Lifco AB (publ)

STO:LIFCO B

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the Lifco 2Q 2022 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Per Waldemarson. Please go ahead.

[Per Waldemarson, executive]

Thank you, and good morning, and welcome to the Lifco Q2 conference call. And we can start with going into Page #2 directly in our investor presentation. And looking at the quarterly performance of Lifco, and the conclusion is that we had another strong quarter for Lifco, once again driven by continued positive development in our Demolition & Tools and System Solutions business areas.

And overall, the sales growth was 22% in the quarter, of which 12% was organic growth. Acquisitions contributed with 7% and exchange rates had a 4% positive impact. We also had a small marginal negative effect of the divestment of the Hekotek business, which took place in May 2022. And as we be communicating previously, this divestment is not something we do -- we basically don't do investment. This was a special case, where the exposure to Russian market was the reason for divesting Hekotek.

If we go further down in the numbers, the EBITA growth of 20% in the quarter, which then means that we had a slightly lower margin compared to the second quarter of 2021. And I would like to remind everyone that the second quarter of 2021 was a very strong margin quarter for us. And in that year, we still had some positive benefits of lower cost levels following the pandemic in our -- especially our sales, marketing and administration side.

And then another comment on the margin is that, as you all know, the material and costs in general have been increasing now for quite some time. It's been a challenging environment from that perspective. But we can now preclude that the vast majority of our companies are adjusting very well to this and are able to pass prices through the system. And I would like to also already here highlight that list of portfolio of companies are typically in strong niche positions, which means that these have good potential for pricing power.

And the issues we had on the margin side during the last 9 to 12 months has been more related to timing, timing effects on passing them through, adjusting to inflation, et cetera, rather than actual fundamental possibility to compensate. So we still think that we have a very strong position in the vast majority of Lifco.

If we go a bit further down, we can make a comment around the cash flow, which is somewhat weaker than you would normally expect from Lifco. The reason for the decline in cash flow is mainly driven by the increased inventory levels. We saw the same effect in the first quarter of this year. And this basically has to do with the fact that the underlying demand has been very strong for quite some time. And supply chain issues are still a factor, it's still challenging to be able to deliver on the stronger demand. And to do that, many of our companies are basically being forced to increase the safety stock levels. And that's the effect that we see there.

Another component, of course, is the cash flow is that the receivables have increased due to the strong sales development in the recent last quarter. Yes, these are the main comments on Page #2. We can then move into Page #3 and look a little bit more on the different business areas.

If we then start with the Dental area, we already informed in the last earnings call about one issue, a specific issue we had in our prosthetics business. Basically, the lockdown in China were creating production problems during first quarter. Those structuring issues have been up and running. We've been back to normal capacity, but we're still suffering in the prosthetic business from that basically shutdown we had in February and early March.

And there is a very hard work going on with the German entries to create comfort around the supply and delivery capacity that we now have. But basically, that was impacted somewhat, not to a major extent, but to some extent it impacted our sales and the profitability in the second quarter because of that sort of lag effect.

Also here, I would like to highlight that Dental, in last year's numbers, had extraordinary high margins, partly due to the lower cost levels. Sales and marketing activities were not fully back to normal in Q2 '21. And also there was, on the margin, a little bit extra sales effect still from safety products for dental offices. But overall, basically, these are the drivers of the slightly lower margin in the Dental division.

If we go further into the Demolition & Tools, we have experienced continued strong market condition for quite some time now, and the sales growth with 26%. And that's a combination of strong bank development and acquisitions contributing. I would like to also go further looking in the margin side to highlight that there was also a very strong development in the quarter of -- second quarter 2021. And the margins in this quarter is also very strong, we remain satisfied with 27% EBIT margin. And they were on the 28% level last year, extraordinary high due to also -- partly some special project levers that have extraordinary high margins, which we did not have in this year.

Balance, as I've mentioned in previous calls, the exact specific margins of this area has been a little bit volatile, but on a very high level for quite some time. And there is, of course, always the effect of product mix effects that to come into play. We are very happy with the development in the second quarter of 2022.

