Lifco AB (publ)

STO:LIFCO B

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Lifco Q1 presentation for 2023. [Operator Instructions] Now I will hand the conference over to CEO, Per Waldemarson. Please go ahead.

[Per Waldemarson, executive]

Thank you, and good morning, everyone, and welcome to the Lifco Q1 presentation, and we can start by directly going into Page #2 in our investor presentation, where we have the overall numbers for the group in the quarter. And as you can see on this page, it's been a very good quarter basically in all dimensions. We have a net sales growth of 19%, and it consists of organic growth of about 8%, acquisitions of about 10% helping positively and then also a positive effect from exchange rate of about 4.5%. We also have a negative impact on 1 divestment that was done in 2022 of about minus 3% in those numbers.

If we go further into the numbers, we also have even stronger growth in our EBITA profits, which basically means that our margins are improving, up to 22.3% in the quarter, which basically has to do with a few factors. Obviously, our continuous improvements in our companies continues to go very well. We always strive for improving our margins and being more differentiated and strong in our niches. We also have implemented price increases during -- yes, through the last, I would say, quarters but also early in the back, and that now has come into full effect, also demonstrates our pricing power in many parts of our portfolio.

What also is impacting our profit is that our Dental business area had a more normal quarter. If you remember last year, we had this first quarter, where we had some issues with one part of the Dental where there was some lockdowns in China that impacted that business negatively. In this quarter, it was more back to normal. And also, obviously, as I mentioned the price increases are now coming into play. That also is contributing both in net sales growth but also in the margin expansion.

If we go further down, we see that profit before tax is increasing 26%, which is then obviously lower than our EBITA growth. This has maybe to do with the increasing interest rates. That comes as no surprise. And that's obviously going up rapidly also for Lifco. We have -- and we always had certain debt. Now those debt items have obviously more higher interest rates, and that is very much correlated with the overall market.

And then if we talk a little bit further down about cash flow, we had a very strong growth in cash flow, which is, of course, satisfying. But we should mention here that last year in first quarter, we had a very weak cash flow due to the buildup of inventories during that period about a year ago. This quarter were more like a normal cash flow for the first quarter, which is not the best cash flow quarter. We normally build up more receivables and also some inventory in the first quarter seasonally.

And then we can go over to Page #2 and look a little bit more into the different business areas. If we start with Dental, as I already mentioned, it was a quarter more back to normal. We are growing sales and profits. And the main impact here is, of course, the normalization of the prosthetics business. That's now been going more normal also in the last quarter of last year, and then the first quarter of this year is also more normalized. So that's -- satisfied to see that we are back to normal there.

If we go further down to Demolition & Tools. There, we have had strong growth for quite some time and that also continues in the first quarter. And it's a combination, once again, of organic growth and acquisitions, and that translates also to a strong profit margin. And I can already here also mention that -- I normally get some questions about the order intake in this part of the business, and basically the same pattern continues. We had extreme order intake in many of this business up until about a year ago.

And then the order intake has been more in a normal still solid level, but that -- and that continues also in the first quarter. That order intake is strong, but it's not on that peak level that it used to be in the period where there was very strong demand, and also the value chain issues was also maybe leading to some preordering here and there that we don't see now. So the orders that come in now are very relevant and for deliveries that are on average a bit closer to the order intake time, but still at lower levels than, for example, 1 year ago in the order intake.

When we talk about System Solutions, here, we have -- well, first of all, we should mention this is the area where we had the divestment last year, so that also impacts the sales gross numbers. But underlying development is still very strong with 10% growth in sales and 24% growth in profits. So continued strong development in margin, which is supported both by organic and also acquisitions in this field. So all in all, if you look at all these areas, we are developing margins in all areas, which is very pleasing and also important part for Lifco.

We can then go into Page #4, the next slide. And this is a slide that we already talked about last quarter. I just want to remind everyone that Lifco -- and this is now looking back for the last 8 years. We don't -- we only publish this data annually. But on this page, I just want to highlight that Lifco is extremely important with our organic development. We have strong ambition in every company to develop profits every year organically. On average, we've done that with about 8% over the last 8 years.

But then we also, as you know, are very actively trying to find very good companies to take into Lifco. And that has contributed on average with 12% on our growth. So the combination is extremely important. Obviously, the organic development has been more volatile because it's more related to, of course, market development. That can go a little bit up and down.

