Storskogen Group AB (publ)

STO:STOR B

Earnings Call Transcript 2022-Q1

[Daniel Kaplan, executive]

Good morning, and welcome to Storskogen's presentation of our first quarter report of 2022. My name is Daniel Kaplan. I'm the CEO and one of the co-founders of Storskogen. And together with me today, I have Lena Glader, CFO. So looking at today's agenda, after a brief recap of Storskogen where we are today, we'll go into the Q1 highlights. Lena will tell you more about our financial performance. We'll have an interview with our Head of Business Area Trade, Christer Hansson, to talk about our new verticals. Finally, some key takeaways and then, of course, Q&A.

So first, a brief recap of Storskogen. We are an international compounder. We buy small- and medium-sized companies, and we try to take care of them with the vision to be the very best owner of these companies. We have an infinite ownership agenda. And so far, we've never sold off for any company or discontinued operations. We have currently about SEK 33 billion as turnover and SEK 3.6 billion in annual adjusted RTM EBITA. So quite a bit more than last time we presented actually. We have about 11,000 employees distributed across 27 countries. We have about 60 investment professionals. And in addition to that, of course, reporting functions as well with almost an additional 60 people spread across 4 market areas and 8 countries.

Our latest addition, apart from the Nordics is in the DACH region, we also have Benelux, Kirsten coming in as the CEO. And then we have the U.K. and Asia as well. Very exciting indeed, the international expansion. So -- we are -- we have 3 business areas: services, trade and industry services with most -- lots of employees, almost 5,000 employees, 7 verticals and trade with Christer Hansson, we will talk more about that with our new verticals, the renaming and restructuring of our verticals there, 28% of our net sales in the first quarter. And finally, industry with 39% of our net sales in the first quarter as well and 3 verticals below that, 122 business units.

A brief recap of our financial targets. First of all, we're guiding towards to have an organic EBITA growth of real GDP plus 1% to 2%. If we're looking at our performance this first quarter, it's 7%, which we're, of course, very happy with. If we're including acquisitions, we are, of course, an acquisition-driven company in many ways. This is in line with historical levels, 60% to 70% approximately. And this quarter, we had a 109% EBITA growth, which is, of course, quite extraordinary. The third consecutive quarter in which we've had 100% or more in the EBITA growth.

If we're looking at our margin targets, it's 10%. And if we're looking at the last 12 months, it's 9.2%, below our target, and we're, of course, aiming to raise that towards 10%. Our cash conversion target 70%. In this last quarter, we had 55%. We'll get into the reasons why, but this is, of course, fluctuating a little bit with this season.

Finally, our leverage target is 2 to 3, and we're currently at 1.8, giving us significant headroom for future acquisitions and to be forward leaning in our operational investments as well. So this is our financial guidance and the performance in the first quarter.

Looking a little bit on the Q1 highlights. Well, give me a second -- almost -- well, SEK 6.9 billion -- SEK 6.9 billion in net sales, 140% increase, of course, quite extraordinary 17% was organic net sales growth. And this is, of course, for companies that we've owned for both comparison periods. If you look at the adjusted EBITA, that's SEK 568 million, 109% growth, out of which 7% was the organic growth. And finally, the adjusted EBITA margin 8.2%; last year, we had 9.4%, but in fact, it's more in line with our historical margin over the first quarter, which is -- was, well, in line with historical quarter.

If you're looking at the key events this quarter, we had done 25 acquisitions including 8 add-ons. And the add-ons are not contributing as much as EBITA. But on the strategic platforms, they are very important, of course, to our strategic agenda of our portfolio companies. We did a bond issue, a tap issue of SEK 1 billion. We raised a credit facility still unused, but of SEK 5 billion -- EUR 500 million. And we also got a credit rating from Moody's and Standard & Poor resulting in a BB+ and Ba1, which we are very happy with. So that was some of the key events for the first quarter.

Looking at the backdrop of the first quarter, it was very strong demand in the market. It's still a good business cycle. But that said, there are lots of disturbances, supply chain disruption and accelerating inflation, and of course, the war in Ukraine increases complexity of doing business. If we look at the transaction market, we have seen -- we actually thought we were expecting a decrease in the deal flow due to the war in the Ukraine. But in fact, we've seen a tremendous increase in the number of cases coming to us, partly because of the fact that we are now established in several geographies but also with a stronger organization in those geographies. So almost 3x as big an inflow of cases. And this, of course, makes it possible for us to be really selective and therefore, to allocate capital appropriately and buy really good companies at the right prices. We can see declining acquisition multiples going forward. The cost of capital has increased. So there is still some competition out there for some of the cases, but nevertheless, decreasing acquisition multiples. So a very good transaction market for us, really giving us some significant business opportunities going forward.