Going further to our third business, Systems Solutions, there's also very strong growth in sales and profits. Once again, driven by strong organic development in many of our companies, complementing with the acquisitions that's contributing positively. And most companies in this segment had a very solid quarter, and this growth also translates into the strong margins. And I think in this year, we can also conclude that the ongoing work of adapting and managing the higher cost levels have been done in a very good way, and we've achieved good results here.

And with that, we can go further down into Page #5, and just briefly comment on the financial position of Lifco. We are ending the quarter with a net debt-to-EBITDA of 1.9x, which is slightly above the level from 1 year ago. And the interest-bearing net debt level is, compared to EBITDA is 1.3x, also slightly above the level of 1.2x 1 year ago. And we have seen this strong balance sheet position despite the fact of being very active in acquiring companies during the last 12-month period. And with the current debt levels, we have a strong financial capacity to continue acquiring companies when we find the right ones, the ones we want to own for a very, very long time and at reasonable valuation levels.

I also already here would like to highlight that for Lifco it's always more important to buy the right companies, rather than maximizing acquisition growth in any given quarter. And the reason obviously is that we will own the companies forever, so we better find the right ones.

Going to Page #6, just to give the long-term history and the perspective on where we are, we've been having a strong development for many, many years, and this development has continued in the first 6 months of 2022. And this has been, for many years, a combination of organic development and acquisition growth. And we think that's very important. And we are doing this while still paying a dividend every year and not, so far, asking our shareholders for any money, we are capital infusions. And then I think that we aim to continue for years to come.

And we also -- on the bottom of this page, follow the margin development, which has, for many years, been positive. During the last 12 months, it's still slightly below the 2021 numbers. But as you can see in this report, we are working very hard on getting back strong margins in Lifco despite inflation problems, investments in the short term and also the extraordinary low sales and marketing cost that we had during -- following the pandemic.

If we can then move all the way down to Page #17, just looking at the same type of graph, but for different areas and here, we can then, on Dental, see the effect of extraordinary high growth following the pandemic in 2021. And this is now slightly then going down in the last 12 months. But still, we are on a level that is quite comparable as 2019 numbers. Of course, obviously, higher sales, but the margin is still on that level. So this will give that perspective. And as we take a very old perspective. Just to remind everyone, the reason the margins are on a totally different level than 5, 10 years ago is that Lifco has, over the years, increased our Dental business in own manufacturing and in prosthetics and software. Whereas in 10 years ago, we were mainly a distribution company. That's, by definition, a slightly lower margin potential.

And then going further, we can go to Page #19, looking at the Demolition & Tools area, which is an area where we actually have experienced the highest organic growth in Lifco over a very long period. And this is an area where we are in very interesting subsegments, where the potential for organic growth development is high and we have been taking that [ to production ] for many years.

In this area, the development and also both the cost of sales and margins can be more volatile. It has come in a straight line. But over a long period of time, we are achieving very good result also in this area and also the last 12-month numbers are strong in this area.

And that if you go to the same type of picture in Page #21, looking in our Systems Solutions business area. And this is an area that when we went public in 2014, was a collection of companies that had relative to Lifco today had slightly lower margin potential than we said today. And since 2014, we've been adding a lot of very strong, highly differentiated companies with strong market positions, many of them actually -- or quite a few of them are global market leader in their niches, and that has generated, in combination with a lot of great organic development, both in sales and margin to this area that today has about 20% EBIT margin.

And I also would highlight here to new investors [ may productive ] that the companies we own today who will own them, let's say, in 2014, the margin would have been substantially much higher than the reported numbers of the portfolio we owned back then. So we have totally faced the type of companies we own in this area through our acquisition work over the last 8 years.

This is all I wanted to share in this presentation. And now I'd like to open up for questions.

[Operator]

[Operator Instructions] Your first question comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. Firstly, as you said, you are building quite a bit of working capital in this quarter as well. Could you perhaps comment which segment this is primarily related to?

