Lifco AB (publ)

STO:LIFCO B

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to Lifco Q1 report for 2024. [Operator Instructions] Now I will hand the conference over to CEO, Per Waldemarson. Please go ahead.

[Per Waldemarson, executive]

Thank you, and good morning, and welcome to everyone. We will now present the Lifco Q1 2024 earnings. We can start directly by going into Page #2 in our investor presentation, where we present the high level numbers for the entire Lifco Group for the first quarter. And as we can see on that page, sales growth with 1% with an organic decline of negative 7.8%, which is then offset by 8.4% growth from acquisition and then marginal positive effect from foreign exchange.

If you go further down and look at EBITA, EBITA declined with 4%, mainly due to the negative operational leverage that we have in the Demolition & Tools business area, which is the area where organic sales is declining due to weak market -- continued weak market conditions, I should say, which we have now experienced since the spring/summer of 2023. We will come back to that in the next slide.

Profit before tax declined by 11%, which is obviously more than the decline in EBITA, and this is related to higher financing costs compared to 1 year ago as interest rates have increased during the last 12-month period. And if we also look then at operating cash flow, it's 14% lower in the first quarter, and this is mainly related to lower profits. I can also then mention that quarter 1 is normally and the seasonally weaker cash flow quarter, just so everyone is aware of that.

If we then go further into Page #3, we will go a little bit deeper into each business area within Lifco. And we can start at the top with Dental. And the overall message here is that it's very much business as usual. We have in the first quarter some negative effects from an early Easter that obviously impacts sales and profit to some extent. This effect is then partly offset by a smaller positive effect from acquisitions. And overall, this led to a flat development in profits in the first quarter for the Dental business area.

If we then move on to the Demolition & Tools area, we have now experienced actually the fourth consecutive quarter with weaker market conditions, which is then related to the weaker construction market. And this is then impacting our attachment and also the machinery business negatively. It's important to remember that we still had a very strong quarter -- or first quarter in 2023, which was following a long period of very high demand in 2021 and 2022, which then led to higher leverage all the way into early 2023.

And then, as you remember, during the second half of last year, we actually saw a similar weakness in market conditions that we now experienced in the first quarter 2024. But the effect during the second half of last year was then partly offset by strong delivery of nonconstruction-related machinery. We had -- for example, in Q4 2023, we had an extraordinary impact from -- positive impact from those type of deliveries.

And I just want to highlight that these type of deliveries can then vary -- has been varying over all these years between different quarters. And I think many of you are aware of that effect. And in the first quarter of this year, we didn't have any impact on that. So now it's basically, I would say, weak market condition affecting the whole Demolition & Tools area in Q1.

And if we go down further looking at EBITA, the negative development in sales for this business area has then led to a negative operational leverage. So despite a lot of actions to reduce cost levels, it's not possible to fully compensate as many of the products we sell in this area have very high gross margins. So that also leads down to a lower EBITA margin compared to 1 year ago.

If we then go further down and look at the Systems Solutions area. We have a sales growth of 12% and EBITA growth of 16%. And the main driver for growth in this area is coming from acquisitions, which means that the underlying organic development continues to be on a stable level. Actually, during the last 12 months, we have been in this type of situation here in this area. And this is then following a period of very high growth up until Q1 2023.

And as you all are aware of, Systems Solutions consists of many different companies with different end market exposures. And also in this quarter, there are some companies with weaker market development. I can just give you an example. In the Infrastructure Products segment, we have a few companies that are exposed to construction, which are having tougher market conditions. But we also have companies in this area that have actually continued to grow sales and profits. So it's a mixed picture just like we saw in Q4 2023. So it follows the same pattern in this area.

And then we can go further into page -- all the way to Page #7 and look at the balance sheet. And I would like to just conclude that the interest-bearing net debt to EBITDA is now at 1.0x, which is a solid level and actually slightly lower than 1 year ago despite that we have done quite a number of acquisitions during 2023. And this leverage situation gives Lifco plenty of room to continue to make acquisitions.