So if we're looking at the business areas and their performance, first out is services. I think services had a decent quarter from an acquisition standpoint. We did a few acquisitions. We -- but we had also -- we also suffered from high degrees of sick leave, material price hikes. In fact, if you take it a sick leave from COVID, that was almost 30% in some of our portfolio companies in the beginning of the year, that was tough, of course. Some of the other verticals like logistics and digital services really had a good quarter with strong demand and sales and margins as well. And we anticipate a recovery in the margins for services in the coming quarters.

If we're looking a little bit deeper what type of companies we bought in services. We have one example here. It's Nitro Consult. Nitro is originates from Alfred Nobel. It's a very old company. They've been a market leader in this niche. They're a consultant for blasting technology environment or monitoring and support software. So a market leader, a long heritage, strong margins -- and it's really a company that we're proud of that they wanted to sell themselves to us, and we hope to take care of it in the best possible way, a good acquisition.

If we're looking at the trade, we saw a very solid demand. We had an establishment as well of our new verticals. We'll get into that in our interview with Christer Hansson, but sports clothing and accessories, health and beauty, home and living and finally, niche businesses is the name of our new verticals. And these are really strong strategic platforms for future acquisitions, but also to find synergies and cooperation between our business units. As I mentioned, we had a very strong demand, but we also saw some delays. We had price hikes. And then, of course, before we raise prices towards the customer, there's a time delay that kind of is a challenge to get through. But nevertheless, and also high material prices and price increases. That said, a strong quarter for trade and we did 4 new business unit acquisitions.

If we're looking closer at one of those, that's 2M2, SEK 147 million in sales in 2020 with a 9% margin. 2M2 is a distributor of products without living environment, that's plants, pots, all kinds of accessories. And those of you who know our portfolio know that we have a lot of decoration. We have a number of companies in this area, in Bowen in the U.K. So we see a lot of collaboration between our companies within this vertical. It's a high growth. It's a stable profitability and very strong and long customer relationships. So this is also a very good acquisition that we are very proud of.

Finally, industry who might have been the business area with the strongest performance in the first quarter, very strong demand. Of course, there were some pricing challenges with, for example, steel price is increasing, energy price is increasing. But all in all, they've been quite successful in pushing these price increases forward to the customer. There are, of course, once again, time delays from the price rises from the suppliers to the customers. But nevertheless, a decent margin, a very strong growth across all 3 verticals, automation products and industrial technology. We did 5 new business acquisitions and 1 add-on acquisition.

And if we're looking forward to Q2, we still have a strong demand outlook. If we're looking at one of the biggest acquisitions we've done to date, that's LNS. You can see it there on the picture, they're doing peripheral automation products such as bar feeders, chip conveyors, filters, they're a global market leader. They have production facilities, basically both 3 in Asia, 3 in the U.S. and 3 in the Europe, and sales representatives across the globe. SEK 1.7 billion in turnover, 11% margin in 2021. And we really believe in the automotive space, not -- sorry, automation space. We think that it's a great underlying trend to increase automation in all kinds of factories. So this is really an area where we want to grow. And this LNS really provides us with a platform for future international growth and add-on acquisitions. So an acquisition which we're really happy with.

All in all, as you might say, it might be that we go into a tougher business cycle now. And then it's really comforting to know that we have a well-distributed diversified portfolio across our 3 business areas, our 14 verticals. No single vertical more than 14% at the moment. And in fact, lots of our companies, they've been around -- if you look at just our 20 biggest companies, they've been around for 49 years on average through upturns and downturns, very resilient and profitable companies, all of them.

If we look at some significant events after the reporting period, we've done 18 additional acquisitions. We have a significant pipeline going forward, and we have also used some equity instruments. So 12 acquisitions have actually been completed. 6 acquisitions have been signed, and we have LOIs and preferred bioletters comprising of almost SEK 577 million in LOIs. These are, of course, not done deals. It might well be that 1 or 2 of these deals will not occur. On the other hand, we also have, of course, additional deals that might come in during the quarter. These will probably be made or closed beginning of July or during the end of the quarter.

One thing on communication of deals, we will always communicate all our transactions on the homepage, but we will, from now on, communicate them as we close the transactions rather than we signed the transactions. So that makes it a little bit easier for you to assess when they will kind of enter our owned period results.

Finally, as you might have noticed, we have used equity and the convertibles in total of 3 transactions. Why is this? Well, the strategic benefits of having our company sellers as shareholders is significant. They drive new deal flow. They sit on each other's boards. They sit on -- they remain longer in the companies we've bought. And all in all, they really create a strategic value to Storskogen. So this is something that we want to do. With the current share price, we use it very sparingly, but nevertheless, you will see going forward additional transactions using primarily convertibles that will convert into shares in, for example, 12 months' time.

So financial performance. Lena?

