Lifco AB (publ)

STO:LIFCO B

Earnings Call Transcript 2020-Q1

[Operator]

Hello, and welcome to the Lifco Q1 report for 2020. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Per Waldemarson, the CEO. Please go ahead with your meeting.

[Per Waldemarson, CEO, President & Director]

Hello, everyone, and welcome to the Q1 presentation. I would like to start directly on Page #2 and just give a quick overview of the quarter that we just reported this morning. And overall, we can say that the first quarter this year was a stable, solid quarter with some COVID-19 effects during the last couple of weeks in the quarter. So overall, we were rather unaffected. Most of our business is done in the Europe and the U.S. end-user market. So we were not really affected by the early problems in China with demand. However, we have slight effect on the Dental side where we have a production unit in China that have some difficulties keeping up the production in the early part of the quarter, but it turned out to work out fine on that side. I'd also like to highlight that we also, this quarter, grew our profits more than sales, which is one of our ambitions at Lifco, not maybe every quarter, but over time, we always strive for driving our profit more than sales to reach high and solid margins. So we did that this quarter, partly -- or mainly thanks to acquisitions. Our organic growth on the top line was actually negative of 2%, but acquisitions contributed with 9% sales growth in the quarter. And this translated in total into an EBITA growth of 11% and actually higher growth in profit before tax and net profit of about 25% in the profit before tax, which has to do with the effects we had in the quarter 1 last year of a onetime cost of SEK 56 million that we didn't have this year, obviously. And then we also like to comment quickly on the cash flow. It was also a stable solid quarter in terms of cash flow. I think the comparative figure here last year, we had some difficulties generating the cash in the last quarter in 2019 -- in the first quarter in 2019, which had to do mainly with a very high level of growth and business activity in that quarter that led to working capital issues as well as also some effects on the prepayments last year. But this year's quarter was more normal and quite good actually in terms of cash flow. So we're very happy about that. And all in all, also just commenting on our return on capital employed, excluding goodwill. If you compare the quarterly numbers, we have to keep in mind that IFRS 16 has a major effect on that number. So we are fairly similar overall, but underlying, it was our performance. So with that, I would like to turn to Page #3, where we look into the different business areas. If we take Dental, we did see some effects of the COVID-19 and the lockdown in certain markets in the last, I would say, a couple of weeks, especially the last week of the quarter. But other than that, it was a stable and solid quarter for us. And yes, as I said before, some issues we had with increased costs in -- relating to the China production entity in our prosthetic business, but that's very, very marginal, as you can see in these numbers. If we turn to the Demolition & Tools area, I'd like to summarize the quarter that I think the underlying market was very similar to the Q4 of 2019, where we reported actually lower profit in that quarter compared to the year before. This quarter, we report improved profit. And that has partly to do with the effect of actually having some deliveries on project business or slightly larger orders with good margins. And as I mentioned in previous quarters, these type of orders tend to fluctuate between different quarters. But overall, my comments on Demolition & Tools and the underlying market is that if you take the last -- maybe last week of the quarter and exclude that part and then look at what was the market before, it was very similar to what we saw in Q4. So basically, slightly weaker market conditions than we had in the beginning of 2019 where everything was very strong in this segment. But still on a very good level, I have to say. So we have to compare to the long-term trend and still good in that as well. And then if we come to the last business area, the Systems Solutions. The growth there of sales in 15% and profit in 25% is mainly driven to acquisitions. As you all know, a lot of our acquisitions tend to end up in this division, a business area where we have a very broad definition of what type of companies that can be included in the area. So that contributed to that growth there. I just want to make one more comment on Systems Solutions. We still have rather weak development in our Forest product business and also saw that in this quarter. We have that now for quite some time, but we're working hard on trying to address those issues. So with that, I'd like to go to Page #4 and just make a summary of the effects. I mean most of the comments I've had up until now has been related to how the situation was before the last 2 weeks of March. But since then, we have seen quite some changes. What we did in the very early part of March, obviously, like most companies, we did actions to reduce our risk for employees when it comes to health and safety and also to make sure we could continue operating our businesses in the Europe and the U.S. despite the demand on basically making it more difficult for people to go to work, but we did quite well in keeping our operations running. We did obviously see some effects, but very limited effects in the Q1 due to the demand over the last 2 quarters, and that's quite general. It was more specific and more immediate in the dental area where we saw quite a few markets, both in Europe and the U.S., where both, due to legislation or basically clear regulations, that the dentists or certain dental treatments were not allowed and also due to a general attitude of patients not wanting to go to the dental office. And this type of trend continued in the beginning of April, and it has also been affecting many of our other subsidiaries outside dental in terms of demand during the last couple of weeks. So with that, we actually believe that the COVID-19 will have effects on sales and profitability levels in Q2 2020. Very difficult to say exactly how because, obviously, it depends on many, many different factors. First of all, how will the markets in Europe and the U.S. open up? And how will it impact our very different type of business that we're operating? And once again, the short-term impact has been clear on the Dental side and also on the Systems Solutions side in certain areas where we have very little order book to work with. We also see the demand going down in Demolition & Tools, but there we have slightly longer lead times and some order book to work on. But the effect is quite broadly spread during the last few weeks. And all I'm saying now is referring to how things have been in early April. Obviously, we don't know how May and June will be. That's given our [indiscernible] and we are as curious as everyone else on how the markets will develop in the next weeks and months. And in summary, it’s basically impossible for us to predict exactly how the impact will be and for how long it will last, and that's how we did that comment. And with that, I'd like to go to Page #6, and just very shortly then make one more comment in addition to data on this slide, and that's that we still exit this first quarter with an interest-bearing net debt-to-EBITDA of 1.6x. So our leverage ratio is still on a quite low level despite high activity in acquisitions in the last 6 to 9 months. And then we can move directly over to Page 28. And just all the way back to Page 28, I'll just comment briefly on the most recent acquisitions. As you can see that we made -- in early 2020, we finalized 4 acquisitions, 3 in Dental and 1 in Systems Solutions. And just a comment on the acquisition level or acquisition activity right now, we are obviously a little bit in a situation where we are still keeping a lot of discussions going on. It's difficult to enter new discussions due to difficult to travel around in Europe to meet the entrepreneurs and the business owners, but we do as much as we can to keep things going. And we hope that once we get more visibility in our portfolio and also in the companies that we are targeting, we can go back to more normal situation. But also, there is, of course, difficult to predict when and how that will develop exactly. So with that comment, I'd like to open up for questions. Thank you very much.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of [ Maxis ] of SEB.

