Lagercrantz Group AB

STO:LAGR B

Earnings Call Transcript 2023-Q2

[Markus Almerud, analyst]

Hi, welcome to Penser Bank and our interview with Lagercrantz. My name is Markus Almerud, and I'm an analyst here at the bank. I have with me Jörgen Wigh, who is CEO at Lagercrantz. Hi, Jörgen.

[Jörgen Wigh, executive]

Hello.

[Markus Almerud, analyst]

So you released your second quarter report this morning, a very strong report. Quite good numbers. Organic growth was at least, to me, maybe surprisingly high, but we've seen that across the -- I mean, in many companies during this earnings season. So 11% organic growth. Strong markets. It's a sixth quarter with a quite high level. You saw a little bit of a dip in the first quarter, but overall, it's been high single digit or double digits for 6 quarters in a row.

And at the same time, the market's worried. We're seeing leading indicators falling. So can you give us some color maybe if you're seeing certain segments which are worse than others, et cetera? Or is it quite strong across the board?

[Jörgen Wigh, executive]

Well, it is actually quite strong across the board. We -- I think with our group and the exposure we have, we are quite business-to-business focused. And we are also working very much in niches. And that means that we are around in very many different markets, and we are, along the way, also becoming more and more international. So we also see exports picking up. And we -- and then of course, we have some engines in the group. Elpress has always been an engine for us within the Electrify division. We'll continue to do it well.

And then we have a number of other toolmakers and other strong engine within the Niche Products division. The [ Waterproof ] is another one within that division. So I think it is very broad-based, and it's in many different markets. And we're a bit sort of not surprised, but still feel that we have some strong concepts in our companies, and it's -- they're winning in their respective markets in quite a few instances, really. That looks good.

I think it's fair to not expect maybe this high level of organic growth if markets start to deteriorate or do we see some really slowdown or a significant downturn. But still seen over a business cycle, I still feel that we have a lot of strong companies and they will -- they are well positioned, and that will be good for us going forward as well.

[Markus Almerud, analyst]

And just to be clear, you have very little consumer exposure. So it's mainly business-to-business that you're exposed to, right?

[Jörgen Wigh, executive]

Yes, that's right.

[Markus Almerud, analyst]

Yes. And still, you have -- I mean you have a plan B. You're talking about it if a contingency plan if we would go into a recession. But I think you also said that you've -- I mean, you've basically not used it at all, which is also a sign of the strength you're seeing. But talk a little bit about the contingency plan, how it works, how you're preparing for a possible recession in your subsidiaries.

[Jörgen Wigh, executive]

I think it's important to understand about us that we are -- I mean, we are a very decentralized organization. So we have -- currently some 70 different profit centers. And when we talk about plan Bs or it's not one plan, it's 70 plans, so each profit center have their own plan. And what we do is that we sort of make a scenario where we look at what would happen if volumes fall 10% or 20%, or really a plan B and a plan C according to 10% or 20%. And then we make sort of a plan around that, what would we do in order to cut costs, what would we do on the pricing side, what would we do on facilities and all types of costs and all type of initiatives, what will we do around working capital in order to really sort of work with that as well.

And those plans, we make one at each of the subsidiaries. But we have not implemented them more than maybe in a handful of instances. And the planning is about to happen. So it's not like we have the plans ready either. We are about to start making those plans. So we are late in the cycle, and we don't see anything really strong deterioration just yet. And therefore, I think it's important to just -- I mean, that's how we work with the plan Bs, really.

[Markus Almerud, analyst]

Okay. Okay. If we move tack a bit to the other maybe main drivers of the top line M&A. So it's a very high activity that you're running at the moment. You added 24% to sales in the quarter alone from M&A. And you wrote in your opening remarks that you've increased the capacity and make acquisitions, and we've talked about it before as well. And you never kept this kind of pace before. So have you reached a new level? Should we expect further acceleration? Or is it this targeted effort which is behind this?