[Lena Glader, executive]

Well, thank you, Daniel. So I'll talk you through very briefly results, margin trends, earnings run rate, cash flow, balance sheet, net debt, I think that's about it. And there's so much we want to say, but you'll find the details, of course, in the actual financial report on the home page now. So very briefly here, repeating what Daniel has already said, of course, is we had sales growth of 140% in Q1 to SEK 6.9 billion. Now the organic growth of this was 17%, driven by both volume and price. The LTM, now that's the last 12 months owned reported period, sales was EUR 21.5 billion. And you can see here also the RTM. Now that's again the pro forma as if we'd owned the subsidiaries, the entire 12-month period, sales was SEK 29.4 billion for the end of March.

Adjusted EBITDA grew by 109% to EUR 568 million. The organic growth was 7%, as Daniel just mentioned here, again, the LTM, the last 12 months own period EBITA at SEK 2.0 billion and the RTM, the pro forma EBITA SEK 3.15 billion for the end of March. Q1 EBITA margin was 8.2% around the levels that we had expected given that Q1 is seasonally weaker with 2021 actually being an exception. If you look at Q1 2020, we had an EBITA margin of 7.8% in Q1 2019. I think it was 6.7%. But then again, we have acquired higher-margin businesses. So this year's margin should be higher.

On the other hand, we've had some severe disruptions in price increases, inflation, COVID, et cetera, that Daniel mentioned, that will, again, put pressure on margins somewhat.

HQ costs, headquarter costs unchanged in Q1 at SEK 75-approximately-million compared to Q4 last year. Transaction costs that were exceptionally high in Q4, were now significantly lower at SEK 18 million in Q1. The LTM margin here is 9.2% in the last 12 months. And the RTM, again, the pro forma margin is 10.7%. I might add here that doesn't show on this picture, but we had significantly higher, of course, financing expenses or costs compared to previous years, especially compared to Q1 last year due to the expansion, of course. And this has an impact on the EPS in the financial net -- I'm sorry, in the financial net also an FX of -- so currency effect of a negative SEK 45 million.

And the EPS of SEK 0.13 is unchanged to last year. Now there's 3 items affecting this. First is this effect on the financial net. So excluding that, EPS would be approximately SEK 0.15 and that's a 15% year-on-year growth. We also, of course, have dilution from share issues. We didn't do share issues only in the IPO. We had quite significant share issues actually pre-IPO in Q2, Q3 last year that also diluted this comparison, of course, and then somewhat higher minority shares of the net results in Q1 this year compared to last year as well.

Return on equity, return on capital employed, roughly 9%, of course, also diluted by growth and share issues. And I'll come back to the cash flow and net debt items in a little while. Here, we show a time series of the sales and EBITA margin. A couple of reflections on this page. Well, first of all, the Storskogen in terms of sales, here we're actually 6x, more than 6x larger in Q1 this year compared to only 3 years ago in Q1 2019. The other reflection is here that the margin has fluctuated in our portfolios -- in our portfolio of between 8% and 11% historically. You can also see here that Q1 has been weaker, except for last year, which was the mix -- well, again, very strong year. So we're happy to have organic growth, of course, despite that.

Our ambition, as a reminder, is to grow our profit in absolute terms, not necessarily growing the margin year-on-year. However, we have the margin target of 10%, of course, and looking at the coming quarters, we expect the margin to recover. But the profit growth in absolute number is the key metric for us. And that is done by growing organically in existing businesses and of course, growing through acquisitions and yes, of course, always creating shareholder value through that. Christer Hansson, Head of Trade, will come back in a little while to the studio to talk about the organic growth, something he is more or less an expert on.

Here, we show the EBITDA growth bridge. Now this is the pro forma growth bridge. Given the fairly rapid growth of a company such as Storskogen looking at the owned period only doesn't necessarily give you the best backdrop for earnings forecast, and that's why we try to help you by showing the run rate earnings or the run rate EBITA of Storskogen. So we're starting off to the left here with the LTM EBITDA of SEK 2.0 billion. We made acquisitions during Q1, of course, that and including those the EBIT -- the run rate EBITA is SEK 3.15 billion per the end of March, but we've also made acquisitions in April and May since the closing of the quarter corresponding to roughly SEK 480 million in terms of EBITA and that gives us a run rate of SEK 3.6 billion here today. And then, of course, we have the pipeline of letter of intents and preferred buyer status deals, which currently is around SEK 580 million. And if we were to close all of those, of course, then the EBITA run rate would already be SEK 4.2 billion.

Looking at the 3 business areas very briefly. Services sales growth, 74% year-on-year, of which 14% is organic, EBITA margin, 7.8%, roughly 1 percentage point lower than last year Q1 is seasonal, especially in services.

Looking at the LTM here to the right, you see that the margin was 9.6% for the last 12 months, which is fairly in line with historic levels. And then moving on to trade, business area trade had a year-on-year growth of 128% of which 20% was organic, and it constitutes both volumes and price. EBITA margin of 9.7%, which is higher than in Q4. The LTM margin, 10.5% around or somewhat below the recent historic levels. And then finally, industry business area industry had an impressive 273% growth, acquisition-driven, but also with strong organic sales growth of 20%, both volume and price, the same as for the business area trade.

