Lagercrantz Group AB

STO:LAGR B

Earnings Call Transcript 2023-Q1

[Peter Thysell, executive]

Hello, everyone. Welcome to this conference call regarding Lagercrantz Group's first quarter. My name is Peter Thysell, and I'm the group CFO. We are having some [Technical Difficulty] so I would ask everyone to take a few minutes to wait and we'll see if we can connect Jörgen into this call.

[Jörgen Wigh, executive]

Okay.

[Peter Thysell, executive]

Hello, Jörgen.

[Jörgen Wigh, executive]

Yes. I thought I was on the call.

[Peter Thysell, executive]

Okay. So then I think everybody can hear you, so we can start the call.

[Jörgen Wigh, executive]

Okay. I was on Page #4 here. Did the rest of the people not hear? Okay. No, should I start over then?

[Peter Thysell, executive]

Yes. Yes, please.

[Jörgen Wigh, executive]

All right. Okay. So we'll do it again. No problem.

So welcome to the Lagercrantz interim call for the Q1 report. My name is Jörgen Wigh, and I'm the CEO of the group. And together with me on the call here is also Peter Thysell, our CFO, that just was on here as well. Unfortunately, we have some technical issues starting up here. I was speaking on my own, I think here on my side. I hope that it is too inconvenient for you, but we will do it over again and start from the beginning.

We have uploaded our presentation here on our website, and you can download it from there and look at it. And I will try to sort of make sure that I mentioned when I change into the next page so that everybody can be aligned with that. We normally put the presentation for about 45 minutes, and we will start with an introduction to the group and then move on right to the figures and what we reported here this morning.

So we'll start with Page #2 then with a short introduction to the Lagercrantz Group. I mean Lagercrantz Group, we are business-to-business tech group. So all what we're doing is selling business-to-business technologies to other companies. And we try to do that with some 60 or close to 70, really, subsidiaries working under their own brand name from their own location and building a very strong position in their respective niches that they're working in.

We have organized our companies into the 5 divisions you can see there, the Electrify, Control, TecSec, Niche Products and International. And we work very -- are very fond of working with decentralization and management by objectives. So each of the companies are seen as a profit center, where we are sort of working and building each of the profit centers and creating a strong company in each of them, providing good growth and good profitability in each of the companies in their respective niches.

Our revenues are now exceeding some SEK 5.8 billion, and we are about 2,000 employees, as you can see there. And acquisitions is, of course, a central part of our business model. We are making 5 to 8 acquisitions per year. It's our ambition, and we lived up to here in the last few years and growing the group both organically and through acquisitions along the way. And we've been on the stock exchange since 2001. From 1976, we were on the stock exchange as part of the Bergman & Beving Group, but we were downspun off in 2001 and being our own company since then and on the large cap segment here since January of this year. So we've been growing steadily along the way.

Over to the right, you can see where we have our companies and our footholds. There you can see that we are in the Nordics and in the Northern Europe mostly, but we also have some footholds where you can see all the way out over to the right there. You can see we are in China. We are in India. We are in the U.S. where we have some footholds for some of our companies and building from there when other companies want to join and those are our ambitions in those geographies. We used them as hubs to create growth in new markets for new companies within the group. That's how we work with that.

So that's a small introduction to the group. We will move on then to the -- as I look at the number we posted here this morning that we can see on Page #3 that we closed another strong quarter. You can see a very strong trend in our numbers for some years now really, but it's been an increasing pace here in the last year or so with good -- both good organic growth and also some good acquisition that has been contributing very well to us. And therefore, we are approaching the SEK 800 million here now in profit after financial items. And that is an ambition we have. We have a platform or a strategy or an ambition to reach the SEK 1 billion here within a couple of years. And we've set 5 years to start with but we are well underway after only 15 months, as I mentioned in my words in the report here.

So it's been a great year, and this new quarter, [ it is taking off ] from that trend here going forward as well. So it looks very good for us.

