect some 5% to 15% growth along the way.Within the Control division, we are aiming -- we're working with measuring and control solutions, usually measuring and steering things from a distance and IoT-related type companies that we have within the Control division.The TecSec is, as I said, one of the fastest-growing divisions or maybe the fastest-growing division within the Group, finding good opportunities through M&A, but also building organically along the way, as you saw from the numbers there.The Niche Products division is where we would like really to grow. We set up that division in 2012, and since then, it's been -- becoming the -- profit-wise, the most important division still, but being challenged a few others, but still a very good position, finding proprietary -- proprietary product companies that we can build through.And we are aiming to do the same thing with International. And we see now when we go abroad looking for other [indiscernible] companies to add to the International group that we see improvements and margins picking up in -- within the International division. So very -- I think a very sort of attractive niche to be or attractive segment to be in as well through the International division. Here, we will build quite a lot within -- in different markets, but we have also set feet on the ground in the U.K. along the way here, building the International division.So we move on from there. Yes, just to highlight that the aim for 85% proprietary products is used to be 75%, but now we've raised the bar to 85% there, then we are aiming for the SEK 2 billion. And you can see, we are pushing it a little bit here in the last 3 quarters or so. And with the acquisitions we made, most of those are proprietary product type companies, so this will increase by adding those companies that we just acquired here in the coming months and quarters. So that will work in the right direction for us.We are also very keen on driving our focus on value-add. And here, you can see how it's developed over time. This is very important for us using the pricing power that we would like to have in our niches and that we do have in our niches, and you can see how that's evolved over time. And of course, everyone that as numbers here and understand that this is really important to keep the good and high margins that we have within the Group and pushing them even further.And we have seen here in the last few quarters that we have been able to push it up a little bit further, as you can see here lately to the 39.3% that we're currently at for the first 9 months of the year. Working quite a lot with pricing, quite a lot of sort of scrutinizing the business that we already have and working through that in order to push Diesel [indiscernible].Yes. Yes, coming into acquisitions then, I think this is a key thing for us along the way and maybe more so now [ then ] when we see a slower market -- but we are [ applying then through the ] SEK 2 billion to acquire 8 to 12 companies per year, and we see strong cash flows, as you saw from the numbers, sort of fueling this. We can see that in 2023 and onwards, you can see that we closed some -- yes, it's 8 acquisitions since the 1st of March, which is the Glova Rail and onwards there, adding some SEK 905 million in annual sales. And we said it should be 10%, and this is actually more than 10%. So this is way ahead of our own ambitions here. Great to see, I would say.We have along the way also expanded our scope. So we are looking more at acquisitions in Northern Europe, Germany, Benelux and the U.K. especially, we are putting some feet on the ground, especially in the U.K. You can see that we are working more and more and closing more deals in the U.K. than we have done.Working the same way as we do in the Nordics, step-by-step, company by company, but along the way building a strong presence and a strong group also in the U.K., which is the aim currently. So we closed the Supply Plus, the Fireco and the DP Seals are all in the U.K. So it's great to see that we are also expanding geographically along the way here.Yes. To comment a little bit on the companies we acquired here in December, the Nordic Road Safety is the biggest one, which we -- as we said already, we are expecting to be -- we expect it to be part of the Electrify division from March. So this is not in the numbers yet. This company is a supplier of permanent drone safety and noise barrier systems. They are working with certified products all along, have a very strong market position in Sweden and are also working in Finland and in Norway, especially with these type of products. A very strong management team there that has built this company for -- in a fairly short time. Located in Timra and the previous owners are remaining with 15% shareholding along the way here.We felt that this was a very good company for us. It has some growth -- has been growing quite nicely. And we can see also a reasonably good or very well profitable working capital at 60%. And we acquired -- managed to acquire this company at an EV/EBITA of 6.5x, which we felt is a reasonable level for a company like this. So that will be important for the Electrify division and for the Group, when it comes into the Group.Yes, we'll move to the next one. The second one, I'd like to introduce is the Material Handling Modules, MHM, which is a Swedish supplier of different type of material handling systems. You can see the price over to the right there and also a strong performance over a few years, over many years and had a very good 2023. We don't expect that to really continue in 2024, and that's why we highlighted that with also some forecast for 2024. I think the SEK 12 million there is more of a reasonable level for next year than maybe the 2023 was. So I would like to indicate that to you guys. So that will be part of the Niche Products division, as starting from December 2023.The next one is the Suomen Diesel Voima coming into the TecSec division, which is a Finnish company with this type of generator sets and backup power solutions for -- and also another segment, which is the fire sprinkler pumps in Finland, similar to the R-CON business that we already have. Also nice growth and also some good margins in the last couple of years here. Really got their act together, which we feel is sustainable, and also then very well positioned when it comes to building infrastructure around these type of things in Finland. So good acquisition coming into the Group in Finland and to the TecSec division.Also, a minority shareholding there, where management is keeping the 14% -- some 14% of the shares. We usually do that with also some put and call options along the way, so that we eventually will be 100% owner, but it might take some years before we're there -- before we get there.Last but not least is the DP Seals, the U.K. company, which as you can see there, is performing very well there with the EBITA margin down there. Some products, they are -- they are the leading supplier of rubber sealings, gaskets and [ moldings ] for high specification applications. Somewhat similar to Schmitztechnik that we already own in Germany. So there will be some mutual sort of collaboration between the companies in the market and have some annual revenues of some GBP 5 million and will add to the International division and have already done so here in December.So just to round off the whole thing, I think the financial overview, and we look at it, the earnings per share growth is at 18%, well above the 15% that we are aiming for. We are now fueling our growth more with acquisitions, as we see the market is somewhat slower. But along the way, we definitely keep up the pace in order to grow the 15% per year. We've had some exceptional years, and we've seen a slightly slower growth rate, but still at a very good level and performing well with a record high earnings in the quarter, some strong cash flows and improved margins and some 4 acquisitions. So we feel pretty happy with the quarter we just closed.Thank you. I think that was all from our side at the moment [indiscernible] and we will open up for Q&A then.

