Good morning, and welcome to SmartCraft Q2 presentation. My name is Gustav Line, and I'm the CEO of SmartCraft. Today, we'll talk a bit about SmartCraft, and the market for those that do not know SmartCraft at all, but we'll also talk about the highlights in the second quarter, and then I'll give the word to Kjartan Bø, our CFO, who'll talk about the financials before we finish off with a summary and a Q&A, and as always, you can pose questions in, and we will answer them at the end of the session. SmartCraft provides software for small and medium enterprises in the construction industry, and before we look at what we actually do, let's have a little look at what sort of challenges face these companies. First of all, they run at a very low margin, and a lot of them go bankrupt.
So I have some numbers from the Norwegian market, but I think they are quite illustrative of what's happening in other markets as well. So in twenty twenty-three, 29% of all bankruptcies were related to construction. There's another thing that is very challenging, and that's the fact that there's a high level of conflict between the construction companies and their end customers. And if you look at the consumer authorities, one-third of all the complaints are actually from customers, and they are related to the construction industry. And thirdly, another thing that is really challenging for this industry is the fact that there are a lot of accidents and a lots of high level of deaths compared to other industries. And actually, 29% of all deaths in the at work is actually related to the construction industry.
So in order to sort of beat this and to get better, the authorities have enforced a lot of documentation and reporting onto these companies that are already struggling with low margins. So this is where we try to help them, to provide good software to deal with, specifically three things: people, the material, and documentation. So when you have people out in the field, and they account for most of your cost, you need to be in control and need to make sure that everything they do is captured digitally, all the hours, the use of materials, and so on. Secondly, the materials that you order and from the vendors must be at a good price, at the right place to obtain the right prices through our digital solutions.
And thirdly, the documentation that is needed to prove that you are doing things according to rules and regulations, we help our customers with, documentation, both for quality, aspects, but also for safety aspects. All of this is captured in our solutions. It's one flow of information for the people in the office and the people out in the field, so they always have the same view, and this way, we help them to get better overview of their business and better control and also increase their revenue and margins. Today, we have a leading position in the Nordics, and since 2017, we've done twelve acquisitions, and we have grown on average nearly 30% every year.
When we've done these acquisitions, and the growth is not only through acquisitions, of course, also organic growth, but when you look at the acquisitions we have done, we typically buy companies with a low margin, and then we work to lift the margin as we go along. And when you look at the margin uplift that we've had over the last years, you can see we've gone from 36% to 40%, which means that we've really been able to lift the companies that we acquire to a higher level through working to focus on the right things and also to work better as one team. Today, we have about 260 employees, and we're present in Norway, Sweden, and Finland. The construction industry is massive.
It's one of the biggest industries in the world, and it has a lot of pockets of opportunities. Our pocket of opportunity and our main segment is the renovation segment. This segment is very interesting for several purposes. First of all, there are a lot of existing buildings that are in the need of renovation and services, and this segment is actually growing faster than the new-build sector, and it's also bigger than the new-build sector. And as you might have observed, the new-build sector is the one that is under pressure these days, where, because there are very few new projects, and this is really affecting the larger construction companies more than the smaller construction companies that are more engaged, like we talked about in renovation.
A good driver for our customers is the fact that a lot of the existing buildings need to be more energy efficient, and a lot of our customers are plumbers and electricians, and though they are the people that are asked to do these jobs, so that's a really nice driver for our customers. And of course, this market, especially the SME companies in the construction industry are not very digitalized, so it's a massive opportunity, and that's what we are going after. The market has been challenging for the construction industry, but we do see some early positive signs, and I should be very careful to sort of say that now things are gonna be a lot better, but at least these are some information that I would like to share.
One sort of mixed signal we get from the Norwegian market is that, when we sort of really deep dive into different NACE codes and the type of customers we typically operate with, we see that the number of bankruptcies has increased quite a lot, but we also see that new establishments have increased over the last twelve months. That's a bit strange. So seems to be maybe that some of the companies that go bankrupt actually start up as a new company a little bit later. When we look at insolvencies in the U.K., on average, the number of insolvencies has actually stayed the same over the last three years or twenty-nine months. It's actually gone down slightly in 2024.