[Mats Nyström, Credit Research Analyst]

Yes, Mats Nystrom here, SEB Credit Research. I have a question on the balance sheet and the liquidity, which obviously is topic on everyone's mind these days. At the year-end, I believe you had SEK 1.2 billion in overdraft facility, so in addition to the cash on balance sheet. Could you tell us what is the situation at the end of Q1? Is it the same financing package? Or have you extended the liquidity? That is my question.

[Per Waldemarson, CEO, President & Director]

We have extended the liquidity at the end of the first quarter. So we have both an RCF solution and also to our normal overdraft check credit.

[Mats Nyström, Credit Research Analyst]

And is that something you could share with us, the details, or are they non-public?

[Per Waldemarson, CEO, President & Director]

We haven't normally communicated those details. But we have -- what we have communicated in the end of the quarter was that we did not -- we had a bond that was terminated on April 3 that we -- instead of making a new bond, we have to go out and make a bridge financing on that. So we are currently working on our long-term financing solutions. In addition to that, we also took certain steps to make sure that we have more liquidity sort of backup, which of course is overdraft -- the thirds is coming up.

[Mats Nyström, Credit Research Analyst]

So finally, is it fair to conclude that the cash on balance sheet and the undrawn credit lines are greater than they were at the end of last year?

[Per Waldemarson, CEO, President & Director]

Sure.

[Operator]

Our next question comes from the line of Per Jørgensen of I&T Asset Management.

[Per Jørgensen;Investering & Tryghed Asset Management]

Per, I have a question regarding the Systems Solutions business. It's doing very well, thanks to acquisitions. If we go back when you really started after the IPO and you saw in 2017, 2018, 2019, you acquired a lot of businesses in the Systems Solution area. I know it's a very fragmented area. But if you take a look at these companies, are they doing better than the old companies in the portfolio? If you take a look at what has happened in April, so they are protecting the margin better. They are protecting their businesses better than the old business. Is that a fair assumption that they are doing very okay actually?

[Per Waldemarson, CEO, President & Director]

Is your question relating to how they're doing after the lockdown of the European and U.S. market?

[Per Jørgensen;Investering & Tryghed Asset Management]

Yes, yes.

[Per Waldemarson, CEO, President & Director]

I think that's a very difficult question to answer because you really have to go into every company. They all have specific situations. And then also the timing of how quickly you fall into effects of COVID-19 lockdowns is also quite difficult to predict. It's been, almost on a daily basis, the discussion with different companies. Certain companies had felt everything was perfect last week of March suddenly starts feeling [indiscernible] in April. So it's that type of situation right now, where it's very difficult to predict. So I think yes, some of the companies, for sure, are maybe less affected, but I will also say some companies are affected quite a lot. So it's very difficult to draw -- to make a statement like you try to make a make me here. And it's because it's really company-specific. It's also day-by-day or week-by-week specific also how it has developed. You're overlapping the [ price achieved ].