[Jörgen Wigh, executive]

I think it has a lot to do with different circumstances as well. We -- in the beginning of maybe a year ago or in the beginning of 2022, we felt that the market was very sort of [ risen ] and we felt that prices were very, very high and so forth. After -- since the -- yes, in the later part of the year and due to geopolitical crisis, we think that it's been more reasonable.

And therefore, we have been more active than normally. We have the intention of closing some 5 to 8 deals, growing by some 15% to 20% per year through acquisitions or so -- and through acquisitions as well. But I think it's also important to highlight that we have the ambition to finance most of our acquisitions through our own generated cash flows. And therefore, I think that is also, to some extent, limiting us to make even more acquisitions.

We would like to be someone that takes good care of the companies, that we work in an orderly good fashion in what we're doing along the way. So I think that is the pace you should expect from us. And that is basically a slightly slower pace than we've had in the last quarter. I think the 5 acquisitions we made here are also the 5 we've made through 2022. And that's -- so 5 to 8 acquisitions is probably what you're going to see from us going forward.

[Markus Almerud, analyst]

And you mentioned a little bit, if you talk about prices for acquisitions -- well, 2 questions here really, 2 follow-ups. If we talk about prices for acquisitions, have you seen them move at all? You alluded to that a little bit, but have prices been stable or have they been falling? And in terms of competition for acquisitions and maybe the state of the companies that -- in the market, does it make it easier to make them? Or is it kind of the same status quo?

[Jörgen Wigh, executive]

I think the market has been good in terms of making acquisitions. I think looking at the beginning of '22, I think we saw it was very much of a seller's market, while now it's more of a buyers' market. So we have seen prices come down maybe from -- yes, we usually work in the range of 4 to 8x EBIT. And it was basically at the very high end of that range in the beginning, while it's more in the midst of that range now.

But -- so we see that. That has happened and I think that's -- and we also feel that the sort of supply of different companies have increased a bit here during the year. And I think maybe we see that when entrepreneurs, if they have the intention of selling their company in the next 3 years or so, maybe they think that this is a good time rather than to wait a year or 2.

[Markus Almerud, analyst]

Yes. Yes. And if we move on, on the same topic, we talk about geographies. So we know that you did your first U.K. acquisition this quarter, right? And you want to increase the geographical area where you make acquisitions. What are your thoughts about that? And what regions are you focusing on, et cetera? And also in terms of sizes, does it also mean that -- we know, for instance, on the continent in Germany, for instance, targets are often a bit bigger. Do you see the same kind of thing?

[Jörgen Wigh, executive]

We see a lot of -- when we're looking into it more deeply, we see a lot of similarities in countries like the U.K. or in Germany. So we -- and we have the ambition as we see that, for some period, at least the market in the Nordics was tightened up and been more -- slightly more competitive. And therefore, we felt that it was a good idea to broaden ourselves geographically. And we have hired a person that is working for us now in the U.K., and he concluded his first deal here during the summer. And I think that's a good ambition where we would like to go.

And of course, just these days, the U.K. market is more uncertain than ever. So maybe we -- yes, we will deal with that along the way here. But of course, we believe that, long term, U.K. will be a market for us. And we also believe that mid-Europe, with Germany and Holland and Belgium and those markets, will also be part of our geographical scope more to a larger extent than it is today.

[Markus Almerud, analyst]

Okay. Okay. And it's a similar size of targets you're looking at on the content in the U.K. as it is in the Nordics?

[Jörgen Wigh, executive]

Yes. You're right. We won't do the very small ones, I think, in those markets. We need a little bit more size. But I think that, from an outsider's perspective, I don't think you will see much of a change, maybe slightly bigger than we've seen in the Nordics, yes.

[Markus Almerud, analyst]

Okay. Okay. Okay. And if we move...

