Lagercrantz Group AB

STO:LAGR B

Earnings Call Transcript 2021-Q2

[Jörgen Wigh, President, CEO & Director]

Good morning, everyone. Jörgen Wigh speaking, CEO of Lagercrantz. And together with me here, we have Kristina as well, CFO. Welcome [indiscernible]. And welcome to everyone.We will run as we normally do a quarterly presentation here for our Q2 report, our [indiscernible] fiscal year. And [indiscernible]. We will -- we have a lot of attendance today, so we will put [indiscernible] collectively so that we don't disturb each other, but if you have something -- we will open up for Q&A at the end of the presentation, which will run around -- usually around 40, 45 minutes. And we will open up for Q&A at the end. [Operator Instructions]. But [indiscernible] at the end, I think that will be for that [indiscernible] [ good to know then ] [indiscernible]. Thank you.Good. Welcome, everyone. We will run through the presentation that has been uploaded to our website on lagercrantz.com, and you can all get it there. We have run these sessions in Swedish a few times, but now we have changed to English because we feel that there is a lot of international interest and we will run it that way instead. So we will run -- and therefore we will go through the English presentations, which of course is the same as the Swedish one.The interim report was released this morning. And I think some of you commented it as a solid quarter. I think that is, I think, a good word for it. And we will run through the presentation, which is [ normally we cut into ] 3 sections. The first section is giving you an -- those of you that are new, a short introduction to Lagercrantz and Lagercrantz Group. And after that, we will go through the numbers and -- that was released this morning with -- and then at the end, we have a third section with some what we have called the "Of importance ahead," giving some comments on things that we are -- think are important to us and crucial things in the development of Lagercrantz. So I will go through the presentation around that. And we will start -- and I'll try to also mention the pages we're on so that you can all follow through the presentation.We will start on Page #2 then. That is an overview of Lagercrantz Group. I mean we are a technology group with -- a tech group with leading position in niches. All of our companies -- there are 50 at the moment or 55 even companies that are working in different niches, trying to achieve market leadership in their specific niche, but what they have in common is that they all are working business to business, serving business customers. They're working under their own names, each of the companies. And we also have M&A and acquiring companies as a key DNA of how we build the group. And so we currently -- we try to make 4 to 6 acquisitions per year, which I think is a reasonable target along the way here.We have put our different companies into the 4 divisions: the Electronics, Mechatronics, Communications and Niche Products divisions. And you can also see how we then run the companies in a very decentralized way and with then putting up P&Ls and balance sheets and running them as profit centers. And you can see how they are distributed between the divisions there to the left. You can also see over to the right where we are present geographically. We have our presence in Northern Europe but also some footholds in other parts, markets where we see opportunities for growth when we go for exports. And especially in the U.S. but also in China and also in India, we have some footholds, as you can see over to the right there in the picture.We have been listed as a separate company since 2001 and have now -- yes, on the Stockholm Stock Exchange and currently on the mid cap.Moving over to Page #3, we can look a little bit at the different technologies and companies that we have within the group. Within the Electronics division, we used to work quite a lot with electronic components and distribution of electronic components. We still have some of that left, but we have also really pushed for other types of products more of modules and semi-finished goods rather than components. And we've also moved into more proprietary products, which is a common theme for the full group, to have more of proprietary products within the group. And I'll come back to that, but that, we also pushed within Electronics. The current biggest division is then the Mechatronics division, which has put up in the last 10 to 15 years, which as opposed to Electronics they are [ looking ] more with electrics and connection systems and cable harnesses and other types of infrastructure products. Within Mechatronics we have also our biggest profit center, which is the Elpress, but also a few others that are very important to us. The Elkapsling and also the Frictape are very important within Mechatronics.The Communications division is the third division that we are building along 2 lines really, the technology -- technical security, where we have a number of companies. It used to be quite a lot around electronics-based technical security and surveillance-type companies, but we've also then moved now into more mechanics and also with -- especially with the acquisition of R-Con, which is currently the biggest profit center within Communications that we acquired, now