[Operator]

[Operator Instructions] The next question comes from [ Max Bacco from SEB ].

[Max Bacco, analyst]

Good morning, Jorgen and Peter. Well done on the quarter, especially on the cash flow. A couple of questions from my side. So first, regarding the quite high acquisition pace during the quarter. Is it possible to quantify how much transaction costs you had during the quarter, which most likely had a negative impact on EBITA?

[Jörgen Wigh, executive]

I don't have that number, but you're right, since we have had several acquisitions, there are transaction costs in the quarter. I don't...

[Max Bacco, analyst]

But we did. Yes, I understand. Would it be fair to say that it was most likely higher than usual at least?

[Peter Thysell, executive]

Yes, it was.

[Jörgen Wigh, executive]

Yes, definitely.

[Max Bacco, analyst]

Yes. Okay. And the next question, I guess, it's a bit related to the first one. So the adjusted EBITA margin, if we adjust for the SEK 6 million that you had a positive impact from revaluation of contingent considerations was down some 90 basis points here quarter-over-quarter compared to Q2 and looking historically, Q3 tends to be on par or even better than Q2. So why the sequential decline? Was it due to the higher transaction cost towards or is it something else?

[Jörgen Wigh, executive]

It was unrelated to the transaction costs, I would say, it's something we do regularly. So those were not correlated at all.

[Max Bacco, analyst]

And something else that drove that margin decline sequentially? Or was it just unusually high margin last quarter?

[Jörgen Wigh, executive]

Yes, we had a good quarter in Q2. We think that this quarter is also good, good improvement from last year, but slightly lower than the previous quarter. And then of course, these quarters cannot be compared since we have the December in our Q3, which is a relatively slow month.

[Max Bacco, analyst]

Yes. Understood.

[Peter Thysell, executive]

I think it's worth highlighting that, I mean, most of the differences you see there is related to the mix, right, the sales mix -- and it's hard to even comment on sort of I mean, the acquisitions costs are there and but we also made some acquisitions last year and last quarter. So it's hard to really [ gearing to go ] at that level of [indiscernible] really. I think all in all, the -- we have a lot of sort of small things adding up and down in the different things in the different [indiscernible]. So it's hard to really sort of isolate something like that. I think overall, the margin was very strong.

[Max Bacco, analyst]

Yes. Yes, indeed. And a few more, if I may. So just to interpret you the right way, should we interpret that you had a book-to-bill of [ 1 ] in the quarter, the way you [ were at ] the order intake? Is that correct?