EBITA margin in business area industry was 10.1%. The business area industry lost a roughly 2 percentage points margin compared to last year. About 2/3 or 3 quarters of this is explained by the price lag that Daniel talked about just recently, price increases have been done, but there is a lag between the purchase and the sales here. And the LTM margin was 11.3%, again, in line with or slightly above historic levels.

So how about liquidity and cash. Here, we show the items affecting cash. We went in -- we started off the year with SEK 6.2 billion in cash. Some might say it's too high, of course, since cash at the bank account doesn't generate returns until it's deployed, obviously. But we have deployed some of it SEK 4.9 billion in investments during the quarter, of which SEK 4.7 billion in M&A, rest CapEx and other items. We raised new debt of SEK 1.8 billion, SEK 1 billion of this is the SEK bond that was raised in January.

And so cash at the end of the quarter was SEK 2.9 billion, but we also have -- and this is important, unused credit facilities available to us of SEK 12.8 billion at the end of March. So that means that the total available funds is SEK 15.7 billion.

A few words on the cash flow here. We had negative operating cash flow in Q1, which is more or less as expected. Three main reasons for this. We had above normal levels of stock, inventories plus price increases, of course, which has a negative impact on working capital. But we also had price increases in our own products and high sales, especially in March, which also boosted receivable which, again, also has a negative effect on working capital, but it's not necessarily a bad thing.

And then thirdly, we had above normal levels of -- or above normal levels, I would say, of paid taxes due to acquisitions, of course, but also due to the fact that some deferred payments that were a result of the government grants related to COVID-19 in 2020 are now being paid.

CapEx to sales, 1.6%, slightly below normal or average levels for Storskogen. Cash conversion of 55%. And this is explained, of course, explained by the negative effect from working capital. So far in April, it looks to be recovering.

And then back to the net debt and leverage. You recall from the previous slide that we had available funds of SEK 15.7 billion at the end of the quarter. So liquidity is obviously not a constraint at the moment. We had interest-bearing debt to -- net debt to -- interest-bearing net debt-to-EBITDA of 1.8x, this excludes earn-outs and minority options. And why have we decided to exclude those? Well, this is because this 1.8 reflects the terms in the current loan -- the current loan facilities, both the RCF and the SEK bonds. So this reflects the terms basically there in the covenants, et cetera.

And we are still below the target range of 2 to 3x of net debt-to-EBITDA. Our aim is to be around the middle of this range. Including earn-outs and minority options, net debt would be roughly SEK 10 billion and comprise a lot would be a leverage of around 2.6x. That was it.

[Daniel Kaplan, executive]

Thank you, Lena. For now, you'll come back to us during Q&A. But first, we welcome Christer Hansson. Christer is -- welcome Christer.

[Christer Hansson, executive]

Thank you.

[Daniel Kaplan, executive]

Christer is Head of Trade. He's been around for quite some time here, building Storskogen together with myself. First, as -- well, you were one of our biggest investors, still one of our biggest owner but also as a Head of Trade and a member of a lot of our different boards as well. So welcome.

[Christer Hansson, executive]

Thank you.

[Daniel Kaplan, executive]

Well, a lot of interesting changes happening in our trade area, including our new verticals. Please tell me a little bit what are we doing there?

[Christer Hansson, executive]

Well, up until recently, we have divided our businesses into 3 different verticals. It's been distributors, producers and brands. And this has been based more on a business model or the business logic, which the company are working with rather than which industry they are active in. And I think this has served us well so far. Take distributors as an example, even though they are working in many, many different industries, the challenges and the questions, and they are pretty similar.

So I think we have increased our knowledge within this field enormously over the past years. However, as we're growing, more and more companies are working within the same industry. And I think they can clearly work more together. So in order for us to kind of grasp up opportunities, we are changing the vertical structure to be more into industry logic rather than the business model logic. So we actually have 4 new ones instead of the 3. So the first one is sports clothing and accessories, here we have all the companies working, for example, with sports equipment, clothing, that kind of products.

The second one is Home & Living. We have companies working with home decoration products, home construction, building homes and products around renovation. Third one is the health and beauty, all the professional hair care distributors, which I will talk about a little bit further on and all the beauty products are there. And finally, we have a vertical, what we call niche businesses, which is a vertical with professional equipment sales, B2B sales, that kind of -- in different industries.

So I think this will help us be clear what we want. And so I'm really looking forward to work with this kind of division going forward.

[Daniel Kaplan, executive]

Yes. You mentioned health and beauty. Could you tell us a little bit about or the viewers rather how has that developed over time?

[Christer Hansson, executive]

Yes. I think that's interesting how we develop in a vertical. And I have to take you back to 2019, where we had an opportunity to meet a company called Baldacci. They were or are a hair care distributor in the professional side. This was our first investment in the field, but we really, really like the company. It was great management. They had interesting products. The customer base with thousands of hair salons was really, really interesting. So we liked it and took the opportunity to invest in it.