And with the new government in the U.K., they promised to, or not promised, they have an ambition at least to, to grow the number of new homes, to 1.5 million, which means that they need to more or less double the level of new build activity over the next five years. So that's also a positive drive for the U.K. market. And in Finland, that has been hit quite hard by the construction downturn. We see some positive signs. We see that what is categorized as, construction starts, that means projects that are starting, are now actually exceeding the projects that are being completed. And that's for the first time since 2022. So difficult to say exactly what's gonna happen over the next months, but at least these are some signs that we think could be encouraging.
Let's move to some Q2 highlights. I think, first of all, I would say a big highlight is the fact that our annual recurring revenue is now at NOK 461 million, and it has increased by 32%, compared to the quarter last year. Of course, that is driven by acquisition, but also by organic growth and also to a certain extent by the exchange rate due to the weak Norwegian crown. Very pleased to see that our margin is staying more or less the same. We have a 29% adjusted EBITDA minus CapEx margin, which and that's excluded for the recent acquisitions that we did in April and May. Call it the normalized EBITDA is actually quite similar to what this has been.
That churn is staying at a decent level. It's at 7.9%. It's up from 7.4% in Q2 and 7.4% a year ago as well. It's still at a fairly decent level. Another thing that I think is quite good to mention for Q2 is the high level of marketing and sales activities that we have in the group. We are gathering more around the SmartCraft brand, and we can do more with the same resources and get more bang for the buck, if you like it. An example of that is the fact that we actually attend several big fairs, like Nordbygg and Eliaden, which are the biggest sort of fairs for construction companies and electrician companies in Norway and Sweden.
And that not only creates a lot of exposure, but it also creates a lot of leads, but also some interesting on-site purchases, which is also quite cool. So in total, we have increased our brand exposure, the visibility in the market, by five times compared to last year, in Q2, so we're quite pleased with that. So I think SmartCraft as a group is more visible than ever in the market, which has created more inbound leads. We have increased inbound leads by about 30%, and also, as a result of the leads, we also get more sales meeting.
Another nice factor is that we also get more online sales, which is a result of the work we do to see if we can optimize more of the sales process, especially for the smaller packages that are easier to buy online. Because if it's a more expensive package, you want to speak to a salesperson, which is quite natural, but happy to see that online sales is now increasing quite a lot. Another thing that I would like to mention is the launch of Telus. Telus is a solution to help construction companies and transport companies to be able to capture emissions data.
And they have to do this. It's required to do this in Sweden, but they had to estimate how to, how the emissions were, but now they can actually get it real time. So we provided something called Telus. It's an open-source solution that everyone can use, and they can connect to Telus in order to capture the data. We have made APIs to Volvo, Scania, MAN, and also Mercedes is coming quite soon, and this solution is actually used by Skanska today with really good results. So this is really a great initiative to help the industry to become more clean. And in Q3, we will launch a solution that will enable companies, truck and machine operators, to actually connect more easily if they don't have developers on site themselves.
So, that will be more of a solution that is possible to buy and use in a very easy way. So that way, we will both create stickiness and also revenue going forward. Another thing that we're very pleased about this quarter is that we have launched some cool functionality for our customers. We have launched a new app for our big customers, which is the biggest customer base we have, and it's always a bit daring and always a bit risky to close down something that the customers are used to. But they've had the app for many years, and now we turned it off in Q2 and replaced it with a new app, and the feedback is really good.
We get 4.4 out of 5 of the use of the new app, so that's definitely been a good decision. Secondly, we also launched, or we are piloting a module for budgeting, which has been requested by our customers for a long time. The feedback is really good, and we will launch this going forward, which will probably be Q2, Q3, I think, at the end of Q3. Another interesting initiative that we've been working on for probably about a year is that we are packaging different solutions into different packages. And if you look down at the slide, you'll see that we have four solutions, Cordel, Quality Test Control, El-verdi, and Elin, and we have made integrations between those so that we can package them into different packages to give great customer value.
So the customers can now buy a low-entry solution called Electro Basic, or they can buy a more premium solution, or they can go for the more sort of full-size solution, where they get also advanced calculation. So this is a really good way to cross-sell the solutions and make it a lot easier for our customers to buy from SmartCraft and get more value out of what we have. One of the probably one of the biggest events this quarter is the fact that we have done two acquisitions, and as I've talked about, acquisitions is definitely part of our strategy. And we have acquired Lokka in April and Clixifix in May.