And looking a little bit on Page 4, you can see the business conditions that we commented on in the report. And we posted some strong revenue growth of 23% in Q1 and a good 9 organic -- 9% organic growth, which is very good for us. Some of that is, of course, price or -- yes, the most part of it is really price. But that's also a good organic growth to be able to compensate and raise prices when we saw options in the supply chain and raw material prices picking up. And it's also good to be able to balance that with some good organic growth, and of course our customers.

And on top of that, we had another 11% through acquisitions and a small part was also currency, 2%. What we saw in the quarter was a continued good broad-based growth and demand continuing in our main markets in the Nordics and in Northern Europe. We feel that the market has continued to be very strong, that we don't see any sort of really clear signs of decline. We think it's been picking up quite nicely for us during the quarter. We, of course, look at what everyone is riding around it, what's going to happen in the fall and the interest rates and inflation rates going up. And of course, we are cautious. And we are also sort of preparing ourselves for if something worse will be ahead of us. But so far so good, and I think it's been picking up quite nicely here also in May and June. And we have a strong order book, as we have also commented on in our report, where we're now approaching -- moving further really.

What we also concluded is that we have been doing some quite good proactive management with price adjustments which has balanced the rising raw material prices and freight costs that we've seen. Component shortages cause longer lead times, of course, And we have also seen some need for increase in our safety stocks in some instances, which has also affected our cash flows, which I will comment on later on.

We also see, of course, the increased uncertainty due to the geopolitical turbulence and new waves of COVID-19. I don't think anyone knows what's ahead of us. But as I said, so far so good. But of course, we are also preparing ourselves with -- we have been used to doing these things and things have gone down for the worse. We are sort of addressing that, which can be working quite tight with customers, focusing on costs and cash flows. And those types of measures we have put in place in a couple of instances before, especially in the 2008-09 financial crisis. That's where we did it the most, maybe. And of course, we have all those tools ready to be used if that will be needed here going forward.

Looking at the Q1 figures then, I mean, I already mentioned that the net revenues was up 23%, I'm on Page 5 now, to the SEK 1.6 billion almost. And organic growth was 9%, as already mentioned. The EBITA then was up 25% to SEK 265 million. And that was the strengthening of the EBITA margin to 16.6% as opposed to 16.3% with same quarter last year. So a strong quarter and picking up good with EBITA margins along the way as well.

Profits after financial items increased by 29% to MSEK 232. And then cash flow from operations was really the weak point. That was SEK 2 million, as opposed to SEK 141 million last year. And this is the temporary thing, I would say. This is not a new strategy or so. We have felt that in some instances, we have needed to put up some extra safety stock. And then we also had some COVID-related things when it comes to how much taxes we pay. And that was a big payout here during the quarter. And we see some buildup of inventory, but also the accounts receivables were high since we have been growing and increasing accounts receivables. So a lot of things affected the cash flows negatively.

But I don't think that -- we're pretty sure that this is not something to expect from us. This is a temporary thing that we will fix here in the coming quarters.

Profit after tax then increased by 29% to SEK 179 million, and earnings per share is at SEK 3 per share then as opposed to SEK 2.80 for the full fiscal year last year. Return on equity stayed at an all-time high. We have had it at 28% as opposed to 25% for last year, and equity ratio is at 34% as opposed to 36% from last year. We will run our -- we will have our Annual Shareholders Meeting here on August 30. And there, the Board will propose a dividend of SEK 1.30 per share as opposed to SEK 1 last year, so also an increase in dividend along the way here.

Looking at Page #6 to have some comments by division. I think we have 5 very strong -- continue to have 5 very strong divisions, especially Niche Products are doing it very well, But also the others are doing it very well. I think where we see the greatest growth is really in the TecSec division, where they have been making some acquisitions lately. They made the CW Lundberg last year. They made ARAS here this winter and they also made the PcP now, which has not affected the numbers yet. But the one growing the most is the TecSec division in terms of the top line and also -- but the biggest one is the Niches Products.