[Per Waldemarson, executive]

Well, Carl, this is preliminary related to -- or primarily, I should say, not preliminary, it's primarily related to Demolition & Tools and parts of Systems Solutions. And the reason for this is very simple. When you have a product with very different components being assembled in a difficult entity and you have a very difficult supply chain situation for quite some time, the need to increase the safety stock is there, if you have, at the same time, a strong underlying demand. So we've been basically forced to attract this in order to fulfill deliveries. And I think as you can see from the numbers, thankfully with strategy we've been able to deliver quite well to the [indiscernible] over the last few quarters.

So it's been a sort of obvious strategy to take in this path. I think we're reaching a point now where we are, of course, carefully evaluating how long will the supplies niches remain and will it easen up, and -- but we're still in the sort of valuation things around that. But business basically the main areas. But also, to be fair, also even in Dental, there's been supply chain issues. So it's also some effects there. So I think it's pretty much across the board. But the major effect has been in the Demolition & Tools and Systems Solutions area.

[Carl Ragnerstam, analyst]

And is it too soon to say or to tell whether we should expect this pattern in sort of H2 as well? Or is it...

[Per Waldemarson, executive]

Well, I think at some point, when the inventory levels -- the safety stock has now been increasing, at some point, hopefully, we will get to a situation where we can feel more comfortable about our delivery capacity. Exactly when that sort of point will be achieved, I'm not entirely too sure. But we are in the discussion phase internally around is quite frequently the last, let's say, 3 months, so we have to prepare ourselves for being ready with it and getting back to normal or at least not increasing levels more. But we're not guiding on this specifically, but we are in the mindset of looking very carefully.

[Carl Ragnerstam, analyst]

Sounds fair. And in Dental, you had basis points margin contraction. You mentioned sort of effect from the prosthetics disruptions in Q1 lingering in Q2 as well. How big -- could you quantify these effects in Q2? And should we expect these effects to sort of ease going forward gradually? Or is it something that will take some time to win back your German dental clients again or...

[Per Waldemarson, executive]

Well, I think it's difficult to give clarity around it, because what we saw was that -- first of all, it's not a major effect in terms of sales, but given that it's a highly profitable part of our business, it has the impact on this business area. So that's basically my first comment. But we are seeing -- we hope that -- we feel that in the later part this quarter, it's getting slightly better. We're working very actively with our customers and as longer the time passes by since we had these disruptions in deliveries, it should become, hopefully, easier. But we don't really have a clear view on exactly when things will be back fully to normal in this segment.

[Carl Ragnerstam, analyst]

I think gradually better, hopefully, yes.

[Per Waldemarson, executive]

We're talking about a slightly lower market demand due to this sort of risk that Dental has experienced. Our delivery capacity has been very good since end of -- or mid-March basically, but we are still working on getting the comfort back. And once again, we also have this uncertainty that what will happen in China regarding the COVID -- reaction to COVID [indiscernible] still an unknown in that industry. But we hope that time will be our friend in this metric.

[Carl Ragnerstam, analyst]

Okay. Very good. And also on Demolition & Tools, obviously quite strong Q2 numbers. But I'm more interesting to know more about whether you have seen any changes in demand during the quarter. And also if -- I mean, if you have seen any sort of slowdown in demand? I mean is there -- may be no use that the outlook for European construction market is a bit so-so given the inflation, and we read news about postponed projects. Is this something that you see currently or too early maybe or...

[Per Waldemarson, executive]

Well, we haven't seen -- as you can see in our numbers, we haven't seen any effect. Of course, there's an order book effect that we don't communicate and it's also, in the order books, as I mentioned in many of these previous calls, different type of companies have different type of order book situation. But if you look at what we actually got in, in orders is still on a good level, maybe not as extreme as it was in certain parts of -- during the last 18 months. But on the other hand, if you compare it to what we get in and what we deliver out, we're still feeling quite comfortable in the situation so far.

[Carl Ragnerstam, analyst]

And the final one from my side is a bit on M&A. It's -- you're lagging a bit last year's level. It was, of course, a very good level last year. Is it something we -- is it more difficult M&A market currently? Or how should we look at it?

[Per Waldemarson, executive]

Well, I think when it comes to M&A, there is of course -- there's always this volatility in modules. And some quarters, we have more outcome than others. The actual underlying work is constant and increasing in Lifco and the number of companies we look for. There's still a lot of companies [ entering numbers ] for sale, but there's many things have to be right for us to feel fully comfortable making an acquisition and also to get the type of valuation that we feel comfortable about.