Lokka is a great solution for 3D visualization, helping construction companies and property developers to visualize for their end customers how their potential flat is gonna be. And then there's a lot of buying functionality and communication functionality between the company and the end user. Clixifix sort of takes over a little bit further down the line when the property is actually finished, the flat is up and running, the customer has got the keys, and the service period starts. That's where Clixifix comes in, and it's a great tool for creating service orders, complaints, and repairs between the end user and the property company or the construction company, and also in connecting this to subcontractors. So this has been a great addition, and also we're very pleased to be able to enter the U.K. market.
We think there's a massive potential, and we have loads of opportunities there. A thing that we find is that the market has gone softer, the construction market, which has also enabled more dialogues with potential targets. Sorry. So today, we have 11 solutions, and like I talked about a little bit earlier, we worked to put these packages together, and we looked at Cordel, El-verdi, Elin, and Quality Test Control, and showed you how they can be packaged into different packages that make sense for the customers. And this is something we're gonna do and look at for different solutions we have, and the way we see it is that everyone is trying to solve a bit of a big puzzle, but we are putting the pieces together to create a bigger picture for our customers.
With the addition of Lokka and Clixifix, we have increased our TAM dramatically. The last time we calculated a TAM was actually based on data from twenty twenty, so we thought it was good time to look at the TAM again, and we applied the same methodology that we did in twenty twenty, and just used the same way to calculate the TAM in the three markets, plus the UK. Then we arrive at a TAM of NOK 50.7 billion addressable construction companies. We think this is very interesting, and remember, again, these are companies that do not have, most of them do not have proper solution to solve their needs. Just to sum up the key takeaways before I give the word to Kjartan.
We continue our growth with high margins and, despite a slightly challenging construction market. We have some very strong results from marketing and sales across the group, mostly driven by the fact that we now work much better together and also apply the methodologies that we have best practices around the group. We've shown you some new product launches that will help us to drive both stickiness, upsell, and cross-sell, and finally, the two acquisitions that we acquired has increased our TAM to about NOK 50 billion, so with that, please, Kjartan, take it away and talk about the financials.
Good morning. So let's get straight to it. So our ARR has a significant growth in Q2, and it ends at NOK 461.3 million. It is a total growth of 29%, largely driven by acquisitions, and organic growth is 11%. I will come back to some positive signals in the markets, shortly, but we do see increased churn to 7.9% and still a high level of downgrades, hampering our growth. While the additional ARR from acquisitions is high, the recurring revenue share in these companies are quite low, and at a lot lower level than the rest of the group. This provides an upside for us, to transition non-recurring revenue and boost ARR growth in the future.
As I said, the recurring revenue share in the acquired companies and acquired solutions are a lot lower than the rest of the group, and thus, the recurring revenue share for the group in Q2 declines to 89.6%. If we exclude the two acquisitions that we did in Q2, the recurring revenue share for the rest of the group increases to 97.4%. So we have a good track history of increasing our recurring revenue share, and as a part of our strategy, we will, of course, focus on this in the latest acquisitions as well. In total, we expect over time to be in the mid-high nineties range as we have been before.
Of course, as all acquisitions we have done, the latest acquisitions have a lower margin than the rest of the group as well, so naturally there is quite a dilution from acquisitions now that we have not only did one, but two this quarter, and the acquired companies dilute the group acquisition by 3.2 percentage points, so the adjusted EBITDA minus CapEx margin goes down 3.5 percentage points. The difference, the 0.3 percentage points, come from investment in marketing and investment in scalability, as we now are entering new geographies. We do have a proven track record to increase the profitability in all acquired solutions, and that is, of course, the expectation going forward as well. Now, as we grow, we spend more, a higher amount on development and capitalizations.
As revenue increases more, then, the percentage has now gone a bit down. We are expecting roughly 9% in total for the year 2024. If we look at the segments in a bit more detail, in Sweden, we have a very high growth of 47% in total. This is, of course, driven by acquisitions, but we also have maintained our momentum in sales to new customers. Comparing to 2023, the growth has gone down a bit, but in 2023, we had a very high boost in non-recurring revenue, as we had the handbook sales to the electric market. The positive signals in Sweden are very good.