You can see it down to the left there in the EBITA, that we see the good EBITA levels in all divisions. We can also see that the International division, which has structurally somewhat lower margins, you can see that from the trend there, that is picking up quite nicely. And that posted yet another quarter at 14.4%, which is very good given what they have been used to and the restructuring they've made some years back now, some time back really, have paid off very well. And a number of the companies are doing quite well at the moment. So it's good to see International at the 14.4% there.

So 5 divisions very strong. To add to that, we have some comments on Page 7 as well. In the Electrify division, I mean, the revenues were up from 5%. But the EBITA was slightly down to SEK 65 million, but still on a very good level and doing it very well. We view it as a very stable first quarter. Last year was a very strong quarter. And we also see that the electrification of society is driving demand for these companies that we have. So I think we are positioned very well within the electrification and what's happening in society.

But we also see that some lead times has gone up. And we also see lead time in investment approvals processes and raising material cost effect on some of the projects they've been running. And therefore, we see slightly lower EBITA this year than last year.

But some companies are also doing it very well. The cable harnesses businesses are doing it very well and Cue Dee is performing very well with deliveries to telecom and the 5G infrastructure in the quarter. So a stable good quarter, we think, for Electrify even though not fully living up to the last year.

The Control division, the revenues were up some 15% and EBITA was up 18%, a very strong quarter. And the EBITA margin was at 14.9% and some good organic sales growth of 6%. We continue to see a good positive business climate for many of the companies. But we also have some project-related businesses, especially Precimeter and those that have been -- we've seen some slowdown during the quarter as well. So but particularly Radonova, Direktronik and Precimeter and GasiQ provided a very improved profits for the quarter. And the recent acquisition, the one we made here this winter, I think it was in November or so, Geonor AS. Geonor delivered according to plan. So for Control division, positive third quarter.

Within the TecSec division, I mean, revenues were up the most, this is 52% and EBITA was up 33%. So a very strong quarter, and the EBITA margin was at 17%. And they posted a very strong Q1 with some 13% organic sales growth. And the largest unit, CW Lundberg, R-Con, ISG Nordic, and Frictape reported strong sales growth. But some of these companies are also struggling to compensate for higher raw material costs. So some of them are also having negative impact on their margins.

So the margin contraction in TecSec is more attributed to those companies than to the PcP coming onboard. The PCP posted a strong June -- and that company was acquired in June, so 95% of the company is acquired. And that is the largest acquisitions we've made so far within Lagercrantz, adding some DKK 423 million with an EBITA of DKK 57 million. So it's a strong bigger acquisition for us. I will comment on that later on here in the presentation. But they had a good start with the Lagercrantz in the first month with this PcP acquisition.

So we move on, on Page 8. You can see the Niche Products division. Revenues were up 30% there, and EBITA was up 33%. And an EBITA margin of 20.6%, so a very strong EBITA margin in that division with some 12% organic sales growth. We saw some improvements in demand and earnings in most businesses, particularly Wapro with the product working very well for them in the U.S. and posted some good orders and good deliveries into the U.S. market and then also benefiting from a strong dollar, which is also affecting them in a positive way.

But also Nikodan and Dorotea, Kondator and a number of other companies in that market continues to show strong performance. And Tormek, that has been a very strong engine for the Niche Products, had some increased sales during the pandemic, had a weak -- had though a weaker start to the new financial year. So everything was very strong in the Niche Products division except maybe for Tormek, still doing it very well, but not fully living up to last year.

Within the International division, we have some revenues picking up some 18% with an EBITA at 41% and the EBITA margin of 14.4%. So the strong quarter margin-wise with some 12% organic sales growth. There we saw some strong development for many of the businesses, especially within the marine businesses, which is done in the Libra and ISIC Group in Denmark. We have a cluster of more marine-related business within the International division, and therefore strong market, all of them basically during the quarter here. So that was a strong part of the business for us. But other companies did it well as well. The ACTE companies in Denmark, Norway, Sweden and Poland did it well and also the NST in Denmark. So good improvements on many fronts also in the International division.

So that was a lot around the Q1 report. Looking a little bit -- looking forward, I think the strategy that we're still working with is the Lagercrantz towards the SEK 1 billion and to go over that a little bit and give you an update.