About a year after, we had the opportunity to do more -- 2 more acquisitions. One -- the first acquisition outside of Sweden and actually with France as an hair care distributor in Norway, and also another Swedish distributor clamp at a time. And even though this was in the middle of the pandemic, we felt confident that we could do a lot good with this, and it's been really, really good investment so far. The companies that work together. They have been able to attract new brands. They're looking at best practices in e-commerce and sales and so forth. So if I look at those 3 companies from '19 up until 2020, we have increased the sales with 35%, 40% and the EBITA with about the double size. So it has been really, really a good investment for us.

Then going further, we -- when we went into DACH region, the first investment that we did in that was in -- with -- PerfectHair, an online distributor in the hair care and beauty segment. We also did an add-on acquisition there with Marvell. And in all those -- I mean we had our team at Storskogen, we also used Baldacci [indiscernible] in the DD and in the investment processes. And he's also now, as you mentioned, one of the members in the board of that. So he really helped us with a lot of knowledge in that area. So we did that in the DACH region. And now recently, we have done 2 more acquisitions with Session map in Sweden and Scandinavian Cosmetics also in the Nordics. Scandinavian Cosmetics will join us in a couple of weeks.

So taking you back from '19 with one company, about SEK 100 million of sales in '18 now to a vertical with over SEK 2 billion in net sales over the last. So I think that's a really good interesting story for us.

[Daniel Kaplan, executive]

Yes. And as a group, I guess, we are more -- we are the market leader.

[Christer Hansson, executive]

If you look at the professional hair care side in the Nordic, we're absolutely the market leader. And looking going forward, I think the opportunities for us with add-on acquisition to attract more people, it will be good. So I'm really, really looking forward for us evolving this vertical even further. And that goes with other verticals as well.

[Daniel Kaplan, executive]

Right. So thank you, Christer, for some insights. Any parting words?

[Christer Hansson, executive]

Well, you mentioned how can we take care of all the companies and I have to say, we have a brilliant investment team in trade and in other business areas. So I mean, we have great people from different industries with a lot of experience taking care of our businesses and also, of course, a great management team out there. So I'm really happy with what we're doing in especially trade what I know. So yes, good people and great opportunities for us going forward.

[Daniel Kaplan, executive]

So thank you, Christer, for some insights into what's happening in the trade area. Thank you for your fantastic work for the entire business area, of course. So it's -- thank you.

[Christer Hansson, executive]

Thank you.

[Daniel Kaplan, executive]

So first, a few takeaways, and then it's time for Q&A. Welcome, Lena back on to the stage. So in summary, I think we had a tremendous growth now in the first quarter, 109% EBITA growth, a decent organic EBITA growth of 7%. Of course, we were suffering from some seasonality, some COVID as well as the war in the Ukraine, but nevertheless, a margin in line with historical numbers.

That said, each and every acquisition we do reduces our operational risk and creates like Christer mentioned, strategic platforms for us to develop our businesses to become even stronger in our market positions and over time increase in profitability in our companies. This shift in the business cycle really offers us some great business opportunities. We can see acquisition multiples coming down, but we still have a great influx of deals to be made. We also have SEK 16 billion in available capital in liquidity and unused credit facilities.

So we also have a very comfortable financial situation, a good headroom, both to handle unexpected things in the business cycle as well to continue to do acquisitions. So a very successful quarter for us. I think we are very happy with that, but not without challenges. So time for some Q&A.

[Operator]

[Operator Instructions] So first question is from Mr. Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. I have a few questions. Firstly, you mentioned several headwinds. I mean, you have raw material sick leaves, I guess, inefficiencies due to supply chain issues. Is it possible on the group level to sort of quantify these impacts? And I guess, also as sick leaves rates are normalizing, I guess, in Q2. But on the other hand, we have inflation, which should pick up quite significantly from Q2 versus Q1, and still you're guiding for a margin recovery. Is it driven by M&A? Or how should we look at that?

[Daniel Kaplan, executive]

I think -- I mean you're on to it. I think we had an extraordinary event with very high degrees of sick leave, especially within our installation, construction and contracting services verticals. I think that was quite extraordinary. And as we -- and the utilization is quite high. So of course, there is a natural recovery, especially in the services area with regard to that.

There has been an acceleration of inflation, which, of course, puts pressure on margins, as there is a time delay between when we get the price raises and we push it onwards to the customers. But overall, we actually see that during the second quarter, a number of our price increases will come into effect. So we -- that's another part of the margin recovery as we go for -- looking forward. With regard to quantifying the extent how that has affected our margin, that's a very good question.

[Lena Glader, executive]

We can say -- and these are approximate numbers, of course. As I mentioned, of the 2 percentage point drop in margin in industry, we estimate roughly 3/4 actually of that is due to price to the delay in price increases. So that is an effect of the increased cost of goods of course.