We did sign a major customer, Stockholmshem, which is one of Sweden's largest housing associations. We have great feedback from our Telus project and our new budgeting module. Of course, in Sweden, with acquisition, the margin is diluted as well, and that affects the whole segment. In Norway, we still have a very solid revenue. This comes from a structured sales process that drives the growth of new customers. Also, as the other markets segments, we do see increased churn and a high level of downgrades. The margin in Norway will, at first glance, decrease, but if we look at a bit more details, then we see the comparable figures for 2023 was quite high because we had high capitalizations.
The CapEx in 2023 was adjusted at year-end, and if we look then at the adjusted EBITDA minus CapEx margin, the underlying operations grow by two percentage points. We have a high level of sales and marketing initiatives, especially towards the electricians market. We are piloting a new solution, and we are looking at packaging the existing solutions together. We have received great feedback and expect a good future opportunity in this electricians market. All in all, Finland, the Finnish market is still challenging, but there are a lot of positive signals here as well. First of all, the negative growth has stabilized.
We have the same growth in Finland in Q2 as we did in Q1, and also some statistics in the market shows that initiated construction projects are now higher than the number of project which is closed. We also have a very good activity in sales and marketing, and we see a higher activity level with our customers, increasing the transactional revenue for us. Of course, as before, when the market in Finland turns, we expect a growth tailwind. Our cash flow and balance sheet is still very strong. Now, although I'm delighted to present a more than 200% increase in operational cash flow, there is an important note to this as well.
In 2023, we paid out more than NOK 17 million in earn-out, and as this was expensed, we had to change the classification from investing activity to operational activity, and thus reducing the 2023 cash flow from operations. If we disregard this change, then the growth in 2024 is roughly 0%. That being said, we also had tax payments a lot higher in Q2 2024, as we did in Q1 2024. On the balance sheet, that is, of course, still very strong. We are net cash positive, and we still have a negative net working capital. The acquisitions, of course, affect most items in the balance sheet, and we had net cash payments of NOK 157 million in the quarter relating to the two acquisitions.
Lastly, we have now roughly 2.2% treasury shares at the end of August, and the program has now ended. And with that, Gustav?
Thank you, Kjartan. So just to sum it up, we will definitely continue to focus on driving in this market. We have a very customer-centric model, which means that we're very close to our customers. We talked a bit about sales and marketing activities that we do. We will continue to be even better at optimizing and driving sales excellence and continuing to do really cool stuff in the market, and a big potential for us is to do more sales automation and self-service. That's something we both invest in and spend a lot of time on. And we will, like we have done this quarter, look for more acquisitions in existing markets and also outside existing markets. And like Kjartan talked about, we are very concerned about being prudent on cost.
So we do anticipate the recovery in the general construction industry in the coming years, and we reiterate our medium-term financial targets of 15%-20% organic growth, and we expect margins to increase due to the scalability of the business. So I think with that, we should close the presentation and go to the Q&A. So Kjartan, please, join me.
Thank you, Gustav. We have several questions coming in from the webcast. Just to remind you, it's still possible to post questions in the player. So first question is, can you say something about your pipeline for future M&A, and what is the potential in the Nordics compared to outside of the Nordics?
Sure. I think the pipeline in the Nordics is something we've been building up and maintaining over a long time, so it's actually fairly constant. It's good and constant. But I think there's great potential in UK, definitely. So that's something we are working on at the moment. We think there's lots of opportunities there. So that would be our main focus area, but we are not disregarding new markets as well.
Thank you. One other question regarding U.K.: How do you plan to drive growth there? You mentioned M&A, but also organically, what's the potential there based on the platform that you now have acquired?
The company in the UK, Clixifix, has done a fantastic job, and they've sort of built the company stone by stone, and the team is really, really great. I think I really like the energy and the way they think, so I think it's a lot about scaling what they already do, investing a bit more, or making sure that we can scale using the methodology that we use in the rest of the group. We are hiring a full-time marketing resource that they haven't had before, and of course, if you have a half-time marketing resource, it's difficult to do a lot of marketing, for example, so we will see how we can scale the company. That is still early days, but there's a lot of potential.
We will also take off some of the complexity that they've had in the past now that they're part of the group, so that they can focus more on business as well. That would be the organic part of the growth.
