Welcome to the Röko Q1 report conference call. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. I will hand the conference over to the speaker, CEO Fredrik Karlsson and CFO Johan Bladh. Please go ahead.
Yes. Welcome everybody. I will give a short overview of the performance of Röko in the quarter. we had some things which works well. I think our acquisitions are rolling on, so we are in a good level. we are getting the margins under control, so we are now constant on the 19% EBITDA profit margin. That was okay. We have a good cash conversion in the first quarter, 77%. That's okay for us as well. we also made our first acquisition without any external financing, just from the cash in the business out of our own cash flow. it shows that we are now at this level where we are regenerating cash, w e reach a certain size.
All of this is good. We have one problem, and that's the organic growth in the first quarter is flat, zero. Why is that? The simple answer is we have some businesses which are affected by the reduction in consumer spending. I give you the two worst ones. One business is selling IT solutions to warehouses in the U.K., and these warehouses are normally either for retail, big retail chains or for e-commerce companies. As the consumer spending is going down in retail and e-commerce, they are more careful, and they invest less in IT.
The second business we have problems in is a manufacturer of furniture, and they are selling worldwide, and furniture sales are down. This is the reason why we are flat in organic growth. Now I will hand over to Johan Bladh, our CFO.
Thank you, Fredrik. Maybe before we leave this Financial Development page, we just point you towards a couple of things. As Fredrik mentioned, we acquired one company in the first quarter of 2023. We did that without any external financing. As you can see, it increased the net debt, both interest-bearing net debt and the minority debt slightly. We are now at a total net debt of close to SEK 4 billion at the quarter. Out of this, we have approximately 1.5x EBITDA, which is interest-bearing net debt. We can go on and have a quick look at the business segment development.
All our companies are independent, but given some similarities in their end markets, and the possibility for them to knowledge share, we group them into two segments, B2B and B2C. During the first quarter, we saw strong growth in reported net sales and EBITDA for both segments. It's driven predominantly by acquisitions, as mentioned. In B2C, the financials are slightly boosted due to seasonality in some recent acquired companies, which added approximately SEK 40 million of EBITDA in the first quarter of 2023.
While the margins have stabilized a bit on rolling twelve months, we still experience some issues we can say with pushing on price increases to our customers. That issue has remained since the second quarter of 2022, and we are working still actively with educating our management teams to focus more on profitability going forward.
I will add something on the general level. On our debt position, we are about three times net debt to EBITDA. You can think about is this a problem or not? We've been giving a thought to it. I think it's not a problem because with these kind of companies like Röko and Indutrade, Lifco, Lagercrantz, they have such a good cash flow, so you can actually stay on three times EBITDA forever. It's not something which limits growth going forward.
Another thing is also that we have two of our banks, we have three banks, one, they, the financing ended here in May or the contract. They rolled it for another year. It shows that the banks have confidence in our business.
Very good. Then, just a few slides on Röko and our Business Overview slides. We are a focused serial acquirer that have a well-defined and strict set of criteria that we assess and evaluate companies according to. We like high margin businesses with consecutive earnings growth. We invest in founder-owned and family businesses predominantly. In most of our cases, we have significant local ownership averaging around 30% in each business to ensure alignment of incentives. While we are very focused on our criteria, we are a sector agnostic serial acquirer, which is something that is a topic for discussion quite frequently. What we have done is we have looked at the development of Lifco since their IPO in 2014 and looked at the three different business segments that they operate.
What you can see is in the more they are ranked in order from more sector-focused to less sector-focused, so system solutions being more similar to what Röko is. What you can see there is that the growth multiple is much higher than in the other two, and it's driven by the sheer breadth of opportunities that you can assess and acquire at any point in time.
We track all our investments according to this set of criteria, as mentioned. What we can see here is that over time, we have become more and more focused and more and more strict in making sure that all the acquisitions tick all the boxes. What you will see here is the last acquisition that we did during the quarter is ticking all boxes except being a market leader in a niche, but they have instead shown resilience and stability in their business over time. We feel that those are the most important aspects.