[Jörgen Wigh, executive]

Yes.

[Peter Thysell, executive]

Yes.

[Max Bacco, analyst]

Yes. Perfect. And I noted here during the presentation that the acquired companies during Q3 are a bit margin dilutive to the Group. Do you over time, expect to bring them up to Group profitability, as you tend to do?

[Peter Thysell, executive]

Yes. We many times have a sort of an improvement ambition and an improvement plan, and that is the case here as well. They [ shouldn't be ] all in all margin dilutive. Even though we have -- I mean, we have set the bar at 15% rather than 17%, right? So it's -- we are constantly pushing all our companies. But the margins should, yes, be adding to the total. That's the intention.

[Jörgen Wigh, executive]

And of course, what's important, if I may add, this is the return on capital employed, okay. So you -- so I think it's important is at what valuation and the valuation multiple that we pay for the companies rather than the starting point margin.

[Max Bacco, analyst]

Yes. And then on the cash flow, as you said, really strong cash flow here in the quarter, and you had a positive impact from the working capital, all components of the working capital was positive. Is that just normal seasonality, you would say?

[Jörgen Wigh, executive]

I would say it's our continuous struggle to always do what we can to have good strong cash flows. I think we're quite happy with some part of it, where we have to work a few more quarters to get inventory and stock down to the levels we want. But apart from that, I think [ other ] things...

[Peter Thysell, executive]

We have a seasonality effect. So it's usually strong within Q3, Q4 [ than ] how Q3 and Q4 are as opposed to Q1 and Q2 or especially Q2 is usually a little bit weakest. This year, it was stronger. But we are also then -- when you see the lower top line organic growth, that is also affecting the cash flows in a positive way.

[Max Bacco, analyst]

Yes, of course.

[Jörgen Wigh, executive]

Usually, we've seen that when we went through the financial crisis or we went through the COVID crisis or all those -- we saw pretty -- so we saw strong cash flows from the operations -- and that we also -- we don't see that dramatic thing here now, but we still feel that we are generating some good cash flows from the business. So there is also a structural thing. On top of that, I think it's also worth commenting that we are working with our inventories and components, but especially the inventories. And as Peter is pointing out, I think we are in the right direction, heading in the right election with our inventory, but there's still more to do there.

[Max Bacco, analyst]

Yes. Understood. And just 2 more quick ones. Is it -- as you stated during the presentation, Tormek is now perhaps the most important company in the Group, and it's heading for another record year, which is quite impressive given the consumer exposure it has. Is it possible to say now how much Tormek accounts for group sales or off group sales and EBITA, perhaps a bit tricky.

[Jörgen Wigh, executive]

Yes. We I don't think...

[Peter Thysell, executive]

We don't disclose that. But it's not like it's standing out. It is the biggest, but it's still -- we have Elpress. We have PcP and a few others that are also very important. Libra in Norway is also very important to us. So it is a fairly broad based, but it's always a leader, right? And currently, Tormek is in the lead.

[Max Bacco, analyst]

Yes. And I guess, it should be somewhere in the range of 5% to 10% of Group EBITA.

[Peter Thysell, executive]

Yes.

[Max Bacco, analyst]

Yes. Perfect. And then finally, if you may -- do you have any comments on the organic EBITA growth during the quarter? I know we had this discussion the last time also, but just to try.

[Jörgen Wigh, executive]

The [ Fortum ] acquisition is important to us at the moment. So the [indiscernible] has come down a little bit [ if I may so ]. We did [indiscernible], but we don't give out -- we don't disclose that at that level we think.

[Operator]

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

[Zino Engdalen Ricciuti, analyst]

Good day, Jorgen and Peter, and thanks for taking our questions. A couple from me. Firstly, could you give some kind of indication to the price contribution to the organic component this quarter? And if possible, share your views on the price expectations in 2024?