So I don't think it's so much different than a year ago in that sense. So there is normal volatility then coming into effect. And as you know and as I mentioned many times before, if we don't feel fully comfortable, we have a tendency of not buying the company because we're going to own the company forever, so they better be really good.

[Operator]

The next question comes from Karl Bokvist from ABG.

[Karl Bokvist, analyst]

Most of my questions have been answered, but just if it's possible to mention whether or not you felt that any particular business or businesses has really stood out in the quarter? It seems to be strong growth in contract manufacturing, environmental technology and service and distribution, for example.

[Per Waldemarson, executive]

No, I think it's been the same picture for quite some time now. It's pretty strong across the board. And it's not different between different type of business and no major difference between geographies, in the geographies we operate I should mention, which is mainly then Europe or Western Europe, as you mentioned. Partly U.S. as well, but the main exposures to European markets. No real sort of big differences that is worthwhile mentioning.

[Karl Bokvist, analyst]

And have you received or heard any indications from your subsidiaries or group companies that they felt any kind of weakening demand towards the end of the quarter?

[Per Waldemarson, executive]

Well, I think there's been a few companies that there's always some volatility. But when I look at the aggregated numbers, it's -- as I mentioned in the previous question, okay, there was a period maybe in 6, 12 months period, or some months, that order intake was absolutely astonishing. And I think in the later part this quarter, it was strong but not crazy strong, if you like. So we feel as we -- the visibility we have now, we feel that the markets are holding up well for the most part. But it's maybe there was a period in the past where we were more astonished about some of the volatility coming on. So that's maybe one I can comment on, on this.

[Operator]

[Operator Instructions] Your next question is from Riccardo Romiati from One Investments.

[Riccardo Romiati, analyst]

Maybe just coming back on pricing to make sure I fully understand the pricing trajectory. Do you think that you have achieved all the price increases that you need to fully restore the margin at this point? Or do you see further price increases coming in H2? And the second question would be on these comments about your orders. Could you say whether the book-to-bill in Q2 was still above 1 or this like not a strong trend that you commented? I mean, if you can maybe elaborate a bit more on that, please?

[Per Waldemarson, executive]

Yes. When it comes to pricing, it's an ongoing process [indiscernible]. So if the question is will there be further price increases in the second half of this year? Yes, there will be further increases in the second half of this year. And this is -- many companies is maybe the fiscal [indiscernible] months that is being implemented. And you have to keep in mind it's not only about raw material anymore, we're talking about the generalization that's coming into the [indiscernible]. Obviously, pricing a very important topic for us. And it's a normal part of the daily work of our operating companies.

[Riccardo Romiati, analyst]

Okay. It's an ongoing exercise and you're seeing inflation throughout the businesses. So you're still, let's say, catching up?

[Per Waldemarson, executive]

Yes, I mean, inflation is obviously here right now if you look around the society. So obviously, pricing has to follow. And exactly these individual company for different situations because of cost exposure on that. But I expect the pricing to be continuous, which is already, but even more so in this type of environment. It's an ongoing thing that's basically being evaluated in every single subsidiary all the time.

And we are -- I think I'm very happy to say, in this quarter, we are getting better in terms of margin so we are going in the right direction. But still some companies, the longer order books and all those, it makes it difficult to be extremely quickly in adapting these things. But overall, we feel quite comfortable about it.

And then the book-to-bill, we don't communicate order intake. I can't communicate that. But I think I'd just refer back to my answer to the previous question is that we had periods over the last 18 months around when we have [ long order book ], where [indiscernible] obviously was on a obviously high level, which we could barely believe. I think this quarterly order intake was strong and solid for most of the companies. And it was not from the revenue that we have recognized in terms [indiscernible]. So that's basically where we've done the right one. But we don't communicate the exact orders over the [ quarter 4 ].

[Operator]

There are no further questions at this time, and that does conclude our conference for today. Thank you for attending today's presentation. You may now disconnect.