Since we started in June 2019, there has been a clear trend, as you can see on the right-hand side of us taking or making larger and larger acquisitions or focusing more on acquiring larger companies. That was clear throughout 2022. With the acquisition that we made in the first quarter, it seems to continue here at the start.
Some short information on our portfolio company characteristics. Most entrepreneurs who sell to us, they are actually not looking to retire immediately, as you can see from the age structure to the left-hand side, but rather it's a long-term planning for the entrepreneur or succession planning or potentially taking some money off the table for the next journey. As Fredrik mentioned, we struggle a bit with organic growth in the first quarter, which is explained by approximately 1/3 of our companies having shrinking sales. As mentioned, we are both indirectly and directly exposed to retail sales and retail volumes. In particular, in the U.K., we saw a slowdown of -6% in the fourth quarter of 2022, which has had an impact on our companies. Retail, not us. Retail volumes.
As you see on the right-hand side, U.K. is the market where we have the most companies followed by the Nordic countries and Netherlands with two companies. Summarizing on a few key investment highlights, have a highly experienced acquisitive management team. We have stringent investment criteria that we follow very well. We provide perpetual ownership and a decentralized structure. This is attractive to private family businesses as evidenced by the fact that we have done 23 of these acquisitions since we started. We have a diversified portfolio of European companies, which creates a resilient business model. In the beginning of 2023, we received approval from our shareholders to make a new share issue of up to SEK 1 billion during this year or next year.
For our two most recent acquisitions, we can mention who have added together approximately SEK 600 million of sales. We have only utilized SEK 150 million of drawn capital from our shareholders. As Fredrik mentioned before, the acquisition that we made here in the first quarter was made purely by cash from our balance sheet. We feel that the remaining SEK 450 million of undrawn equity commitments plus this potential additional SEK 1 billion gives us ample room for further acquisitions and to maintain a relevant acquirer going forward.
We will leave off with a slide on showing what we have done up until today. In less than four years, we have reached the current size, which is a bit more than SEK 1 billion of rolling twelve months EBITDA, which is around the same level as Lifco were at the point of their IPO in 2014. While we potentially feel a little bit of market headwind, we are eager to continue the journey and hopefully in the right and good direction. With that, I think we are done with the presentation, and we can hand over for questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Christian Binder from Redeye. Please go ahead.
For taking my questions. Two from my side. The first one regarding B2C. How much do you think you can actually coach entrepreneurs, so to speak, to be more strict in terms of pricing, et cetera, to kind of avoid the cyclicality in terms of margins? How much do you think in B2C you just have a higher inherent cyclicality, and that's all right as long as you account for that in terms of how much you pay?
The thing is, you know, it's, if it's B2C, B2B, it's the same question. The problem we're facing right now, in some companies, we face with the declining sales, we face them in B2B and B2C. There are some B2C companies that perform extremely well in spite of general consumer spending. It's, actually you have to look company by company. You can't say that business to consumer is worse affected than business to business. Of course, business to consumer capital goods, that's difficult right now.
Right. Got it. The second question, concerning leverage. What kind of leverage should investors expect, once you have potentially IPO? Are you going to look to decrease leverage somewhat once you're listed, or do you think the current level around three times, is something that you wanna maintain even after an IPO?
I've been giving some thought about this because everyone, or most, they have around one to two times EBITDA. If I look at the companies, they, you know, they usually have a level when they, for example, when they start, and they keep that level. You can be at three, or you can be at two, or you can be at 1.5. These kind of type of companies are so cash generating, so actually you can be at three times. My conclusion is previously I communicated we wanted to reduce the leverage a little bit, but I changed my mind. I think it's, I think it's good to stay at three times for a long time around, even after we are listed.
All right. Understood. Thank you so much.
Mm-hmm.
That was all from my side.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad.
We have some questions that have come in through the chat board, so we will take them as well. I will read the question, and Fredrik Karlsson will start to answer. How do you view the future working capital requirements with supply chains having relaxed since the second half of 2022?
What we've experienced now, we had some issues with too high in-inventory levels during 2022, but now we are back to normal. The reason is now supply chains are working. Now, during 2021 and 2022, they were not working. You had big delays in container transportation and things like that. Now we are back to normal, and therefore I think the inventory levels are. It's just supply chain is not an issue for us anymore. Problems.