[Max Bacco, analyst]

Jörgen, this is Max Bacco from ABG. I think some people on the call have their lines open. So perhaps if we could ask everyone to mute themselves. That will help.

[Jörgen Wigh, executive]

Peter, can you mute everyone? Or -- once again. Okay. Maybe it's better. We'll try and move on. I hope that, that works.

I mean, the program that we put together a year ago or really 15 months ago was the Lagercrantz towards the SEK 1 billion. We concluded back then that we had a profit at financial items just above the SEK 500 million, and we felt that we should go for the SEK 1 billion here. And we said we would do that within 5 years, really. We have had that sort of trajectory of growing some 15% per year and then we would double the profit in 5 years. And we said we would do it within 5 years. Now we've been working with this program for 15 months and we are approaching SEK 800 million. So it's -- we are basically well before our time plan here, which is really great. And what we said here is that we should build on what was the platform then? Well, what was the build on the success we've had for many years and continue our journey. And Peter? I can't hear you, Peter. Are you on the line? Or...

[Peter Thysell, executive]

I'm on the line, Please try star 4 again.

[Jörgen Wigh, executive]

Is it Star 4 to mute everyone? I thought it was star 6. Star 4?

[Peter Thysell, executive]

Yes, star 4.

[Jörgen Wigh, executive]

Okay. Now I hope everyone can hear me and I muted everyone. Good.

So to continue on Page #9 with our strategy and Lagercrantz towards SEK 1 billion, And we have some key themes in this program. And that was the first and maybe most important one that was to clarify the strategies and the financial goals. And to be very clear on where we would like to be and where we would like to go and do that also by reorganizing ourselves into the 5 divisions with some clear growth ambitions, finding more sustainable tech areas and customer segments that we can go for where we find some structural underlying growth in those markets. And that, we've been doing here with the reorganization into the 5 divisions. I will cover that shortly here.

We also decided to increase our capacity within M&A, and we will focus on sustainability. And I will try to cover these in the slides to come here.

So first and foremost is then the vision and financial goals. What would we like to build with Lagercrantz is really a stronger group, a sustainable supplier of value-adding technologies and companies providing those type of technologies and build those companies with establishing and developing market-leading positions in several expansive niches. We have used this quiver with all the arrows here to illustrate that, where we see each of the profit centers as one of the arrows here and that there will be very sort of refilled and sharpened and doing what they're doing very well, and through that build a very strong group with a number of companies, providing good cash flows and profits and build from there.

The annual -- and we put up some financial goals then. The EBITA should grow more than 15% per year and at least 1/3 of that should grow organically, and the rest to 5 to 8 acquisitions per year. And we should do this in a very profitable way with having a return on equity of more than 25%. So that was a clarification regarding our goals.

The reorganization -- and then we did a reorganization into the 5 divisions. And 15 months down the road, I feel very encouraged that this has been very good for us. It's creating some good dynamics when we talk about where we should be internally. And also, when we talk to the M&A community, we feel that we have -- can better address where we would like to be, what companies we are looking for and being more targeted to finding the right companies. And we've also increased some resources regarding M&A in these divisions. And that means that we also can run more sort of M&A processes simultaneously.

And an important thing here is also by addressing these customer segments or these product segments, it's also about finding areas where we see the underlying structural growth. And that we do in these companies now. So we also have an ambition to have good organic growth in our companies. Due to that, we are focusing on the right thing along the way.

A clear ambition here has also been for us strategically have been to grow the part of proprietary products. And here, you could see that we have increased the share of proprietary products for many years now. In the last quarter, it was 70% still. But with the acquisitions we just made here, this will pick up. And we will probably be at the 75% in the year or so, I assume. We have been very targeted to finding those companies when we do an M&A. And through that, we should be able to reach the 75%.

The 75% means that we are having more proprietary products where we own the product rights, and that means that we can both price our products more independently and go for the markets where we would like to be and go for exports more than we have. So it means that our ambition is that, that should push our margins but it should also push our top line organic growth when going for more proprietary products along the way. And therefore, it's been a very strategic ambition for us. And we are about to deliver on that well along the way here.