Once again, when we find attractive, profitable niche companies to acquire at reasonable valuation, we will -- we are very motivated to do more deals. And we are continuing to increase our capacity in this dimension. So we are able to identify and also then obviously take care of your acquisitions at an increasing level. But as I mentioned in many of these previous calls, the timing of when acquisition materializes will and should always be fluctuating.

The development of Lifco is not a short-term sprint. It's a long-term perspective. And we then try to combine our high ambition levels to continue to grow from acquisition with a very disciplined strategy in acquisitions, where we always are ready to sort of turn down potential transactions if we don't feel fully comfortable that this is a company Lifco should own forever or if the price tag of the potential acquisition is too high.

And so far this year, we have acquired 2 companies with a combined turnover of around SEK 650 million. And we can just put that in perspective that during the full year of 2023, we acquired a total of SEK 2.2 billion. We could continue the hunt, and we have the financial capacity to do so going forward.

If we then go to Slide #8, this is the long-term trend that we normally also would like to show in every quarterly call. And as you all know, Lifco has one overall target, which is to increase our profits every year. And we have actually done that every year except for 2009 and 2013 since Lifco started its journey in the late '90s. And now, after a period of very high growth during the last few years, we have now started with a weaker start in 2024 compared to last year. Our EBITA margin remains solid at 22.9% on a rolling 12-month basis, but did fall slightly in Q1, as we have looked in previous slides. This is basically related to the weaker market conditions in Demolition & Tools and the operational -- or the negative operational leverage that we then have when volumes are falling in this extent.

And I just want to round off by saying we continue then very hard to achieve our target every year to work with organic improvements and also acquisitions. And this is our target also for this year.

And with that final remark, I would like to open up for any potential questions. Thank you.

[Operator]

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

[Zino Engdalen Ricciuti, analyst]

I would just like to start off with Demolition & Tools. If you could give some more insight into how you're thinking about development going forward for the underlying markets if you expect it to get worse before it gets better in that kind of sense?

[Per Waldemarson, executive]

Thank you for the question, Zino. It is a difficult question. And as you know, we don't give forward-looking statements. But I can give some more flavor and say that the situation has been on a similar level now for a few quarters. I think we were -- in the second half of last year, we had -- some companies we had some order book effect that helped us. We had some special remuneration in Q4, which we mentioned in the previous earnings calls. And this quarter, we basically didn't have any of that. So now the market is really what we see now.

And I think also now we are -- we did discuss maybe 9 months, 12 months ago the effect of dealer inventory reduction, all that. I think that has also played out. So we are now in a situation where it's -- basically the market is where it is in the numbers we present. And the feeling we have so far is that it's moving sideways. We don't have exact data around it, but that's the feeling we have right now. And it's been like that for not only -- I'm not only talking about March or February, but looking out maybe a little bit longer period now, the last 6 months or so.

[Zino Engdalen Ricciuti, analyst]

Okay. So then there hasn't been any material changes, so to say, within the quarter and within the individual months?

[Per Waldemarson, executive]

No, not really. I think that March was -- we comment on the Easter effecting in a slightly shorter month in Dental. It's not really relevant to mention that in Demolition & Tools, but it was a little bit shorter month there also. But we don't see any changes within the quarter, not really, not even maybe even comparing with the previous quarters. On the underlying market, I'm now referring to.

[Zino Engdalen Ricciuti, analyst]

Yes. And then when looking at the margins of Demolition & Tools, of course, you say that there is some -- the operating leverage effects. But is there anything others regarding mix or similar with exception to the breakup with nonconstruction sales that you have?