[Per Jørgensen;Investering & Tryghed Asset Management]

Yes, yes. But if you look back, it's fair to assume that the companies that you have bought for Systems Solutions, they are of a much better quality than you actually had before. So all things being equal, they should be doing better.

[Per Waldemarson, CEO, President & Director]

If you take the bigger perspective of it and look at it in more normal marketization, I would totally agree to that statement that the companies, on average, that we have brought into Lifco has had an even stronger niche position and a stronger market position and margin opportunity and also margins coming into Lifco as well as, I would say, quite a few of them also have opportunities to do something to develop their business going forward. So yes, we are quite happy with the portfolio we have acquired. But we're also very humble in this period of time to say that many companies that you normally would not think would be very volatile, could have a severe impact in this period of time where demand suddenly can 1 day to the other almost be wiped out as it's very short term. So -- but it's also very difficult to predict how things develop in the next few weeks or months.

[Per Jørgensen;Investering & Tryghed Asset Management]

Yes. Okay. So it's a fair assumption. Just my last question regarding Dental. And it's very obvious that the dental clinics, for example, in Denmark, where I am, and they have been closed for a month or so, and they are coming back to business now. Do you see any -- and it's probably also fairly difficult to analyze. But is it fair to assume that there are some sort of pent-up demand? There'll probably be some lost revenue that will never come back, but there will also be a pent-up demand. So how do you see that for the Dental business in general?

[Per Waldemarson, CEO, President & Director]

Yes. I mean, I thought about that topic, and I got that question actually before we got into a silent period from some people as well. But I think it's very difficult to predict that because some of the treatments, they will never come back. Some are related to annual checkups and more stuff like this. And then we have some treatments like bigger prosthetic treatments and implants and all that. Will that come back with the -- it's sort of difficult. Even if it would be solved, that recent pent-up demand, what -- how quickly will the dental market has capacity to increase that? There's always -- there's only so many dentists available. And depending on how the [indiscernible] been and when it opens up. So yes, in theory, there should be some, but how it will develop is very difficult to say because of the capacity.

[Per Jørgensen;Investering & Tryghed Asset Management]

Yes. Fair enough. Just lastly here on the M&A. If we assume that you are discussing with potential sellers like you always have done, is there anything on the financing side that you see an obstacle or are the banks ready to? Because your balance sheet is actually quite sound, and you are very cash generative and so on. Are there any issues with banks that you see it? Or is it mainly you can't agree on the price with the potential seller?

[Per Waldemarson, CEO, President & Director]

I think to maybe comment a bit more on M&A, I mean, the last 4 to 6 weeks, due to obvious reasons, have not been focusing on maybe finalizing deals. So we've not been in that [ pricing ] over the last weeks. We have some smaller add-ons that we still might or might not do in the near future. But these are the more normal stand-alone Lifco type of acquisitions that we've done in the last 5 years have been a little bit on hold in terms of -- because we've been very busy in trying to understand where the world is going and to make sure our companies are going in the right direction as well as making sure we focus on our cash flow and operations we have. As we turn now in the next few weeks and months, hopefully, the situation will slightly improve and we can get into a discussion. And you're right, we have a strong balance sheet, so we have the capacity to take on more acquisitions, but we also have to be making sure that we know a little bit more about the future before we make major steps forward. Because we have -- the whole portfolio is our financing source for the future acquisition as well. So we have to make sure that it would be nice to see at least a little bit more opening up of dental markets in the next few days and weeks instead of...

[Per Jørgensen;Investering & Tryghed Asset Management]

Yes. But you don't see any problem on the financing side, like when you -- from banks and so on when you do the acquisitions?

[Per Waldemarson, CEO, President & Director]

No. As I told you, we have not been in a deal-striking mode the last couple of months as we're more in focusing on building up our cash positions and our liquidity situation more enough. But of course, we plan for continuing our acquisition activity at some point in the next weeks, months or at each quarters. Whether it will come back to a more normal situation, I don't know today.

[Operator]

[Operator Instructions] Our next question comes from the line of Jon Hyltner of Enter Fonder.

[Jon Hyltner, Fund Manager of Equities]

Some more questions on the Dental side. How has the Swedish market developed during this period as Sweden hasn’t locked down? But I guess it's still heavily affected.

[Per Waldemarson, CEO, President & Director]

Yes, it's been heavily affected. Some of the public -- big public dentistries in Stockholm and Southern Sweden, they basically decided to close down dentistry with the argument that the materials that go into dental institutions is better used in hospitals. So there only have been a few clinics then also for emergency dentistries. So -- and on top of that, you have the -- when a lot of people get the recommendation to stay at home, I think a lot of people also canceled their dental annual checkups. But if you also have severe pain in your teeth, you maybe don't go to dentist right now. Obviously, that's not completely true because there still are a lot of dental offices open, and there's still operations there. But to summarize, we saw also a substantial decrease on our markets in Sweden in the last 4, 5 weeks.