Looking a little bit at acquisitions, As I said earlier, we have increased our resources around this, and we are driving many processes simultaneously and looking at a number of companies that potentially can be part of Lagercrantz. We concluded here the PcP here lately, and Stegborgs also here just a couple of weeks ago. And since a year ago, we've closed 7 acquisitions, adding close to SEK 1 billion in revenues with some good margins and good profitability. So this is a very important sort of engine for us. We've said that 10% of our top line should come from acquisitions and the MSEK 975 is well above that now.

And of course, it was important for us to close the PcP acquisition. Here is a fact sheet around that on Page #14, it is. The PcP Corporation, you can see there. They are a Danish leading designer and producer of high-quality bespoke safety solutions with gratings, treads and handrails. It might seem a bit bulky, these products, but they have a lot of patents and they also have a lot of very niche-oriented solutions, doing quite a lot of customization of their products and addressing a different market really where short lead times and delivery times are very important to the customers and thereby created a very strong company.

They have some revenues of DKK 425 million and a profit/working capital exceeding 60%. So it's a profitable good company, we feel. And they are addressing some key end markets with -- mainly related to infrastructure might be within industry production, such as food, pharmaceutical or petrochemical production or it might be within energy - power generation and transformer stations, these type of equipment used, with also some fire protection, gratings as well as the key product. So it's a quite interesting company, we feel. And they're also working quite a lot within construction, of course, with rail. But the infrastructure part of that with railways installations, roads and bridges and water treatment plants and those type of installations.

So they have a very broad-based sort of customer base and working in many countries. They are working in 30 different markets worldwide. And they have wholly-owned subsidiaries in Norway, Sweden, the Netherlands, Belgium, Germany and the United Kingdom. So it's a stronger and maybe a bigger company than we normally -- but we did this at a -- we also feel that this was a good acquisition when it comes to the price we paid, We paid 6.1x EBITA for this company, and that could add to our group as well in a very good fashion.

Their management team have the ambition to drive this company to 15%. They're currently at 13.5% or so. You can see that from the fact sheet down to the right. There, you can see the numbers they've been posting. They have been doing quite a lot with both production costs and also with pricing here lately, And we see good opportunity for them to strengthen their margins a little bit to the 15% or above, which we have the ambition for. And they will be part of the TecSec division starting from June. So onwards here, they will add to our numbers along the way. So a very important acquisition for us, with PcP.

The second acquisition we posted here during the -- here lately is Stegborgs. Stegborgs is a very much smaller company but a good add-on to the Control division. They are a market leader within -- especially in Stockholm, but will grow outside Stockholm as well in other parts of Sweden. They are making some leading hardware and control systems for renovating -- the renovation of elevators. And they are -- have some SEK 60 million in sales with some good profits adding to also the Control division.

So I round off my presentation here. We closed, I think, a very strong quarter, the best we've ever had. So -- and we feel that the order book is strong. We feel that we have just closed a very strong acquisition for us with the PcP and are looking forward to the coming quarters, even though we have also realized that we might be heading for tougher times. And we are preparing our companies to take measures if necessary along the way. But so far, so good, we would say.

I usually round off with the financial overview. You can see the sort of good trajectory we have here with our increase in sales and EBITA and EBT and the return on equity now at 28%, which is above the 25% which is our target. And the EBT growth should be 15%. And you can see that we have been well above that here for the last couple of periods here. So -- and the earnings per share growth has been very good as well at 34% here now in the moving 12 months figure that you can see there.

So with that, I would round off. I don't know, Peter, if you will unmute everyone and maybe you would add something. Otherwise, we will open up for questions. Let me...

[Technical Difficulty]

[Victor Hansen, analyst]

Can you hear me? I think you guys can hear me. But I can't hear you guys. It's Victor Hansen from Nordea Equity Research. Here again, Peter?

[Jörgen Wigh, executive]

Victor, can you hear me?

[Technical Difficulty]

Hello, everyone?

[Peter Thysell, executive]

Jorgen, can you hear me now? This is Peter.