I think it's 2 years ago, which has been very important in the buildup of Communications. Within the control and access, we also have a number of companies, quite many of them. And they're quite -- they're somewhat smaller but, on the other hand, very profitable, some of them, so it's also very important within the Communications divisions. Here we have -- some examples are Precimeter and Radonova within that area.Last but not least is then the Niche Products division, which has -- we've been building now for some 9, 8 years, something. I think we founded it in 2012, putting up a fourth division within Lagercrantz, where we have found some really even more niche-oriented companies all running proprietary products. And here we found some portfolio of really interesting companies, currently then 12 companies. And here we also made some important acquisitions in the last few years, and I will come back to a couple of them. And I think Tormek is really one that is important to us and have proven very -- with very good development in the last year or so, but also a few others have been doing very well there within the Niche Products division.So that's to give you an overview and a start for the group. I think we will then start with the revenues and profits chart which we normally have in our presentations.You can see there that we had a new sort of a little bit of an uptick in our profits again here in the last quarter. I think we were affected in some areas more of the COVID-19, and we saw some decline in our business volumes but also -- and that also affected the profits. We have taken some measures. That is also included in here. So that meant that we've had a couple of quarters now we didn't increase our profits, but now again we increased them here in the Q2 of -- this last quarter, which is good to see that we have this good trend over a long period of time. And you can also see that we have had good margins along the way here.Moving to Page #5 and looking at the business conditions during the quarter. I think we saw -- we have seen here some limited effects connected to the COVID-19 pandemic. And we've seen some gradual improvements here in recent months since it started to improve a little bit, in May even but more so in June. And then along the way here, we've had now a summer quarter. And it was, of course, a lot of uncertainty in what would happen during the summer, but I think we had a pretty decent improvement along the way here. And the fall has been good for us, we think.So it's been -- all in all, the business volume was down approximately 5% here year-to-date, which is to sort of give you a rough estimate of how much, yes, the COVID-19 affected us here during these 6 months. So it's -- but -- and I think that's limited really compared to many others, but I think that's been very good. What we, however, saw was some volatility among business units. We, of course, have some units that are more affected than others, but all in all we also have a couple of companies that have positive effects. And all in all, on a group level it was then 5%, as pointed out here.And the uncertainty remains going forward. I mean we -- as we write in the report, of course, we see the shutdowns on some countries again and what is happening in some markets. We have not seen anything in the business yet, but if -- of course, if there will be more shutdowns, of course, that will affect us as well along the way. But so far, it's been holding up very good even though we see the headlines in the newspapers as well.I think what's also good in the quarter was that we saw really that our main companies and the ones that are really important to us performed very well through the pandemic and through the summer and has done so now for a long period of time. And Elpress is especially a really strong company within the group and very important to us, and that is within Mechatronics. Then R-Con, within Communications, with their sprinkler systems has also been performing very well. And as I point out in my comment there, they also have now full order books basically 6 months ahead, which is what they've had for a couple of -- so it's filling up in -- at the same pace basically as it has been for a year or 2.Also Tormek then, on the other hand, showed great improvements. They have their sharpening tools, and they improved their performance quite a lot here in the last year or so. On the other hand, we've had a couple of companies within Niche Products that have gone the other way, so -- but all in all, Niche Products are performing a lot better, with Tormek as the engine but also with Wapro and a couple of others. Dorotea Mekaniska is another one doing very well within Niche Products. Also NIKODAN has been doing it after a reboot that we had last year in that company. So a couple of companies and the main ones are doing very well. And that is, of course, helping a lot when talking about the group and then overall figures.We've also then pointed out. And actually if we look at the numbers, we can see that we have a couple of divisions doing it very well, which is the Mechatronics and the Niche Products, while communication is doing so-so. And Electronics are doing better than they have been doing in the last couple of quarters but still on -- not on the level that we -- what we