And then we can jump further to Page #6 and just briefly look at our net debt and our balance sheet. And here, you can see on the net debt situation we are very stable in the ratio net debt to EBITDA. And we've been that quite some time, which basically means that we are -- the cash flow we generate is then being consumed on the same pace on average in terms of acquisitions. And where we'd sort of end this quarter, we end with an interest-bearing net debt to EBITDA of 1.2, which is well below our target of 2% to 3% -- 2 to 3x, sorry. And we've been below that for quite some time. But it means, once again, that we have a very solid financial position and also further room for acquisitions going forward. So this is quite normal.

And then we can go to Page #7. And this is once again a more long-term graph looking at our development. And I just would like to once again highlight that we are continuously looking to improve our businesses, and we have done so. If you look from 2014 until now, our average EBITA margin has gone from 14% up to now only 12 months of 22%, which is once again a combination of constant small improvements in our companies combined with, on average, better quality companies coming into Lifco over this time period. There's nothing new in this perspective either.

And then we can move all the way down to Page #18 and just look a little bit about the Dental numbers. I mentioned in previous slides that we had some problems in last year, especially with the prosthetics business. And as you can see on the right-hand side of the graph, we actually dropped EBITA in Dental due to this effect last year. And now with a strong first quarter, we are back to more normal levels and the margins is also moving in the right direction. It's also worthwhile highlighting that the margins in 2021 were extraordinarily strong due to the still lower cost levels following the pandemic. The company has had lower activity in the beginning of that year. But now it's getting back more to normal, especially over the last 2 quarters.

And if you go to Page 20, we can look at the same type of data then for Demolition & Tools and more long-term perspective. And here we can see that we've had now for quite a long time very strong development in terms of sales and also profit development. And the margins are on a high level. It's -- as we have been noticing for many quarters. It can be a bit volatile between quarters, but the business area as a whole has a very strong margin and has been on a high level for quite some time.

And then if we do the same thing on Page 22, looking at our System Solutions area. Here, we are still improving our margins. So if you look at the right-hand side we are going up. And this is, once again, the combination of many small improvements of the existing companies combined with, on average, very high-quality companies coming into this business area, which leads to a record high margin also in this field now in the rolling 12 months numbers.

And then we can go to Page 31 just to round things off. And just mention briefly that we have actually been quite active in acquisitions in the first quarter. We have acquired a number of companies. And it's, as always, a combination of companies in our Demolition & Tools area, our Dental area and also some more, I would say, partly unrelated niche companies for System Solutions. And this is the same pattern we've seen for quite some time.

So it's a strong start of the year. But once again, as I've said many times before, when it comes to acquisitions we are very, very careful to make sure we buy the right companies at reasonable valuations. And it's something that comes and goes a little bit, but our ambition is very high and our focus on developing in this dimension is of course very high. But actually, outcome can vary between quarters and months, as you've seen historically. But a strong start to the year, which is very good.

And that's basically all I wanted to say on this stage of the presentation. So I open up for any questions.

[Operator]

[Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

My first one is just on the acquisitions that you have made so far this year. And based on the numbers that you provide, it's still just 1 quarter, but the implied profitability is very, very high in those companies. So I'm just curious, I mean, yes, we're used to you acquiring companies with plus-20% margins. But is there any or a few of the companies that really stand out there? Or is just the aggregate of all of this business reflective of that margin?

[Per Waldemarson, executive]

Yes. We don't normally communicate -- we don't communicate the profitability of the companies coming. But you have, of course, the data point that you can look at. It's of course not an exact data point because you're looking at 1 quarter, but it's basically another quarter of very strong margin companies that we acquired. And the exact amount, we will see when we have the full year numbers. But -- so don't -- we cannot exactly extrapolate like-for-like 1 quarter, but it's a very strong combination of business that we have acquired in this quarter.

[Karl Bokvist, analyst]

Understood. And then your comment there on a bit more normalized, let's call it, lead times. I appreciate the differences between the business units, but your kind of average or rough estimate now on how long it takes from order to delivery now compared to half a year ago or so.

[Per Waldemarson, executive]

Well, it's very different between different companies of Lifco. But if you look at the ones -- we still have a few companies with very long lead times and they're still -- it's trying to ramp up. But that's a relatively small proportion of it. For the most part, our companies are running with, I would say, right now quite normal -- if you can say normal nowadays, but if you look at prepandemic type of order books in terms of delivery.

And then obviously we have a quite big part of Lifco with very short order books. If you look at the whole Dental division and the whole -- this area and also a number of the Systems Solutions companies, they always run with a short order book, especially if you're in the distribution company or even some manufacturing companies that have sort of lower value product that normally are shipped within a week or so from orders. So it's, of course, very different.