[Jörgen Wigh, executive]

And yes, to add to that, maybe it's also -- I mean, we will also look at add-on acquisitions. So for instance, we made an add-on acquisition here a year ago in the U.K. when we talk about Radonova. And that company was really very small, but then it's an add-on. And that is sort of a separate thing, the sort of taking more of new platform acquisitions.

[Markus Almerud, analyst]

But you said you've hired a person in -- responsible for this in the U.K. and you don't have the similar type in -- you don't have the similar -- in Germany, for instance, it's in the U.K. you've started.

[Jörgen Wigh, executive]

Just yet, we don't. But I think we have some feet on the ground in terms of our sort of MDs of the company. So they have that on their agenda as well. But in order to really put focus on it, then we -- then I believe that we need some feet on the ground in terms of some more of M&A -- some with more of M&A background to really put emphasis on it. And that we've done in the U.K., but yes, Germany still remains there.

[Markus Almerud, analyst]

Okay. Okay. And if we move down a little bit and change tack again, we move down the P&L and look at the margins. So the margin continues to expand. And I think this is the best second quarter that you've ever seen. Slightly lower than Q1, but there is also seasonality, et cetera. So it's a very good quarter margin-wise. What's the driver behind the margin increase?

[Jörgen Wigh, executive]

I think that we have been pushing margins quite a lot in some of our companies. We felt that in the COVID and through the long lead times and also the shortages and price inflation, I think we've seen sort of our cost prices or prices of our sort of purchases has gone up. Therefore, we have been pushing quite a lot to get them to compensate fully. And that has been pushing the margins to a very good level.

On top of that, we've also then increased the margins through the acquisitions we made. So the acquisition has been margin -- has improved our margins slightly. And it's not like -- but the intention we have is to, over a business cycle, to be well above 15%. That's what we've said in our financial sort of targets. But given now that we've had it for a long time at the 16% or 16.5% now, then I mean we might reconsider that, but that we haven't decided. Let's see what happens here in the year or 2 to come to see whether we can keep it at very good levels. But I think the margins are important to us. That is providing profits for us and that is providing cash flows for us. That is providing more room for acquisitions along the way. So margins and profitability are very important to us.

[Markus Almerud, analyst]

So -- and also, you talked a little bit about component shortage and long lead times. And just curious to hear if you're seeing any easing on that front.

[Jörgen Wigh, executive]

Yes, we have seen some more of, I would call it, stabilization rather than easing. But in some instances, we've seen some easing as well. But from my -- our electronics guys, the one working with lead times and suppliers in Far-East Asia, then the lead times are still very, very long. They are -- in a normal circumstances, they usually work with 6 to 12 weeks as lead times. But currently, it's plus 52 weeks.

And when they say plus 52 weeks, they don't even get sort of a -- they don't even get a delivery time, so -- or the delivery date. And that has been the case for 1.5 years, really. That has been plus 52 weeks for some components. But -- and it's stabilizing and improving in some areas, but -- so it's basically -- I think we have peaked, but it's far from the levels it used to be.

[Markus Almerud, analyst]

Okay. Okay. But still it peaks. So we're kind of through the worst, but it's still bad.

[Jörgen Wigh, executive]

Yes. I would expect that, yes.

[Markus Almerud, analyst]

Okay. And then coming back to the margin. What I wanted to ask was if I look at the single subsidiaries, I mean, there's always more to do on the margin. But do we still have subsidiaries which are performing below, so to speak, were you still working to raise it to kind of a good level?

[Jörgen Wigh, executive]

Yes. Well, having 70 subsidiaries or 70 profit centers, we will always have a number that are below the mean, right? That's the Handelsbanken way of thinking of it, everyone should be above the mean. But -- and of course, we do have that. And we also have someone in the bottom of the list. But I think the bottom of the list is very short. We are looking at some -- we are always looking at the return on sales. And currently, I think we have 3 or maybe 4 units that are below 3%.