expect from the Electronics, and therefore we have conducted quite a lot of restructuring within Electronics. And that is also hurting the numbers a little bit, but it's in this quarter better than it has been for a couple of quarters. I will come back to that later on.So that was what we had to mention around the business conditions. And looking at then Page #6 to add up the numbers, so to speak.Net revenues amounted then to SEK 918 million, which is down a little bit from last year organically around 5%, as we pointed out, partly -- or mainly due to the COVID-19 pandemic, but also then that we see some restructuring going on especially within the Electronics that is hurting the top line there as well. And what we're really doing is restructuring in some of the areas where we don't see the profitability we would like to see, and that is hurting the top line. On the other hand, we also cut out costs then. So the EBITA increased by 5% and reaching the SEK 132 million. So I think we are pruning and we are sort of, yes, improving the overall quality of the group by doing these efforts even though it might hurt our revenues a little bit here in the beginning. And the EBITA margin then reached 14.4%, which I think is a really good number for a summer quarter, up from 13.2% last year. And we also see the profit after -- or EBIT -- increase by 4%. And important to know is also then that we had -- made a split here of the stock, 3 out of 1. So that is also affecting the stock price as well, as you -- I'm sure you noticed. And given -- after the split, then the earnings per share reached SEK 1.75 for the moving 12 months, which was -- and profit after tax was up 4%.Cash flows was very good. I think the summer quarter is usually a little bit weak on cash flows and which I think is normal for most businesses, giving the vacation period and stuff like that, but still on a good level with SEK 80 million from operating activities. And if we look at Page #7, you -- we can see a really strong cash flow for the first 6 months with the SEK 326 million that we see from the bottom on Page 7 there.So looking a little bit at the 6 months, we could see that, yes, the EBITA reached the same level as last year basically. And we can also -- if we compare the 6 months to the 3 months period, we can see that the last 3 months was stronger than the first 3 months trend-wise. So it was, as pointed out, a solid quarter [ we finished ].Looking at outcome per division. I pointed out already on Page 8 that, I mean, we have our 4 divisions, and we see the numbers there. And to give you a little bit of comments around that: We see clearly now that we have strong performance in 2 divisions really. Company is not affected as much and doing it very well, on the other hand, while others are more affected.And in Electronics, we have some companies more negatively affected by the COVID-19. We have the -- we saw some decline in the German market here early on this year, and that, we are now addressing with some restructuring in that company. We also have made some restructuring in a couple of other companies. Poland is doing a lot better now. The U.K. is doing quite okay. And we also saw that we integrated a company in Norway, which is also affected in -- also had a positive effect here within Electronics. So Electronics is not at the level we would like it but still better than it has been for the couple of -- last 2 quarters or so. And you can see that from the EBITA margin here on Page 8, that we normally have been at the 11%, 12% level earlier on, but then we had a couple of weak quarters with a 7%. And now we're back to 10% or 9.7% here in the last quarter.On the other hand, we have the Mechatronics division, a little bit of comments around that. The EBITA margin increased by -- the EBITA increased by 33% in Mechatronics, which was really good number. And the margin reached 7 -- 17.6%, which is also a very good level. Here we have the Elpress and the Elkapsling and Norwesco and Elfac, a couple of -- quite a few companies doing really well and improving their performance. And we also then had the addition of the Frictape acquisition last year, which has also affected the numbers in a positive way. So Mechatronics is an engine for us and continue to do -- to be so.Within the Communications area, we saw a little bit of a decline here. I think some of the companies are still doing it very well. The R-Con is delivering a very strong result. And some of the other companies are also doing it, with ISG, Nordic, the COBS and Excidor and Leteng in -- as also doing it very well. On the other hand, we last year had within Communications a couple of companies that did it exceptionally well with Precimeter and Radonova. And they still are performing on a good level but not reaching up to last year. So that is affecting the numbers all in all in -- within Communications. We also have a couple of other companies, one that we are more struggling with, but that's a smaller one, so that one is not significant in that sense.Last but not least is then the Niche Products division, with EBITA increasing; 19% and reaching a good margin of 20% then, EBITA margin. And within Niche Products, a lot has happened since last year. I mean a few companies are really doing it much better than last year, with Tormek as an engine