[Per Waldemarson, executive]

I think in this -- I mean, the difference between this quarter and the previous ones is that we didn't have that positive mix effect that we saw previously. So now it's pretty -- of course, it varies between companies a little bit, but it's pretty much a clear picture now that the weaker market conditions related to mainly the construction segment is now affecting many of those companies that have that exposure. So it's mainly the operational leverage effect that basically we have very high gross margins on companies. And even if you save on overhead and SG&A and different costs, it doesn't really -- it cannot save all the way down when you're losing volumes like this.

[Operator]

The next question comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl from Nordea. I have a few questions. Firstly, I mean, on the inventory situation or the amount of product in the channel currently, did you say that the situation is normalized now from a distributor point of view? I know it's maybe not your biggest, I mean, selling vertical, but would you say that it's normalized now?

[Per Waldemarson, executive]

Are you referring to dealer? I will talk, but...

[Carl Ragnerstam, analyst]

In demolition that is. Yes.

[Per Waldemarson, executive]

I mean -- once again, we don't have perfect data for all our distribution or even OEM customers. But I would say that now the market condition has been on a weaker level for quite some time, so the effect should be definitely been -- the majority of the effect has been taken care of, for sure.

[Carl Ragnerstam, analyst]

And how is that impacting your order, if you could give some brief comments on your order intake in demolition, I guess, given that it must be a little bit better than what you saw during, I guess, second half '23? Or...

[Per Waldemarson, executive]

No, I think it's been -- basically the orders overall for the companies where we basically don't have -- where we did not have this effect that customers were trying to be first in line with queuing tickets, which we had in some companies, where order books were not really relevant to look at, at some point.

If you take for the more -- the other part of the business, I think that effect has been gradually coming in. So now the orders has been on a quite stable level for quite some time, I should say. And I think now in the Q1, we really see -- it's never perfect, the order intake in the sales, but it's now matching pretty well where we are. So -- and I think the deal inventory, I think, has been coming into effect for the last 15, 18 months, gradually. So it's not a dramatic effect in any given month or so, the ones you were referring to first.

[Carl Ragnerstam, analyst]

And also in terms of pricing, have you seen any terms of higher pricing competition or that the market is weak or has been weaker for quite some time now in demolition, both into some attachments as well as for a demolition machine or I guess, Brokk is less impacted than perhaps Kinshofer?

[Per Waldemarson, executive]

Yes. I mean you would normally -- in these type of market conditions, you normally see competition being more active. We -- I guess, I would put it this way that the price increases that we saw in '21, '22 were extremely high, and now, we are down to moderate price increases in this area, in the space that we act.

[Carl Ragnerstam, analyst]

Okay. So you're still raising prices in the weaker market.

[Per Waldemarson, executive]

In the moderate levels. And then, of course, there's some products with very high raw material that, that could be a different discussion point. But for the majority of Lifco products, it's -- we sell final products, not raw material.

[Carl Ragnerstam, analyst]

Okay. So on the net -- on the segment level, you expect prices to be up, I guess, than low single digit full year '24?

[Per Waldemarson, executive]

Yes.

[Carl Ragnerstam, analyst]

That is pretty impressive inevitably. And will you do any more sort of harsh cost-out measures in order to sort of endure the softening markets in -- or the currently soft market in demolition? I guess it's up to the local subsidiaries. But what's the thinking there?

[Per Waldemarson, executive]

Well, the thinking is, as always, in Lifco, we take action all the time in all our companies. I think the first companies that started to take cost action was 18 months ago. So we don't comment on individual companies, and the action we take, but we saw some companies already in the end of '22 taking restructuring in that. And then it's been a gradual process depending on the situation in each individual company. So it's happening continuously in all companies. It's not something we do as a big project in the center, as you know. We do it every day out in the different subsidiaries.

[Carl Ragnerstam, analyst]

That sounds fair. And also finally, on Dental here. I mean, if you look at the margin year-over-year, would you say that the drop of perhaps 60 basis points is driven by the Easter effect purely? Or is it anything else we should consider there in the drop?