[Jörgen Wigh, executive]

I think the price contribution has -- again, as you know, we are a group of some 75 companies, right? And we don't run ERP systems common together. So I think most of what you see is the differences in mix, and we don't aggregate the sort of pricing component. So it is a rough estimate that I guess from our side. And I think the price component has come down significantly. I think that we've seen some companies -- we have quite a few companies that are more metal based, and we see raw materials and metals coming down. So we see some increased sort of -- yes, the price component can be very big at the moment.What we see -- on the other hand, see is that we see the -- you've seen the gross profits, and EBITA margin has come up a little bit. And that is also -- I think that that's how we work with it in order to push getting to the right level in our companies. So I think we have done a good job with sort of compensating and things that. But I don't think the price component is very strong in this quarter, not at all. Might be even -- might be very close to [ 0 ], I would say, or yes, maybe a little bit more than that, but not very much.

[Zino Engdalen Ricciuti, analyst]

Yes. And with regards to order backlog, you said, of course, that the intake was in line with sales, but I'm wondering, I don't know how much of an indication you have on this, but if you're seeing some of that orders are being pushed or canceled in a different extent to before?

[Jörgen Wigh, executive]

No, nothing new there. I think it's been a normal over the -- over this period. We usually have visibility of 2 months to 3 months or so, and that has been the case now -- is the case now as well.

[Zino Engdalen Ricciuti, analyst]

That was my -- that's my follow-up. And lastly, you mentioned that you have several attractive transactions in the pipeline. Is there any like particular areas, which are more -- there are more attractive targets? Or is it uncorrelated in that sense?

[Jörgen Wigh, executive]

Yes, I would say it's uncorrelated. It's -- I mean, we are working now with in multiple markets, in all the divisions with finding new M&A deals. And we feel that we have a strong position with our balance sheet and the cash flow we're generating. So I think we are looking, and we are quite active in that market. So I expect more deals to come here.

[Operator]

The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

My first one is on margins within Electrify. Would you say that the margin shift in this division now in this quarter, where take the last 3 quarters really has it been mainly due to accretive effects from M&A? Or has it been to any mix effects within certain businesses performing well and others not performing as well?

[Jörgen Wigh, executive]

Yes. In our world, it's always a little bit above, right? I think some of the bigger companies that have very good margins are continuing to have that, but we also have a couple of companies that actually have made some turnarounds here in the last year or so, especially with infrastructure, we have a couple of companies there that are really pushing their margins to the right level, and that is affecting the margin in the division.

[Karl Bokvist, analyst]

Understood. And then, more of a perhaps strategic question. When we think about how you disclose proprietary products and trading and niche production. First one, just on what you call trading. I noticed that sales growth has come down [ very a bit ]. Do you think it's -- is that part of a strategy, where you're phasing out some low-margin units? Or is it that this part of your business has been more affected by weaker markets or inventory adjustments or things like that?

[Jörgen Wigh, executive]

I think it's actually more of the latter. I think that what we see is that when we talk about trading is what we normally call the value-adding distribution part of the business, and that has been more related. We talk about the Vanpee companies, for instance, within the Control division, addressing more of the construction sector. So we see a few of those losing some volume.So I think it's more of that they're sort of more affected, and they're also more related to maybe the domestic type markets, while some of the proprietary products are more broad-based and also have some more exports. And as commented here already, some of them are more related to the U.S. and other markets, where we see better growth at the moment.

[Karl Bokvist, analyst]

Understood. And my final one is on the M&A side. Have you seen any form of hesitation of either from your side or sellers due to potential impacts from weaker macroeconomic conditions that either reseller or you want to see some more numbers before agreeing on the deal or any of those kinds of factors impacting M&A?

[Jörgen Wigh, executive]

Yes, definitely. It's a big concern and a big focus of ours then -- when we acquire companies that we want to make sure that we know what we're buying and the outlook for those companies. So that's -- it's a major concern for us. I don't -- but I don't think it's changed in this quarter. I think we're always addressing that. And it depends on what type of segment, where you're in and what we see. We've seen some decline and some continuous [ hassles ] when we talk about sort of the private sector of construction, private housing and that type of thing.While we see still a big -- still a good sort of continuation when we're talking about infrastructure or more commercial-type buildings in that sector. So it's -- so it's definitely -- and that might -- it might affect the price. It might -- of the target, it might affect sort of the structure of the deal, where it might be more earn-out or so or it might affect some minority shareholding, or it might affect other things, as we sort of structure the deal.

[Operator]

The next question comes from Niklas Savas from Redeye.