and -- but also NIKODAN doing it exceptionally much better than last year. And Dorotea and Wapro is a couple of others doing it very well. On the other hand, we have the ASEPT, which was negatively affected by the COVID-19, especially with the shutdowns in the U.S., as they are addressing some markets with the fast food and the restaurants markets in the U.S. And of course, you can all imagine that those markets have been affected quite heavily with COVID-19. So ASEPT is going the wrong way, so to speak, while some of the others are going in the right direction, but all in all it -- the EBITA increased by 19%.So 2 divisions doing exceptionally well, Communications still on a good level, while we also see some improvements in Electronics from a slightly lower level. That -- those are the comments by division.So that was what I would like to say on sort of the section 2 here of the numbers. Looking ahead, I think it's we -- when we continue to develop the group, we will still work with sort of a case by case and looking at the situation in each company. We're adjusting everything that we do. And you can imagine from my comments here that we have companies which are really struggling with growth issues, more than anything, while others are more of in a restructuring phase or conducting downsizing.So actions due to the COVID-19 pandemic, we still have some underway. We have initiated in a couple of our companies that we still see -- that we still expect some better sort of -- yes, some effects to take place here in the next quarter, while others are also growing. We see that Tormek and Elpress are hiring people again and that they have been hiring and are still hiring. So that's also within the numbers here and things are happening there. So it's very sort of situation-based in each company.We will, along the way, come back to focus on growth. That is our -- we are -- have not and are not satisfied with our organic growth, while we -- but we think here that, given the pandemic, the 5% is a reasonable figure. But all in all, we are pushing for more growth, especially in the more export-oriented companies, the ones that are doing it best for us. The continued focus on value add will still remain, and we will also then look at acquisitions. I will come back to that in just a minute, looking at what we see in that area. I mean we are constantly looking for 4 to 6 acquisitions per year. And I think -- after a pause here during the pandemic, I think we have a lot of good discussions going on at the moment. So hopefully, that will pick up here -- again here in just a short period of time.And we will then conduct -- I mean what we do here -- looking at Page #11. What we will do along the way here is to continue with our strategies and our business concept, which is then to build a strong group with various sort of narrow and specialized companies that are doing it very well in their specific niche and through that reach an annual growth of 15% in profit after financial items. We should basically double our profits in every 5 years, and that we've also been doing here. So it's we have delivered on that one. And then we should have an high profitability here measured as the return on equity of not less than 25%. We have been close to that. Currently we have a strong balance sheet, and therefore I think we also have now currently -- it was 23%, right? Was it -- 23% maybe. We have that on a previous page here, but we are close in the neighborhood there.Looking at the -- coming back to the focus on value add here on Page 12, we could see the very good trend we've had all the way back since 2005, '06 with the 21.2% there, on Page 12. And we reached a new all-time high here with the 38% here in the moving 12 months period, of the 38%. So that's a very good and satisfying trend to look at. And how have we done that? Well, we have changed a lot with -- and continuously done restructuring and pruning in our portfolio, but we are also then aiming for more and more of proprietary products where we see that the gross margins are higher and we see some greater profitabilities but also better opportunities for organic growth.And coming back to the focus on proprietary products. We have that on Page #13. And we reach now also that 63% here in the moving 12 months, so -- and as we've pointed out many times, we are aiming for the 75%, and as you can see there, we are getting there. And I think we have also now -- with the restructuring we're making, I think that will also continue with also the [ new ] restructuring we're making in the portfolio but also with the acquisitions that we see here in the near future.Looking at the acquisitions then, coming back a little bit to that. We are looking at Page #14 then. I mean we made -- this is part of our DNA. This is very important to us. And we remain at the target of having 4 to 6 acquisitions per year. We took a pause not only due to ourselves, but also the market took a pause here in the sort of April -- March, April, May time frame; and since then, we have resumed quite a number of different discussions. And I think it's exciting and looks promising here for the future with more opportunities to look at. And we have had -- made a few smaller acquisitions here in the last year or so. Some of them are more important. The Frictape and the