[Jon Hyltner, Fund Manager of Equities]

And how is the timing of your sales to the dentists? How far ahead do they typically order your products?

[Per Waldemarson, CEO, President & Director]

It's a very direct link. So there's no long lead time. Majority of our sales and profits in our dental business comes from either distribution of dental consumables or the prosthetics, which is, of course, order-by-order type of business. So there's not a lot of lead time. Maybe -- normally, dentists -- a dental office orders on a weekly or biweekly basis probably.

[Jon Hyltner, Fund Manager of Equities]

Okay. So the impact will be very direct given the activity the dentists have in their business?

[Per Waldemarson, CEO, President & Director]

Yes. So maybe what did happen in March was that there was maybe a little bit of increased demand at the beginning of March, when everyone was trying and stocking up on food in their kitchen, they also bought some more material because they didn't know what's going to happen. And then -- so that was maybe the only effect, but that was also kind of marginal. But you're right, it's kind of direct, the link to the end-user demand and our sales.

[Jon Hyltner, Fund Manager of Equities]

Okay. And when you look at your overall market in Dental, have you seen any time line for how government recommend the dentists to act now? Are they supposed to open in May or are they supposed to be limited?

[Per Waldemarson, CEO, President & Director]

Yes. So the only market where we -- that I'm aware of, I know in Denmark, we had some discussion about making it now allowed to do certain dental treatments from, I think, this week or early next week. So that was the only sort of -- but I've heard of positive regulatory or sort of governmental decision-making. Most of the other decisions are more -- like in Sweden, there's no real rules, it's more how people act, how patients act and also how dentists act. So that is more important here maybe than what is actually regulated. But we do hope, and this is more hope, that there is discussion now in Germany, which is a very important market for us, that they will see a little bit more opening up of the society in the next few weeks. And we hope that, that would have some effect. We don't know how much. And we don't believe it's going to be back to a full normal, but we hope to see that it's going to go in the right direction for us. That's more hope than a sort of prediction on what's going to happen.

[Jon Hyltner, Fund Manager of Equities]

Okay. And then finally, on your cash flow, it looks pretty strong. More or less, all net income turns into cash. Have you done anything extraordinary, encourage your subsidiaries maybe to increase factoring or anything? Or is this just a normally strong cash flow that wouldn't take anything away from coming quarters?

[Per Waldemarson, CEO, President & Director]

I think we -- like most companies, when we saw this coming in March, we had a very strong internal focus on cash flow. But we still have a very strong internal focus on cash flow. So it's difficult for me to say exactly how all 164 subsidiaries have acted exactly on the last week of March. But I would say, in general, it's maybe more important for me to compare the cash flow this quarter compared to last year is that last year, we had a pretty sloppy cash flow because of the huge organic growth we have. If you remember back then, I commented that we were not so happy with our inventories and things like this. But now we have more stabilized that and then we [ talk ] on that. And maybe we have a little bit effect in this quarter on the supplier side like the certifications. For example, in the dental market, we have been asking some of the distributors -- so some of the manufacturers to share a little bit of the burden on the dental lockdown, so that our dentists can -- we can help them together. So that's the marginal effect overall, I think.

[Jon Hyltner, Fund Manager of Equities]

Okay. And if you just look back at what happened in the financial crisis for many similar companies to Lifco, as everyone released working capital, cash flow was the strongest ever. Is there anything in this situation that would make one believe that cash flow wouldn't be strong? Could it be that, well, if sales completely get wiped out, you don't get the cash flow? But I guess you're such a widespread group that you should have some sales and then the cash flow would be strong.

[Per Waldemarson, CEO, President & Director]

Yes. But I had the same thoughts that if we get a total stock, you don't get -- these materials will just sit there. But I don't think we're there. And I think we definitely will not be there. Even if we're there for a few days in the beginning of this month, we will not be there for the whole quarter is not what I'm seeing right now, at least. But once again, we have to be very humble to predict anything in these very turbulent times. So we hope that...

[Jon Hyltner, Fund Manager of Equities]

But the most reasonable scenario is that cash flow will be very strong in [ 4 years ] or weak in general?

[Per Waldemarson, CEO, President & Director]

We focus on that. We don't predict cash flow, and we don't communicate any quarter. We expect to do our best.

[Operator]

And there are no further questions on the line at this time. Please go ahead, speakers.

[Per Waldemarson, CEO, President & Director]

Okay. Thank you, everyone, for listening, and yes, have a good day. Thank you.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.