And that means that we still have a few sort of companies to work with. I think a couple of them are improving, but still we have -- we will always have something that is in that end. And we will always sort of work with keeping in a minimum and fix those problems we have there. But we will always have something there. It comes with the business we run.

[Markus Almerud, analyst]

Okay. Okay. And in terms of pricing, I mean, you've raised prices to compensate for higher raw materials, et cetera. You've been doing it quite successfully, I mean, given the margins and given the high cost base on the other end. Where are you now in terms of pricing? Is it -- are you done? Or are you seeing more price increases coming through?

[Jörgen Wigh, executive]

Yes. It used to be only price increases, now it's -- I think it's improving in some areas and still have more to do in some areas, but it's more balanced. So it's -- we also see some raw materials prices coming down even. We are metal-based, and we see that some metals are coming down price-wise. And it's also affected quite a lot with the currency effects. So it's a really mixed picture. I think we have been good at driving prices. We see that in our sales margin, which is slightly different from the gross margin, that we have been better at improving margins the last year -- half year or so.

So I think we are coming to an end with sort of the intense price work we've been doing and bringing margins back to where they used to be before the -- yes, a couple of years back in some instances. We have a couple of companies that are still not there. And I highlighted in the report that it's mainly within the TecSec division where we see that, a couple of companies there. So it's -- that we need to fix. But otherwise, I think we are through most of it, I would say.

[Markus Almerud, analyst]

And finally, maybe talk about your "Lagercrantz towards One Billion", where you are moving quite rapidly. I mean you said it 18 months ago, right, and you were at kind of SEK 500 million level then and you're kind of SEK 850 million level now after only 18 months. And at the same time, you still have acquisitions rolling over and then coming into the numbers. So you're almost there, if you would add these. Maybe a little -- a couple of thoughts about that, what we should expect. Should we expect you to raise them? Or is it too early to say? Some color.

[Jörgen Wigh, executive]

Yes, we think it's been a great challenge. I think we -- the management team and me, myself, have been working with Lagercrantz now for 17 years almost. So I think in the year back, we needed some new energy in the whole situation, a new platform to work from, and that we decided to do then with formulating the ambition of "Lagercrantz Towards One Billion". And that we've been working with. We also then decided to reorganize the companies and setting really clear ambitions when it comes to what sectors and what sort of trends we would like to work with and benefit from. And that was around sustainability and also sort of sectors, customer segments where we see some underlying growth.

And I think that's -- by pushing that, we've also highlighted where we would like to go and also pushing that we would like to see better organic growth from our companies, which we've also seen here in the last year or so. So I think it's great to conclude here now that we are at SEK 850 million now and we are sort of moving towards -- you see the trend line is upwards. Then of course, we will see what happens if we see a severe downturn or things really happening. But I think the ambition will still be there, and we will work to get there. And once we are there, I'm pretty sure that we will find another goal.

And then long term, in these type of companies it's always been that we should double our profits every 5 years. So I feel that once we are at the SEK 1 billion, we will probably have a new goal of SEK 2 billion in the next 5 years. It should be 15% per year, and that's we've been -- the way we've been working in these type of companies since the 1980s, and we continue to do that. So it's a way of setting targets. It's a way of sort of creating enthusiasm and growth ambitions and keeping everyone focused. And that's been working for us and will continue to do so.

[Markus Almerud, analyst]

Okay. So if I try to sum up a bit, I mean, you had a very good quarter. Strong markets. You're not seeing much of a downturn anywhere, really it's quite broad. And -- but were it to happen, you're ready for it. And in terms of the margin, you continue to expand. There's more to do, but we should maybe not expect any strides, but there's definitely more to do. And then when it comes to the target of SEK 1 billion, I mean, you're moving fast towards it. And we'll have to see when it comes to new targets, but you're definitely getting there. Thank you very much for coming and talk to us.

[Jörgen Wigh, executive]

Yes. Thank you for having me.

[Markus Almerud, analyst]

Okay. Thank you.

[Jörgen Wigh, executive]

Thank you.