Dorotea and G9 is more important, but we plan to resume these activities here now in the near future.And I would like to make a little bit of an add-on here to my presentation currently. So I put in -- looking at the portfolio that we have within the companies within the -- within Lagercrantz, I also put in a couple of more slides here, the #15. This is, when we make acquisitions, we put -- try to put today -- put together a fact sheet on each of the companies that we acquire. And I think it's very satisfying, as I also pointing out in my comment, that -- to see that we -- the portfolio of companies within Lagercrantz is getting stronger and stronger. And just to give you a highlight of that, I put in 2 more slides here to see what we have done in the last few years.The most important profit center for us is the Elpress business. And they're making some 80 million or so on an EBITA level in Elpress, and they have continued to do well. Then we have -- as the #2, we have had -- now have R-Con. R-Con is making pumping systems for sprinkler installations and has been doing it very well. We acquired this company some 3 years ago, something like that, and since then, it's been developing very well for us. So they're reaching now the SEK 50 million. And you can see where they were when we acquired them.What have we done with R-Con then? Well, we have sort of streamlined the company. We have put some follow-up routines in place. We have sort of put focus on growth in the company. So they have a sort of a sales volume of some SEK 190 million currently on the moving 12 months, approaching the SEK 50 million in terms of profits, as pointed out. And I think this is a very good example of we -- how we develop the companies that we acquired. What we've also done with R-Con is we have made an add-on acquisition. The Bjurenwall, who's providing tanks, is an add-on acquisition that we made here, a smaller one but still a very fruitful one, and has been working very well for R-Con and Lagercrantz along the way. That's one good -- I think, good example of a company coming in.I would like to make another example, and that is the Tormek, on Page 16. Tormek, we acquired here in January of 2018, so it's been with us, yes, 2 years then or something, 2.5 years. And they are a leader within sharpening systems and edge tools such as knives, chisels as well as other tools for wood carving. A company in Lindesberg, in the midst of Sweden, doing it very well on exports.And here we've also been able to develop the company. They have been focusing quite a lot on digital marketing and changed the scope of that with working quite a lot with social media and that type of thing. What they've also done is decided to restructure their approach in the U.S. They used to work with some layers in-between, some middlemen working in the U.S. especially. We have now taking over that role ourselves as importers and selling through a different type of distribution channels and also resellers in the U.S., also pushing volumes not only in the U.S. but other markets. And since we have acquired the company, they are currently up, but -- they have a sales of some SEK 170 million and profits around SEK 50 million there as well. So as -- besides sort of the Elpress engine of the group, we also have 2 more companies doing exceptionally well here now and coming up as a good -- so the portfolio within Lagercrantz is getting stronger along the way here, which I think is very promising for the future.Last but not least, I would like to take a third example, and that is Frictape. Frictape, we acquired only a year ago. They've been with us for a year. And you can see the exceptionally good margin they have down there to the right on Page 17. They're making different types of safety products for helidecks, helicopter decks, mainly offshore, both in the -- related to oil platforms but also in windmill parks offshore and that type of environment. It's very tough, rough environments and providing good safety products with -- for that market. Here we had some -- this company has been affected by the COVID-19 but still doing it very well, addressing a little bit of new markets geographically, but also we have put in some better sort of follow-up routines within the company and sort of integrated it within Lagercrantz structure. And they here, during the first year, has been delivering above what they had in the forecast for 2019, a little bit above, which I think is a very strong sign, given also the pandemic, in that company. So here is also another company coming in, doing it very well for us. And that is, as pointed out here, part of Mechatronics as of October of 2019, so it's been with us for basically a year now then coming in very, very nicely for us.So a little bit of add-on there. I thought giving a couple -- a few examples, and I would round off with a financial overview which, yes, that is last year. I mean we have a very strong performance and very strong business concept along the way here, and we plan to sort of continue doing that here. And we'll see some limited effects from the COVID-19, but still I think we have a very much of a bright future ahead of us. So it's -- yes, it's promising, I will say.So that was probably around my presentation. Would you like to add something, Kristina? Did I miss something?