[Per Waldemarson, executive]

I think it's -- part of this is probably Easter effect, and then there's always -- we're talking about one quarter, and there can always be some special effects. Minor effects, we don't tend to bring up on this level. There could always be some minor effects from other things, ERP system changes and all that, but we don't tend to bring that up. So the majority of it is Easter because in all these other effects, they tend to sort of even out in a big group like Lifco. So majority -- then you have always some fluctuations between quarters.

[Operator]

The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

Just a follow-up on what you commented there about the competitive situation in demolition. Would you say -- I think you started by saying normally we would see a certain kind of behavior when the market is weak. But just in general, how would you assess the competitive dynamics within demolition? I understand there are quite a few different end markets as well, of course.

[Per Waldemarson, executive]

I mean, it varies a lot between different companies. There's a full range -- I mean, we are ranging from companies that are selling relatively standard products with some more competition. And there, we try to stay firm, as always. We don't want to participate in any sort of battles down. We rather lose some volume and stick to our quality products and service levels.

And then there, of course, on the other end of that range, we have companies with highly differentiated products, where basically the price -- where the price is this or that would not impact the volume very much, it's the market itself. We know that from previous situations, for example, a financial crisis, et cetera, it doesn't really matter in certain situations. On the margin, while a few sales could be impacted, but overall we try to stay disciplined also in this respect. So even if there could be in certain areas turbulence we try to stay firm on this.

[Karl Bokvist, analyst]

Understood. And then the comment you started by making there regarding special projects. As you said, you flagged it last quarter. And they don't always come every quarter, but how should we think about these kinds of orders in future quarters? Do they usually occur when the markets begin to improve again? Or can it just be they come and they go, really?

[Per Waldemarson, executive]

They basically come and go. And these type of products are not construction related. They are not -- it depends. It could be a nuclear project for Brokk, it could be another special machinery or -- so it's not really correlated with that. So it's not following that pattern.

I think we even had those type of deliveries in '09, 2010, when we are speaking of market issues. So it can happen often when the construction market is weak. But when they come, it's also normally a long lead time from order to shipment. And we also don't know exactly when they will come in if we have them. So we decided not to make the big forecast around that.

But we had -- I think it's important to remember my main message that the market we are experiencing now in the first quarter is very similar to the market we experienced in Q4. Then, of course, you have seasonal differences, and your Q4 is normally a stronger quarter. And Q1 is normally, I think, a weaker quarter for Demolition & Tools. So that's normal.

But the market felt pretty much the same in Q4 as in Q1, but we were then -- we had some extraordinary effects and the mix effect that made them -- that basically made Q4 maybe luckily, but better than the underlying market, which we tried to highlight in the last earnings call.

[Karl Bokvist, analyst]

And then within systems, if we exclude the effect of acquisitions, any segment worth highlighting there either being weaker or stronger? You do mention contract, environmental, infrastructure and so on. But to my understanding, these generally include the impact of acquisition when you describe them.

[Per Waldemarson, executive]

No, it's really company-specific, if you're talking about the growth companies now, what you are referring to? This is supposed to be...

[Karl Bokvist, analyst]

Just curious to understand if there are any differences in end market conditions and if anything had picked up or anything had weakened further.

[Per Waldemarson, executive]

No, but I think there are some segments there that are similar pattern to the Demolition & Tools on the more extreme side or the negative there. And then the majority is more in the middle, maybe a little bit softer market conditions. And there is a few companies and a few areas where we have still a very strong growth actually for very specific reasons, which we don't tend to pinpoint individual companies in this. But there are certain companies.

And they are actually in different divisions in this category. So we have that effect in Transportation Products, Environmental Technology. We have that also in Contract Manufacturing. We have companies with that positive effect, and even in Special Products. So it's a mix in there. So -- and there are specific reasons for that, but now we're down to individual companies when we disclosed it.

[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 calling in and for the questions, and I wish everyone a nice day. Thank you.