And then in trade had a roughly 1 percentage point drop in margin compared to last year. That is a split between the same price delay and as well as a shortage of material goods and freight costs, et cetera I would say. And then for the services business area, the majority of the margin drop is related to the COVID situation, we would say.

[Daniel Kaplan, executive]

Yes.

[Carl Ragnerstam, analyst]

And also just to be clear, when you're talking about the margin recovery in Q2, are we talking sequentially or is sort of a year-over-year development they might be the same or?

[Lena Glader, executive]

Well, we've talked sequentially here. Of course, I mean, our target is to have a 10% EBITA margin. And what we -- from what we can see today, we believe that we might be able to reach that or up to 10% for this year despite Q1 being lower, of course. But there is -- I mean, we have to say that there's a lot of uncertainties regarding what's going to happen in the second half of the year, of course, but that's what we see today.

[Daniel Kaplan, executive]

Yes. I should say, I mean, in the second quarter where we have some transparency, we have a very strong demand. So I think we are quite confident in the performance in the second quarter. On the other hand, we have less transparency into what will happen with the business cycle, for example, in the second half of the year.

[Lena Glader, executive]

Q2 is seasonally stronger than Q1. So it should recover. And as far as we can see now, it looks as it's going in the right direction, despite still some troubles on the way of course.

[Carl Ragnerstam, analyst]

Very helpful. And also, I think you mentioned somewhere in the report that you see sort of scalability of central functions. How should we look at these costs? They were fairly flattish, just about SEK 70 million sequentially. Should we just extrapolate that level on a full year basis? Or is it depending on the possibility to sort of taking capital or I mean, being able to maintain the high M&A pace you had in the past 2 years?

[Daniel Kaplan, executive]

I think it's a very good question. I think [indiscernible] work, I mean, we are moving from almost 100 people at the beginning of the year to 140 people in total in central functions by this -- by midyear. If we take one step with regard to central costs, I mean it's all about what we want to achieve. And one of that part is actually to be the best owner of small- and medium-sized companies. And this means that we're not -- we're doing the work. We are helping them. We're supporting them in good times and bad. And that requires resources.

In addition to that, we have also have a relatively high ambition on the company level. We want to gradually expand into new markets, basically most major markets and we want to become the leading SME compounder in those markets. So it's a significant vision. And to be able to do that, we need to scale the organization in time so that we can do this with quality and a decent workload. So I think we're guiding towards SEK 400 million in total central costs this year. So I think that's still reasonable going forward.

[Carl Ragnerstam, analyst]

Perfect. And also, I mean, regarding M&A multiples you've said that they might come down or maybe that they had come down already. I mean one problem, which we've seen before, is that sort of the public market's perception of the multiple -- I mean it comes down faster than the private market, meaning that we may be under a period of a mismatch between the buyers and sellers, meaning a potential slowdown of the M&A pace. Do you see a risk of that? Or what's the thinking of the seller currently?

[Daniel Kaplan, executive]

I mean, it certainly is an effect that the stock exchange moves faster than for the small cap acquisitions that we do. That said, we've actually seen a significant decline in multiples going forward and also in the current pipeline. So -- but then, of course, it's depending on those individual companies, the size of the companies and the quality of the companies we buy. So -- but there is -- has already been a significant decline. That said, they will not -- I mean they don't have the volatility as you would have on the stock exchange. So they will decline but not to the extent that the stock exchange has declined.

[Operator]

The next question is from Mr. Daniel Harlid from SEB.

[Unknown Analyst]

Two questions from my side. Maybe I'll start a bit on -- you continue to build on inventory. Do you believe that -- some of your customers are also building inventory? And if so, did that support your sales that strong here in Q1? Or would you rather say that you suffer from being -- not being able to deliver to full capacity due to missing certain components? Or what's your feeling on those types of dynamics here?

[Daniel Kaplan, executive]

I think you're probably right on both counts, actually. So we certainly have, in some instances and some of our companies are actually -- we would have sold a lot more if you would have had the goods. So I think that's certainly affecting our sales even though it was a relatively strong even the organic sales was -- but the demand was even stronger in some areas.

On the other hand, I think it might have been -- we saw that, for example, that people have been building stock in certain areas quite actively now to just as we do to avoid supply chain disruptions and volatility in inbound prices.

[Unknown Analyst]

Okay. Got it. Perhaps on cash flow, accounts receivable increased quite a lot on last 12-month basis. What's driving that development here? Is there any seasonal effects we should be aware of? Or is it due to different mix of the group as it looks today. Perhaps also if you can guide a bit for the coming year, if you expect the inventory and working capital to continue to drag on cash flows here due to the supply chain situation? Or do you expect it to reverse now in a few -- yes, maybe already in Q2. What's your feeling about that topic?