[Kristina Elfström MacKintosh, Chief Financial Officer]

No. I think that was what we had in mind, and we will open up for questions then from the audience. [Operator Instructions]

[Jörgen Wigh, President, CEO & Director]

Anyone would like to start off the Q&A? No questions, anyone? We have -- we usually have a few. Okay, all right...

[Robert Redin, Research Analyst]

Jörgen, can you hear me?

[Jörgen Wigh, President, CEO & Director]

Yes -- no, I can.

[Robert Redin, Research Analyst]

This is Robert with Carnegie. I'm hearing some strange sound, I mean, in the background, but anyway, I have a couple of questions. If you could say something about those restructuring costs in the quarter in Electronics. Were they big at all? That will be my first question.

[Jörgen Wigh, President, CEO & Director]

I think, if they have been really significant, we would have commented on them, and we didn't. So there -- I think there are a lot of smaller costs in the different sort of -- in the different entities. And we have not really added a number [indiscernible]. I think we see some lower costs in Electronics. [ We've seen that things ] have an effect [indiscernible] I think we are aiming to with a -- within a quarter or so, a quarter or 2, I would say, come back to the [ 10% or 11% to 12% ] EBITA margin that we normally had here a couple of years back [indiscernible] to give you sort of a guideline [ on what I think ] we would be expecting [ of us ].

[Robert Redin, Research Analyst]

All right, that sounds good. You also mentioned something about an improvement in demand during the quarter [indiscernible] in Electronics. Was that a broad trend, that you see like a sustainable sort of market improvement? Or was it related to very specific things in those subsidiaries?

[Jörgen Wigh, President, CEO & Director]

No, I think it's related also to geographies. So I think it's a little bit of a better, broad demand. We especially saw it in Germany, where we have -- [ sort of are ] struggling with some of the companies, especially in early on this year, in the spring. But for instance, Schmitztechnik, which is an important [ secular ] part for Germany, that -- they saw some better demand here during the quarter. We also saw some better -- [ a slightly ] important unit we have within Electronics is the Danish one addressing also the hearing aid cluster of companies or customers [indiscernible]. There we also saw some clear improvements in overall demand. So I think it was more broad-based.

[Robert Redin, Research Analyst]

All right, that sounds great. And [ the easy ] question maybe, but there are not revaluations. They were 0 in this quarter versus 6 million last year. So basically, EBIT growth excluding that was a bit higher than what it looks like when we look at the numbers reported. And so in that light then, where the margin development you have here is very, very solid, so do you feel that the costs [ were sort of ones ] sustainably low in this quarter? Or well, you have a target of always improving, I guess, your added value, but how are you thinking about margins?

[Jörgen Wigh, President, CEO & Director]

It's a mix. I think we are doing some clear restructuring and also downsizing of [indiscernible] units that are not performing well. And that is reducing costs and that is sustainable, but I also think in general terms that, I mean, we also have what we call positive costs normally. That is costs of traveling, visiting customers and running different fares and sort of marketing expenses and that type of thing. And I think they are -- in many companies, not only us but in most companies, I think they have been unsustainably low here for the last 6 months. It's been troublesome to even meet customers in some areas. And that is not good long term, but it saves costs in short term. And that is unsustainable, I will say. So we'll probably see some of that, but I think that's -- yes, I think the main thing, and we see why it's -- where we have lower costs, and that is especially within the [indiscernible] is significantly lower in Electronics and also to some extent within Communications. [indiscernible]. Someone else would like to ask a quick question or 2?

[Jonas Jansson]

Jonas Jansson, Erik Penser. I was wondering if you can put a bit of color on -- I mean, with the acquisitions. You've been positive for a couple of quarters, the outlook for doing that. And as it is now, I mean, your cash flow position is really strong, and your ambition is to buy 4 to 6 companies per year. If you convert that 4 to 6 companies through volumes instead, I mean, looking from turnover, how much higher power do you have right now?

[Jörgen Wigh, President, CEO & Director]

Our aim is to acquire basically 10% of our top line. So it should be around SEK 400 million then that should be acquired each year through 4 to 6 acquisitions, and I think it will go up and down a little bit along the way. It's also -- it's always very difficult to sort of -- I think we have a sort of a positive position right now. We have firepower. We have a stronger balance sheet than we normally have had in the last few years because we have [ the dry powder ] at the moment. I think we are -- and we are addressing and into some interesting discussions in a number of markets, and so [indiscernible] I expect us to deliver on that 4 to 6.

[Jonas Jansson]

Okay. And the pipeline in general, if you look upon it now compared to last quarter or the quarter before that, I mean, what does that look like?

[Jörgen Wigh, President, CEO & Director]

I think it has improved significantly because, as it was during the spring, it was a bit silent. And a lot of, I think, both sellers and buyers wanted to [ pause their processes ], while they have picked up and resumes a lot of the processes now. And then we had additional coming on. So I think it is a positive outlook at the moment. Someone else?Okay, me and Kristina are available here for, well, if you would like to give us a call, if you have some additional questions and you want to do it one-on-one rather than in a big forum. And please don't hesitate to call us if you'd like. Otherwise, I thank you for listening in. And have a good day.