Perfect, and when it comes to the other acquisition that you made in the first half, Lokka, how do you plan to increase the revenue, the recurring revenue share there? And do you think it's possible to lift the recurring revenue share to the level in the rest of SmartCraft?
Yeah, yes, definitely. Lokka has been in a special situation. They've been short of cash, basically. But been restrained liquidity, which means that their business model has been try to get as much money upfront as possible. Now that we have a solid bank, with Kjartan Bø, we are actually able to sell more, like the way we would like to sell it, as a service, where you pay as, along the road, down the road, rather than one big investment upfront. We think this is much better for the customer, because it creates more assurance for future payments as well. We think it's good for us, and we definitely think it's good for the customers.
Thank you, and can you also give an update on the progress so far in terms of cross-selling or bundling of your solutions for electricians?
Yeah, we did mention that in the presentation, what we are actually doing. That's the main initiative we're doing, and we're very pleased so far, but we're not revealing any numbers yet. But hopefully we can talk more about that on the Q3, because it's still piloting, but it's good results so far.
Is there anything to report with regards to cross-selling Lokka, Homerun, and Clixifix? How are you... Have you done anything there so far?
No, we are having people sitting down to look at what are the opportunities. There's a lot of energy around what we can do, but we need to take that down into concrete actions.
All right.
It's important to remember that the company was acquired just before the summer holiday, and then there's been summer holiday, both in the Nordics and in the U.K. Basically, the people from the U.K. are more or less back from holiday now, well, this week, actually.
All right. There's one question on more on the macro market sentiment. You had some reference to various data. Can you elaborate anything on what you're hearing from your customers? Are they getting more optimistic and interested in actually investing in digital solutions?
I think what we hear from our people out in the field is that the market is more or less the same, but people are a bit more concerned since there's been the challenges in the market has been going on for such a long time, which means that we sort of feel that some of the decisions are being a bit more delayed. It's a little bit more difficult. A bit more uncertainty in the market, I think, in general, but there are also, like we talked about, some signs of maybe a bright future, and that hopefully will also boost some optimism, but it's difficult to say. It's a bit uncertain.
Mm. Thanks. One more on the UK. Any view or any sort of information about the digital adoption over there? Are they as mature and ready for the digital solutions as, as the Nordic clients? And also, how's the competition, would you say?
Yeah, we've done some presentations of our solutions to the rest of the group, and the people in the UK were, like, ecstatic of what they saw. When they saw some of the Nordic solutions, they said, "Wow, this is absolutely amazing. If we can have this in the UK, that would be the best thing since sliced bread." But we'll see. We're definitely looking into that. The impression is not only for construction software, I think software in general, the Nordics are much in front of the rest of Europe and also the UK, so there's a great opportunity.
Perfect. Couple of questions on current market environment, being well into the third quarter. Can you say anything about how the quarter has started? Something similar, anything particular to be aware of?
I wouldn't say anything to be aware of. I would say it's more or less the same as it has been. Good activities, our people out in the field, meeting customers, doing e-events and doing marketing activities, and the response is fairly constant to what we've seen in the past.
Perfect. You touched upon your growth targets, the medium and long-term targets. Would you say that you are dependent on the cycle, so to speak, to reach that target, get into that corridor again? Or can you get there even if the construction markets remains weak?
Yeah, I would say we would definitely have a nice push with the market getting back into a better stage. I think that's fair to say, and we have been on a downward trend in our growth. So I think that would definitely give us a good push. Saying that, we are looking into the opportunities we have in the U.K. We are doing some really interesting initiatives. We're sort of pulling together the resources and the acquisitions, and things are starting to fall into place, but I think it would definitely help us to get into the corridor with a bit of a market getting back.
It's important to remember the crisis that the construction market is in at the moment is the deepest crisis it's been in for many, many years, and it's not. It can't go on forever.
All right, final question for now, at least. Do you think that the Q2 ARR was boosted in any way by the calendar effect relating to Easter this year?
Not in any major way, I would say. Easter is, of course, coming every year, but it's sometimes in Q1, sometimes in Q2. We see a slowdown in activity with the customers around Easter, but we don't see any major changes in Q2 with more.
All right. There are no further questions from the webcast viewer at this stage.
Let me take the opportunity to say thank you very much for tuning in, and have a great day.