Lifco AB (publ)

STO:LIFCO B

Earnings Call Analysis

Lifco Q3 2024: Light Growth Amidst Market Challenges

In Q3 2024, Lifco experienced overall sales growth of 2%, aided by 8% from acquisitions, but faced a tough 8% decline in its Demolition & Tools segment, affecting its EBITA margin, now at 24%. The group reported a modest EBITA growth of 3%. Financially, while cash flow was lower than the previous year due to higher tax payments, net debt remains stable at 1.2x EBITDA. The Dental segment showed strong stability with 7.5% EBITA growth, contrasting with System Solutions’ robust 19% sales increase driven by acquisitions. Lifco's outlook remains cautious due to low order books and weak market visibility.

Resilience Amidst Tough Market Conditions

Lifco Group's latest earnings call encapsulates a blend of resilience and challenges faced in the third quarter of 2024. The CEO, Per Waldemarson, highlighted an overall organic sales growth of 2% despite facing a 3% sales decline due to unfavorable exchange rates. A significant contributor to growth has been recent acquisitions, accounting for approximately 8% of the quarterly sales. However, a downturn in the Demolition & Tools sector is casting shadows on group margins.

Segment Performance Insights

Breaking down the performance, the Dental segment showed stability with a solid EBITA growth of around 7.5% for the nine-month period, signaling a positive outlook given its independence from cyclicality. Conversely, the Demolition & Tools division saw a stark net sales decline of 8% this quarter, coupled with a concerning EBITA plunge of 15%. This trend reflects prolonged adverse market conditions, resulting in diminished profitability and visibility moving forward.

Systems Solutions Surge

On a brighter note, Systems Solutions experienced significant growth, with a robust 19% sales increase and a 14% rise in EBITA during the quarter, primarily driven by acquisitions. It appears that the Contract Manufacturing subdivision made notable contributions to this growth. While the underlying development within the Systems Solutions area shows mixed results, the overall sentiment is stable, especially in niche markets.

Financial Health and Debt Management

From a financial perspective, Lifco maintains a solid posture with a net debt-to-EBITDA ratio hovering around 1.2x, which indicates a stable balance sheet even after several acquisitions over the past year. This prudent financial management underscores the company’s capability to explore further opportunities in acquisitions when favorable prospects arise.

Looking Ahead: Cautious Optimism

Waldemarson's comments indicate a vigilant approach to the uncertain market landscape. Given that the EBITA growth so far this year is just 3%, below the company's historical averages, Lifco is strategically positioned to navigate these turbulent waters without panic. The focus remains on defending and improving profits while maintaining strong operational discipline and exploring acquisition opportunities in niche markets.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to Lifco Q3 report for 2024. [Operator Instructions]

Now I will hand the conference over to CEO, Per Waldemarson. Please go ahead.

[Per Waldemarson, executive]

Good morning, and welcome, everyone. We can, as usually, move directly into Page #2 in our investor presentation and take a look at the numbers for the Lifco Group as a whole. And the overall message remains very much the same as we have mentioned in previous quarters. We are still facing, what I would say, less favorable market conditions in our Demolition & Tools business area due to the continued weak end market in construction and demolition markets.

And as a whole then, in the third quarter, we have on the total group level a small positive organic growth in sales of 2%, and the exchange rate had a negative effect on sales with about 3%. Acquisitions added around 8% in the quarter on the sales numbers.

So in summary, we can conclude that the continued organic decline in Demolition & Tools is basically offset by acquisitions made during the previous year and some organic sales growth in Dental and Systems Solutions. We'll come back to that in a few moments. And the decline in the most profitable business area, Demolition & Tools, is then obviously hurting the margins on the group level. And therefore, the EBITA growth is 3% and the EBITA margin is almost 1 percentage point lower than the same quarter in 2023.

If we move further down and look at cash flow. It's in the quarter lower than previous year, mainly due to higher cash payments on taxes in the quarter. And the operating cash flow on the -- in the accumulated period for the whole year is in line with previous year. And for the 9-month period, if we look a little bit longer term here, sales grew with 6% with a negative 2% organic growth and around 8% growth also there coming from acquisitions. And the same trend with the weak market conditions in especially Demolition & Tools has now been in place for the entire year, which explains the slightly lower EBITA margin also for the 9-month period.

And then I think we can go a little bit more into the details on Page #3 and look at the different business areas. If we start then by Dental. We continue to see a solid and stable development as expected in this area. And this is the area where we have the least exposure to cyclical markets and, I have to say, also the lowest structural growth over long periods of time compared to our other areas. So it's a quite stable area. And for the 9-month period, EBITA growth is around 7.5%, which is a combination of organic growth and some growth from acquisitions.

And then moving further on to the Demolition & Tools area. We are still, as I mentioned, experiencing weaker market conditions. And I can already now mention that we don't really see any market improvement in the third quarter. And the weaker market conditions now leads to a net sales decline of 8% in this quarter and an EBITA decline of 15%. And we have actually included some smaller acquisition in this area during the last year. So the organic development is even a little bit more declined than these numbers.