But I mean, maybe you're referring more to the ones with long order book, especially in Demolition & Tools. And there, we still have a few companies with very long order books, and they're still scrambling and trying to get components in and kind of really ramp up as fast as we can. But the majority of that -- this area now has more normalized basically order books, which also means that the visibility is of course not huge. It's never huge in that sense. And also with long order books, you have to be careful because we experienced 2008, 2009, and in such a situation, then order books maybe are not too relevant to look at in some situations. But if we're in more normal market development, we have now -- we're back to normalization around that.

[Karl Bokvist, analyst]

Understood. My final one is just now you -- it's 2 quarters now at least where you kind of highlighted that Dental is in a normalized market situation. But in terms of the work you have made when it comes to kind of regaining dentists and making sure that they acquire products, et cetera, what kind of efforts did you feel were really successful in making sure that you came back to a normal market condition in a fairly quick time?

[Per Waldemarson, executive]

Well, actually, I think the biggest factor was actually time. When you have this type of uncertainty, then time is our friend. The longer we can show that we have stability in deliveries, the easier it is to convince the customers. But obviously, we've been very close and we're always very close to our customers in this business area. We are working with high level of service and very close contacts to our dentists in Germany in this area. But I think the main factor was the time. And it was, of course, difficult to say how long it will take. And now we have 2 good quarters, so it looks promising, to say the least. We think that unless there's something -- new things happening, it should be hopefully more normalized also going forward.

[Operator]

The next question comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. A couple of questions. Firstly, just to clarify here on the demand in Demolition during the quarter. I mean, you gave -- I mean, could you firstly maybe give some more granular comments whether you have seen shift in demand? I mean, during the individual months or -- and also by end markets where you feel that if it's tools and attachments, that it's better currently than other parts? Or -- yes, I'll start there.

[Per Waldemarson, executive]

Well, when it comes to -- within the month, actually there's no real pattern. I think the quarter as a whole had quite stable development. So there's no difference between March and January. I mean, it's very difficult to say because every month is a little bit unique, But we don't see any trend shift within the quarter. So I think the trend shift that we've seen has been more happening about a year ago when things were getting more normal. So I mentioned that now a few quarters, I think. And sorry, the second question, Carl, was related to...

[Carl Ragnerstam, analyst]

If you have seen any, I mean, shift in demand, if you try to split up the division a bit by more end market or by product area.

[Per Waldemarson, executive]

Well, there's one thing I could mention, that maybe the Nordic or Swedish region has been more weaker than others, actually. It's interesting to -- in fact, we see that both in Demolition & Tools and also in a few companies in the now called Infrastructure area. These are actually companies within that area is more related to construction, but most of these companies are, of course, infrastructure-related. So we see that's likely one thing we have seen.

Other than that, it's difficult to see clear patterns. We've seen pretty good development in the quarter in North America. So that's more on the positive side. But other than that, I don't think there's anything that stands out especially. Of course, the more you are related to a pure construction product, maybe a little bit weaker compared to something that's more infrastructure or stuff like this. And that's -- these are small differences. But overall, it's difficult to pinpoint anything more than that.

[Carl Ragnerstam, analyst]

And also, you explained a bit on orders. Just so I understand there, I mean, you said that orders had a good development, right, but not as strong as during the peak levels. So should we interpret that as negative organic growth, meaning that you compare it to the peak levels? Or should we interpret that as -- that there are still positive organic order intake growth, but you mentioned that the peak levels might be in Q2 and Q3 2022 if you understand what I mean?

[Per Waldemarson, executive]

Well, basically, what I'm saying is that the order intake that came in, in the period there in '21 and early '22, they were on so high levels that we were a little bit astonished. So from that perspective, they are lower -- on the lower level now. But it also then -- compared to what we ship out and what we get in, then it's more close to normalization. So a little bit we have to -- we don't publish these data. We have to be careful how deep we go into this. And also, order intake for all these type of companies, Lifco is a little bit difficult to value on level how you define an order and all these things.

But I would say that the orders that came in a year ago or even more than that, they were on extremely high levels in certain parts of our business. And now we are overall on a quite good level, stable level. But of course, predictability is, as we said now for many quarters, it's quite short. We don't know so much what will happen in the next 2 or 3 quarters in this area. So that's the same situation around that.

[Carl Ragnerstam, analyst]

Okay. So you said that book-to-bill is 1 then or maybe...

[Per Waldemarson, executive]

I mean, it is not a huge gap there. It's not -- we're not ramping up a lot in that specific area. So...