[Niklas Sävås, analyst]

Hi, Jorgen and Peter. I have a question on the Control divisions -- Control division. You have had some problems with component shortages in that division for a couple of quarters, but you didn't mention that in this quarter. So I just wanted to know a bit more about the situation there and what you see ahead?

[Jörgen Wigh, executive]

I think we have -- yes, to some extent, that is related to the Control division, I think, is also affecting the International division. Those are the value-adding distribution type companies that are relying on suppliers in Far East Asia, where we seen -- where we saw a stock buildup during the COVID and to some extent, maybe halfway or so has come down again. I think that we've seen lead times and things improving. So I think the destocking of that sort of that whole phase is mostly past us now, and that's why I decided not to comment on it in this quarter.

[Niklas Sävås, analyst]

Okay. Good. Last question for me is on the TecSec division, which has been a great performer for quite some time. And looking ahead for the fourth quarter, you had 25% organic growth in the last fourth quarter. So I just wanted to check there if there were any large projects or I mean, like onetime items that means tough comparables for the quarter ahead for the division?

[Jörgen Wigh, executive]

Yes, I think we have some tough comparables there. It's usually -- we had a couple of companies doing it really well there last year. So I think it's -- this -- I think we now are -- with some of the acquisitions we made will add to that division, but we also have some companies that did it exceptionally well in Q4 last year within that division. And we're challenged now to beat that, but we're working on it.

[Operator]

The next question comes from Jakob Marken from Danske Bank.

[Jakob Marken, analyst]

Hello, Peter and Jorgen. So just a quick question from my side [indiscernible]. On the International segment, you have seen some quite good margin development during the last years. And even though, you had a negative organic decline in this quarter, you still managed to perform very well -- very good margins and keep -- kept improving it. So I'm just wondering, do you think 17% or above is that the level, where you think you can be for a longer time? Or is this like a -- do you think this was the best quarter, so to say? Or should we expect this to be at this level?

[Jörgen Wigh, executive]

Well, time will tell, right? Well, let's see, where we end up. I think some of the companies are doing it very well in -- within the division, but we still also have some companies lagging behind. So still there are things to work with. What we have done in the last few years is that we have made some really important acquisitions within the division.I think the Libra acquisition is very important. The Supply Plus is adding to the performance. The Tebul in Finland is also adding. And if you buy one of those companies, that might be sort of yes, more sort of -- yes, one quarter is good, and another -- next one is worse. But I think as we grow the portfolio companies, then you can expect more of the margin level to be sustainable. So let us keep at it for a while more before we answer that question and prove ourselves that this level is sustainable. But let's give it a few more quarters before we see that.

[Operator]

The next question comes from Aline Ghatan from Carnegie Investment Bank.

[Aline Ghatan, analyst]

Thank you for good report. Most of my questions already been asked, but I have one. Looking ahead, is there any division that we should -- that you're more worried about in the coming quarters?

[Jörgen Wigh, executive]

Well, not really. We feel that we have a strong portfolio of companies organized into these 5 divisions. I think that of course, we are concerned or not concerned, but we are focused on understanding the different market segments that we see. But we don't see it as more sort of difficult in one than the other. They're all broad-based. So I think it's more of where the general market will go in the next 2 quarters or so.As we speak -- as we said in the communication here, we feel that all the -- with lower inflation rates and lower interest rates along the way, I think the investment willingness will improve along the way. But I'm also -- it might take a couple of quarters before we really see it in the numbers. We really see it in the markets we're in. Some of it is more infrastructure or more project related. And from start to finish of that project, it might takes a -- it might take a while. And therefore, I think it will pick up. It's -- I think the outlook is -- long term is better now than it was a quarter or so ago. But still, there might be a time lag between what is sort of what we see now and the improvements that we've seen until we see it in the numbers.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Jörgen Wigh, executive]

Thank you all for listening in. I think we closed a solid good quarter. And I think the pace is picking up and holding up very well. And we are -- as I said already, we are sort of generating some good cash flows, and we're using that to do some more M&A. I think the opportunities there are really good at the moment, and we will continue building the Group towards the SEK 2 billion. That's the aim we have. So thank you for listening in, and please come back to us with any additional questions you might have. We are all available. Both me and Peter are available over the phone here in -- here during the day. And so -- so thank you very much, and bye-bye.