We start from the bottom here. In a recent interview, Fredrik mentioned he would be okay if organic growth was 1% for the acquired companies. However, if you're supposedly purchasing good businesses run by good people, shouldn't organic growth be more than 1%, or at least in line with inflation?
You're right. As for us, for our model, it works with zero growth, basically. Because we always have growth from acquisitions. Of course, we would prefer some organic growth. We are not happy with organic growth in the first quarter. You're right. We are buying good companies which historically have shown good organic growth. It's just that in some cases, you know, they are just hurt by the business cycle right now. We aim for higher growth. It's not a big problem for us having in zero growth because we'll be able to grow through acquisition forever, plus 10% a year. That's okay. It's not good, but it's okay.
Compared to when you were at Lifco during the financial crisis or other recession periods, do you believe your portfolio of companies would perform better or worse?
Yeah. It's. Of course, it depends on what type of recession because there are different types of recession. This recession we experience right now we only have a consumer spending recession right now. All industrials are running well. Of course, I think we probably have compared to other serial acquirers, we have a more portfolio which is a little bit more sensitive to consumer spending. They have more traditional industrial companies, these industrial companies are not affected yet. You can't say that in general. I think they. Maybe we are less affected by industrial recession, but more affected by private consumption recession. This depends on the type of recession you have.
If you look at the 2008, 2009 recession, the big loss recession we had, it was completely different recession. Then all cyclical businesses were suffering and less the consumer businesses. It depends what type of recession you're having. Okay.
You look for businesses with at least 15% EBITDA margin, good track record, and so on. How much emphasis do you place on the quality cyclicality of the business? How recurring do you believe that the businesses you own are? If you were able to provide a percent, what percent of the companies you own have a recurring business or recurring products?
It's our businesses, it's difficult to say what is. If you take traditional recurring revenue as a. You have in software or. We have very little recurring revenues. You have that in some industrial products like compressors. There's a lot of recurring revenue. We don't have that either. We have. I can't say, you know. We have recurring revenue as any normal company, but not these typical high recurring revenue companies like software and or compressors and things like that. Can you add? Do you have?
Yeah, I think maybe I can add something. I think we probably have quite a lot of recurring customers across most of the businesses that we, or companies that we own. How large share of the actual revenue that is, from a recurring base, I think is challenging, as Fredrik said.
I can see that.
The final question we have is if there are any timeline updates in terms of a potential IPO.
We don't have that. We don't have a specific timeline.
We, we are just working to make sure that we are prepared for it. That's it. That's it. Today, Lifco reported that its newly consolidated companies in 2023 have an average EBITDA margin of approximately 30%. Still, the multiples paid are very reasonable, seven to eight times EBITDA. At Röko, have you seen a change in the multiples you're paying because of a change in interest rates, willingness from family-owned businesses to sell their business to a proven serial acquirer? What does their profitability profile look like? Is it higher than the group average? We provided a bit of an update on the multiples paid in the Q4 presentation.
What we can see is that we have averaged around the eight times EBITDA since we started. Some companies a bit higher, of course, and some a bit lower, but on average, we tend to be around that level. If you back out from the report that we published today for the first quarter, you can see that the multiple paid for paid there is maybe slightly below, but roughly on par. I think what we can say is that still from the acquisition processes that we have been participating and evaluated for the start of this year, there is no clear evidence that the prices have come down significantly. It seems to still remain around those around those multiples of seven to eight times.
What we can say is that we have been able to increase the average size of acquisition, and that is probably due to that there is less competition from private equity because they are calculating with higher leverage, and therefore, they are more, private equity companies more affected than we are by increased interest rates.
Now we got a new question. With the amount of money still available, do you plan to adjust your type of acquisitions given the insight in Q1?
Actually if you think about it, you can think about like that. We maybe should buy more companies which are a little bit sensitive to consumer spending because if something will come back, it's probably the consumer spending in the future.
I think we can say, we have not changed our criteria that we assess acquisitions on. We remain stringent and keep the same lens.
Okay.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad.
It seems like.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Okay. Thank you very much all of you for taking the time and listening in, and have a good day.