I would also just like to mention here that our portfolio companies have been doing, I think, a great job in protecting the margins even though we are declining the margin in the quarter with 2 percentage points. In this area where we have quite high gross margins, when the volume drops are significant like now, it's very difficult to fully protect the margins. But I think we're still, in the quarter and for the 9-month period, showing a 24% EBITA margin, which is quite healthy in these market conditions.

And also just a final remark on this area. We have now had a period of time for quite some time with, what I would call, weaker market conditions. So most of our companies in this segment now have quite low order books. And that also means that our visibility for the coming quarters is, as always, quite low. We don't really have anything more to say around that. We will follow the markets very closely and be adapting to the market situation as we move on.

If we then go further down to the Systems Solutions area. We have quite high sales growth of 19% and EBITA growth of 14% in the quarter. And the main driver for growth is coming from acquisition. And also in this quarter, we have higher than, I would say, normal organic growth in our Contract Manufacturing subdivision. And this is an area where we have slightly lower than average EBITA margin, which also means that the EBITA margin in the business area as a whole is then lower in this quarter. So this is really mix effect in these margin numbers.

If we then look a little bit more on the 9-month period for this area, it's more solid and stable. EBITA margin is quite stable and as it should be on that level. And the underlying development within this area is, as I also mentioned in previous quarter, it differs quite a lot between different parts of the area. Some companies are growing nicely in their respective niches, whereas other parts of Systems Solutions are facing more difficult market conditions. And as one example on the negative side is, of course, as I mentioned previously also the Infrastructure Products division, where we have exposure to construction market in that segment.

If we then move further down Page #7. We can look a little bit at our financial position and once again conclude that the net debt in relation to EBITDA is on a stable level, relatively low levels at around 1.2x net debt to EBITDA if we measure the interest-bearing debt. And this is then on this level despite that we, during the last 12 months, have closed a number of acquisitions. And we still have plenty opportunity to continue to look for great companies to acquire when we find them basically.

With that, we can move into Page #8 and take a little bit more long-term perspective on Lifco, if we take a step back here. And since the downturn -- the severe downturn in 2008, 2009, we had many years of stable and, what I would call, friendly development or market conditions which gave us the opportunity to have high organic growth combined with acquisitions. And during the last 18 months, it has been a little bit tougher market conditions, especially in certain areas of Lifco. And therefore, we have now a year where EBITA so far only has grown with 3%, which is way below our average historical numbers.

But I think it's important to, in this period of slightly more difficult market conditions, remind everyone of the strong operational profit culture we have in Lifco. We are not panicking in this period of time, but we have a very strong organization of both group managers and subsidiary management that really take daily actions to make sure that we do everything we can to defend our profits and also improve our profits in many areas of Lifco. And we do that both for the next week, next month, next year and also the very long-term perspective. It's a combination of all these things. But we -- as a conclusion, we continue to work very hard to hopefully reach our target of improving our profits every year.

And then we can go all the way down to Page 33 and just as a final remark look at the acquisitions that we have concluded in this year. And yes, it's -- we have basically bought in SEK 1.7 billion of revenue. And as I've mentioned many times before, the outcome of when acquisition materializes is always unpredictable. And it should be unpredictable. Because it's way more important for us to buy the right companies. And we want to buy great companies for reasonable valuation rather than maximizing any outcome of acquisition in any quarter. And we continue to work very hard to find great niche companies. But despite high activity levels, we always try to stay patient and make sure we don't make transactions if we don't feel it's the right long-term decision for Lifco.

Yes. With that as my last comment, I'd like to open up for any potential questions. Thank you very much.

[Operator]

[Operator Instructions] The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

[Zino Engdalen Ricciuti, analyst]

Per, I would just like to start off on the group in aggregate when it comes to underlying demand. I would just like to hear, if you compare it to what you had expected going into the quarter and the outcome, if there was any material difference on an aggregate level.

[Per Waldemarson, executive]

Well, first of all, as you know, we don't really spend too much time with future expectations. We are always trying to adapt to the situation as it comes. But having said that, I think it's very much a similar overall picture as we've seen in the previous quarters in this year. And that basically means that Dental is stable. Demolition & Tools, I would say, the feeling is the same as it has been then. Of course, we can vary between quarter on the exact output of sales, but the overall feeling has been on this level for quite some time.

And we don't really see any improvement. We don't see any dramatic decline either. Of course, it can vary between different subsegments a little bit. We have the different types of products and things within this area. But overall, it's pretty much as we've been feeling now for quite some time. And within Systems Solutions, it is -- as I've also mentioned before, it's a very mixed picture. We have some companies that still are growing nicely. And then we have -- we mentioned -- I mentioned here before that we have Infrastructure Products. We have some construction exposure.

We also have some other companies that have more exposure to the higher interest rates, more capital goods type of deliveries having a difficult time. But overall with a group like Lifco, we have a very diversified portfolio. So that's maybe what you could expect in this situation, that we will see this outcome. So in summary, I would say, yes, maybe as expected, even though we don't have big expectations.