[Lena Glader, executive]

Should I do that? Yes. Okay. Well, the receivables increase, that's exactly right. The main driver behind this is it's two-fold. First of all, is that we had price increases, of course, in our sold products that boost the receivables, which is not necessarily again a bad thing. And then second of all, we had quite a slow period in January and February, whereas March is typically very active. And so I understand that was, I think, more emphasized this year than it would be normally. So sales in March picked up very strongly. And that means that, I mean, if the average receivable is 30 days, then that means that the receivables would be higher over the end of the quarter basically. So it's volume and prices that push up the receivables. That would be the main -- the explanations. And again, neither inventory buildup nor higher receivables in this case, is a negative thing, we believe.

Of course, if it's persistent, then that might be signs of other disturbances, but we haven't seen that. It's, of course, difficult to project that future now given the turbulence in the market, et cetera. What we can see in April is that we have the reverse effect in April, what we can see so far. But that's not a guidance or a complete forecast for Q2.

[Unknown Analyst]

No, I got it. That was all for me from now.

[Operator]

The next question is from Mr. Andreas Koski from BNP Paribas Exane.

[Andreas Koski, analyst]

I just have a question about your net debt to EBITA target? Because I noticed that you have changed the definition and you now just capture interest-bearing debt. And did you make that change just to make further room for acquisitions? Or are there any other reasons as well?

[Daniel Kaplan, executive]

I think originally, we had -- this was actually always the intention that we would measure on this one. And of course, the bank agreements that we had at the time of the IPO was basically the net debt to EBITA definition was reflecting that bank agreement. However, we refinanced in -- as we did the IPO, we refinanced the RCF and the covenants were changed and also the agreements were changed. So we thought that we needed to clarify. So it was basically misleading with the previous definition. So we wanted to clarify how we measure towards the banks and therefore, how we measure our own leverage targets.

[Lena Glader, executive]

I might add here also is that, I mean, this does reflect how the covenants are measured. So that does give you a good picture of how much headroom we have whereas with the older definition that would be Daniel says like misleading. However, if you choose to, when you look at the net debt in Stocken, if you might want to choose to add back the minority and earn out liabilities, of course, to get a good picture of the net debt. But that's 1 thing. The other thing is the net to EBITA and the target and the headroom in the financing. And that's better measured on 1.8.

[Andreas Koski, analyst]

Okay. And how to think about the cash flow impact from contingent consideration liabilities and minority options? How will that impact cash flows in the coming years?

[Lena Glader, executive]

Well, the earn-outs are -- I believe -- I wonder if there -- actually, if you're able to see that in the annual report, the earn-out liabilities are typically shorter. It could be 1 year, it could be sometimes or up to 3 years, typically, I would think. And so there is always a component of short-term in the earn-out liabilities. Now this will typically be paid out in -- during Q2 once the annual report is reviewed, then after that the earn-out is paid. So there will typically be a cash payout in the second quarter of the short-term parts of these earn-outs and that will occur this year as well. So that's included in our own financial planning, of course. Whereas when it comes to the minority options, they're typically much longer. And I don't know if you want to...

[Daniel Kaplan, executive]

2024, 2025 and onwards, basically, that's the majority of the of the minority options start to fall out that at that point of time. I should say if the management stays on, if we're happy with them and they're happy with us, it might be that they actually -- we have the option, but not the obligation basically to buy it. So it might be that we kind of postponed the buying of the final minority option, so to say.

[Lena Glader, executive]

If you don't find the split between the earn-out and the minority option in the annual report between the short term and long term, get back to, I think, you'll find it there. But if you don't get back to me, and I'll provide some help with that.

[Andreas Koski, analyst]

Yes, I have a look. And then, Daniel, you talked about a shift in the business cycle. And in the report, you're writing about the potential shift. But have you already started to see a weaker picture or a weaker business -- weakening business cycle? Or is that something you just expect because of all the headlines in newspapers, et cetera?

[Daniel Kaplan, executive]

Good question. We actually haven't seen it yet. We still feel that the short-term demand is quite strong. So -- but I think having a more than 100 subsidiaries, of course, we do get some macro insight into the expectations of our customers as well. And we see that the complexity in the economy is difficult. And -- but that's -- it is, in fact, we haven't really seen it in demand.

[Andreas Koski, analyst]

Yes. Because in the Q4...

[Daniel Kaplan, executive]

We could be optimistic for another quarter.

[Andreas Koski, analyst]

Because in the Q4 report, you wrote about normalization of organic growth rates. And -- does that still stand? Or do you expect a weaker demand and weaker growth than a normalized growth rate for the next? 6 to 12 months?

[Daniel Kaplan, executive]

I think in the short term, we don't -- we think still that it's not a weaker demand. It's a relatively strong demand going forward. But that could well -- I mean the transparency for next year, in particular is very low. So in the short term, we do see a strong demand still.

[Operator]

The next question is from Mr. Will Turner from Goldman Sachs.

[William Turner, analyst]

I hope you can hear me okay. I don't have the strongest action. But yes, I hope you're doing well. I just had a couple of questions. The first one was on the leverage. So if we look at your -- the narrower definition of leverage, of net debt and take into account the letters of intent that you've signed already, it means that you're probably -- if it's assuming that you managed to complete these further transactions, you'll probably be in the middle of your target range. What does this mean going forward for the capital structure? Are you going to look at doing a more significant capital raise in the future? Or are we going to -- is that basically the limit to the further acquisition growth that you have?