[Carl Ragnerstam, analyst]

Yes. Okay. That's very clear. And also, I mean, obviously, quite strong margin in Dental again. Would you say that the year-over-year margin delta is solely driven by the prosthetics business recovery? And also, if you could give some comment maybe on the underlying market for manufacturing and distribution and whether you have seen maybe a catch-up -- sequential catch-up effect from Q4 maybe, as they have -- I mean, when looking at market data, at least it looked like Q4 had lower utilization in dental clinics in Europe due to high sick leaves. Is that something you have seen a catch-up effect from? Or...

[Per Waldemarson, executive]

Well, the main comment I have here is related to the prosthetics business. That's back to normal. That's -- in the numbers, that's the main effect. The other effect that you're referring to, they can have a smaller impact but not that -- not close to the first effect that I'm trying to mention. So these are very small changes, if anything, that you refer to.

[Carl Ragnerstam, analyst]

Okay. So the main year-over-year delta then is prosthetics in margin then?

[Per Waldemarson, executive]

Yes. Like we commented last year also, the main negative division last year was also in the prosthetics. And now we have the reverse effect of that.

[Carl Ragnerstam, analyst]

And also on the M&A pace here year-to-date, obviously quite strong. Would you say that it's an effect of the expanded M&A team getting up to speed? Or is it a bit stochastic? And also, would you say that you worked through the near-term pipeline and that you need to rebuild? Or is it still quite solid?

[Per Waldemarson, executive]

Well, first of all, our ramping up of activity is very gradually. It's not -- we do small increases constantly to get better capacity, looking at companies. So that's not the main effect. It's actually more the stochastic part, that sometimes we get more luck or more success, depending how you look at it, and more -- basically, we get -- we find the right companies, right entrepreneurs and then we agree on the price and everything is going all the way. And then in other quarters, you can have the reverse effect, that we might have still a very big pipeline, but for various reasons we don't go all the way.

It could be partly driven by us not being 100% sure about the quality of the company or the price level or maybe the entrepreneur wants to wait a bit. It could be many reasons like this. So this is -- as I've said many times before, this is something we work very hard. We constantly improve our capacity step-by-step, not dramatically. And then the outcome will always be a bit volatile. And it should be volatile because it's not a gold-seeking process. It's a process of finding the right acquisitions. And when they happen, they happen. But as you've seen now for many years, we are -- the activity level is high enough to normally see some good results, not in every month and every quarter. But over time, it tends to be working basically.

Also on the last question, of course, if you close a lot of companies in a short period of time, that probably means that a lot of your hot leads have transferred into discussion. But our dealmaking is always a combination of things that we worked on for years, things that we worked for 6 months and things that we maybe worked only for 1 or 2 months. So it's always new things coming up. And we always have things that we've been discussing for years that might or might not pop up. So the pipeline is always a difficult thing to reverse. But of course, the more we have closed in 1 month, obviously it has some impact on the short-term effect, so to say.

[Operator]

[Operator Instructions] The next question comes from [ Anna Wikström ] from Handelsbanken.

[Unknown Analyst]

I'm just wondering if you maybe could give us some details on the sort of cost side development. I mean, you do refer to doing continued price increases due to cost inflation. But maybe give us some details on what's happening on like raw materials in transport or just if you're experiencing a general cost inflation and if it's sequentially getting better or anything.

[Per Waldemarson, executive]

Yes. And I think here, we have to differentiate by different parts of Lifco. We have very different type of companies in that sense. Some companies obviously have a higher proportion of raw material impact into the business. And those companies have, of course, done a lot of price increases in the last 2 years. And there, you could start to see in some areas some sort of at least stabilization and even maybe potentially some special benefits in that side. But it's -- and then you have other areas where we are so differentiated product that actually raw material is only a part of it. There's many steps in between and many -- much engineering done, both us and also by subsuppliers. And there, I think the more general inflation is still coming into play, in that sense.

So I think still we experience price increase and inflation obviously overall. So -- and I think for the most part, that's -- if you take the whole Dental area, the raw material part in Dental is obviously very small. So there are now general inflation that will come into play there. If you take other parts, a company that makes maybe more -- less, I would say, relative to other companies, less differentiated product that has more steel in it, of course, that has more relation with the raw material. But overall in Lifco, our companies are highly differentiated, highly engineered products. So there, the raw material of course has an impact, but also inflation has an impact in general right now.

[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 and for the questions, and I wish everyone a good day. Thank you, and goodbye.