[Zino Engdalen Ricciuti, analyst]

Yes. Very good. And jumping into the Contract Manufacturing. Of course, we see the growth high and there is some acquisition effects in there as well. Could you give some more color on these larger deliveries? Were it from a group of companies? Are deliveries completed? So to say, do you think there will be more in the coming quarter, which you have seen from the orders that you have now?

[Per Waldemarson, executive]

Yes. So without going into too much detail here because now we're quite far down in the Lifco structure. But yes, we had a very strong sales quarter in this division. And whether it will continue, it's not -- I saw some of the comments here coming from analysts. It's not a project type delivery. So it's more of a run rate. But in this area, with OEM customers, we can never be sure about stability of such a high growth that we have. So we don't extrapolate that fully. But it's not the product deliveries. So in that sense, it's not -- it could also be on a slightly higher level going forward. But yes, we will see in next quarter basically how that develops in that area.

[Operator]

The next question comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. Coming back to the Contract Manufacturing delivery, sorry for that. But would you say that the 100 basis points margin delta in Systems Solutions is mainly or solely due to the Contract Manufacturing mix?

[Per Waldemarson, executive]

I would say, because this time actually the calculation, Carl, because I checked, so it's more than half of that change. And then we have some other -- in a group like Lifco, with so many companies, there's many mix effects into play. But the others are less material compared to this one for Systems Solutions. And then on the whole Lifco -- just sorry to interrupt here, but on the whole Lifco, we also have a mix effect between the different business areas on top of that, of course, Demolition & Tools having a lower mix.

[Carl Ragnerstam, analyst]

Yes, for sure. Very good. And looking at the central group function costs, it looks a bit lower in the quarter than in Q1, Q2 as well as year-over-year. Is it anything we should, I mean, consider there? Or is it normal fluctuations? Or...

[Per Waldemarson, executive]

No, it's lower than normal. So I wouldn't extrapolate that either. You can look at the normal...

[Carl Ragnerstam, analyst]

And why is that?

[Per Waldemarson, executive]

I think we have different releases of -- it's bonuses and it's also as a reserve for that and it's also -- cost can jump between quarters a little bit also in that field.

[Carl Ragnerstam, analyst]

So a normal level, you'd say, is the Q1, Q2 level? I mean, meaning...

[Per Waldemarson, executive]

It's the more normal run rate, yes.

[Carl Ragnerstam, analyst]

Okay. Very helpful. And if you look at -- I mean, you touched upon the construction market. Is it possible to give any flavors on what you said but on subsegment levels? And also if you could come back a little bit on pricing, I know I asked it before. But of course, it might be tougher to maintain pricing in the market trending downwards, perhaps.

[Per Waldemarson, executive]

Well, I think the subsegment comment, maybe we shouldn't take too much out of that. Because in general, it's very much across the board in that segment. Then it can vary exactly how severe the market position is. But in general, it's -- I don't think there's any area in Demolition & Tools that is sort of growing right now. So it's just a matter of slight variations on a lower level in market conditions. And sorry, the second question?

[Carl Ragnerstam, analyst]

No, but coming back to that, you see no variations on order intake as well? Or is it just on deliveries?

[Per Waldemarson, executive]

No, but it's always some variations when you have different type of products and different types of markets. But I wouldn't say that there's any area that is significantly strong right now in this area. So it's small variations on lower level. So I wouldn't draw too much into that comment I made earlier. It's pretty much across the board. But of course, it's not exactly the same in every product segment and every geography. But it's relatively across the board weaker market conditions now in this year.

[Carl Ragnerstam, analyst]

Outside of the Brokk machines, do you see pricing getting tougher on the more sort of commoditized products? I mean, you have little commoditized products, but still you have some attached and risky business that could be more impacted, I guess.

[Per Waldemarson, executive]

No, not really. We stay firm in this. So it's [ very tough ], the pricing question, yes, sure. No, we stay firm on that level. Yes.

[Operator]

The next question comes from Robert Redin from Carnegie.

[Robert Redin, analyst]

Maybe I could just ask on System Solutions. So in this quarter, Contract Manufacturing had more deliveries than normal. But are there any other trends in the quarter, any segments within System Solutions that accelerated or decelerated through Q3?

[Per Waldemarson, executive]

No. I would say that the trends that we've been -- experienced throughout this year remains in the third quarter, basically meaning that we see, as I said, some areas where we have niche segments where they're growing nicely. We have a vast majority of maybe more industrial exposure, not capital goods. They are sort of maybe a little bit weaker but not dramatic.

And then we have a few areas such as Infrastructure Products and construction-exposed area and also some companies with more, I would say, CapEx type of deliveries to customers that still remain weaker in the quarter. So it's -- I haven't seen any trend shift in this quarter compared to what we saw in Q2 or Q1 in that respect. Then, of course, the exact outcome can always vary a little bit. But as a general, underlying feeling of the market condition hasn't changed.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Per Waldemarson, executive]

Okay. Thank you very much for listening in and for the questions, and I wish everyone a nice continued day. Thank you.