[Daniel Kaplan, executive]

I mean, the basis for our future acquisitions. At this point, we have a relatively low leverage, 1.8 with significant headroom to do acquisitions in the coming year. In addition to that, of course, we have cash flows from our business, a good profit. So of course, the basis of our -- we have the available cash, we have the cash flow. And probably to that, we will add a debt side, so we can complement that one.

So we don't actually see any shortage of funds in the near future at all rather than we can do all the transactions that we would want to do. Then as a natural part of seasonality, we do very few transactions in the third quarter simply because everybody is going on holiday and the investment memorandums come out in September, and we negotiate and do deals in the fourth quarter and primarily, we usually say that 70% of all the acquisitions are done in the first half of the year.

So long story short. We see that we have plenty of dry powder, a decent leverage and good headroom. So -- and then, I mean, in the current financial market at the current share price, I don't foresee any big -- at least not any traditional accelerated book building processes or anything like that, but rather we will use the cash at hand.

Then of course, we have an uncertainty in the business cycle. We are relatively speaking, still having a high acquisition pace, but we are still being a little bit more conservative. When we are evaluating cases, we are a little bit more. So we were almost projecting an accelerating pace of acquisitions. This will not happen this year, but we will rather be a little bit more restrictive on acquisitions with regard to the pace of acquisitions, not due to funds but rather due to the business cycle outlook.

[William Turner, analyst]

Okay. Yes. That makes sense. I mean when you take into account the 12 acquisitions that you've made after the quarter and then the 10, which you have lesser of intent, it looks like you'll be in the middle of your -- at some point, somewhere in the middle of the target corridor range. So should we expect those possibly to complete? And then there'll be a pause in the third quarter and then fourth quarter will reassess activity dependent on the various factors you mentioned?

[Daniel Kaplan, executive]

We will certainly have a somewhat of a pause in the third quarter, not to actually to the funds or anything, but simply because it's that seasonality. We do we conclude the deals before summer and then we basically wait until the new deals come into the pipeline. So -- but we don't foresee any shortage of funds actually that will affect our acquisition pace as such. But the seasonality gives us, I mean last year we almost didn't do any acquisitions in the third quarter, partly due to the IPO, but also due to seasonality.

[Lena Glader, executive]

I might add here that the -- I mean we're a new company, so you still getting to know us, the letter of intent and preferred buyer deals that we presented in the Q3 report that's half a year ago. Of those, the majority, I think, almost all -- only one has fallen out I think, and the rest have either been closed or assigned, I believe, maybe 1 or 2 of them are still in the pipeline active. So we will -- we believe we will conclude them. So it is -- it doesn't materialize necessarily in the quarter. These deals sometimes live for 6 months, but are still closed. So the deal flow we present now in the pipeline we present now, those are deals that were not necessarily all of them closing in Q2, right, Q3, even Q4.

[Daniel Kaplan, executive]

Yes.

[William Turner, analyst]

Okay. Great. And then just a final point question. You mentioned earlier on in the call that you've used equity in free transactions in the quarter. I know you expect to use more going forward. How much equity would you -- could you typically use in an acquisition? Is there a limit to the amount of share capital or you can use on upcoming transactions?

[Daniel Kaplan, executive]

I think in the annual -- the annual meeting that we have the shareholders meeting that we will be having in a few hours, we have asked for a mandate for the Board to do the equivalent of 10%, I think issuing new shares. So that's one way to see it. But as I said, I think we will use it, but we will use it sparingly given the current valuation of Storskogen. But it is, of course, one tool in the toolbox, so to say.

[William Turner, analyst]

Okay. Great. And one thing that you were mentioning earlier, obviously, employee absences in your installer business is a bit of a challenge. I'd be very interested just to know, in general, how has employee turnover been in the last 6 months or so. Obviously, there are very tight labor markets globally things like installers and a lot of your industries, there's a shortage of workers for various different actions and quit rates have generally been high in a lot of economy. So I was wondering how have you seen the employee turnover?

[Daniel Kaplan, executive]

I think we haven't really seen a significant shift in employee turnover at this point. There is, of course, a shortage of -- we have a digital services where we need IT programmers and stuff like that. But so far, we really haven't seen that shortages or that wage inflation coming into play. I think that's probably a Swedish phenomenon to some extent, but not to -- not in any significant manner, I would say, at this point.

[William Turner, analyst]

Okay. That's interesting.

[Operator]

We have no other questions, so back to you for the conclusion.

[Daniel Kaplan, executive]

Thank you, everybody, for today and for your questions. Don't hesitate to call if you have additional questions. Thank you very much.

[Lena Glader, executive]

Thank you.

[Daniel Kaplan, executive]

Thank you. Bye.