Lifco AB (publ)

STO:LIFCO B

Earnings Call Analysis

Quarter Highlights: Sales Growth and Market Challenges

In Q2 2024, Lifco's sales grew 8% with a 0.6% boost from foreign exchange rates, despite a slight organic decline. The EBITA margin remained steady at 24%, but profit before tax dipped due to higher interest costs. The Dental segment bounced back, aided by acquisitions, while Demolition & Tools faced an 8% sales decline due to weak market conditions. Systems Solutions thrived with a 90% sales increase. Lifco's strong 37.5% rise in operating cash flow and 5% EPS growth reflect the company's resilience. However, market challenges persist, particularly in construction-related segments.

Introduction

Lifco's second quarter earnings call for 2024 was helmed by CEO Per Waldemarson and CFO Thérèse Hoffman. The company's overall group performance showed an 8% sales growth, with acquisitions contributing significantly. Although there was a slight decline in organic sales, this was offset by a 0.6% boost from foreign exchange rates.

Performance Overview

For the second quarter, Lifco saw its EBITA grow by 8%, with EBITA margins remaining steady at around 24%. While profit before tax was slightly lower due to higher interest costs, operating cash flow increased by 37.5%, and earnings per share rose by 5%. When examining the first six months of 2024, a negative organic sales growth of 4% was noted, although acquisitions contributed an 8% boost.

Dental Business Area

The Dental segment experienced a bounce back in the second quarter, partly due to seasonal effects from Easter. Over the first six months, sales grew by 6%, driven by acquisitions. Interestingly, the high-margin prosthetics and software companies outperformed the distribution businesses, leading to a 10% increase in EBITDA.

Demolition & Tools Segment

The Demolition & Tools segment faced challenging market conditions, with an 8% decline in sales even with acquisitions. Despite these weak conditions, the EBITA margin improved to 26% from 20% last year, attributed to better performance in high-margin companies within this segment. For the first six months, the segment saw a significant 13% sales decline and a 23% drop in EBITA.

Systems Solutions Segment

The Systems Solutions segment showed strong growth with a 90% increase in sales and a 21% profit margin in the second quarter, largely aided by acquisitions. Even on a like-for-like basis, the segment demonstrated solid development both in the quarter and the first six months of 2024. However, performance varied across different companies within the division.

Free Cash Flow and Financial Position

Lifco emphasized its focus on free cash flow per share, which has grown by about 24% on average since the IPO. The company’s interest-bearing net debt stood at 1.3x net debt to EBITDA, unchanged from a year ago, providing Lifco the financial capacity to pursue further acquisitions.

Market Conditions and Outlook

Lifco is navigating through difficult market conditions in certain areas, notably in construction-related businesses. Despite these challenges, Lifco remains committed to its acquisition strategy, continuously searching for attractive businesses at reasonable valuations. The company has already announced five acquisitions in the first half of 2024, contributing over SEK 1 billion in sales.

Conclusion

Lifco's diversified business model and robust management teams are key strengths in adapting to market changes. As the company continues to identify and integrate niche, high-margin businesses, it remains well-positioned for long-term growth despite short-term market fluctuations.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to Lifco Q2 Report for 2024. [Operator Instructions] Now I will hand the conference over to CEO, Per Waldemarson; and CFO, Thérese Hoffman. Please go ahead.

[Per Waldemarson, executive]

Thank you, and good morning, everyone, and welcome to the Lifco second quarter earnings call. We can start with going directly into Slide #2 in our investor presentation and have the high-level look at the overall group performance in the second quarter. We are growing sales with 8% consisting of actually small negative organic decline in sales helped by around 8% growth from acquisitions. A small 0.6% help from foreign exchange rates.

The EBITA is also growing with around 8%. Margin -- EBITA margin is in line with previous year around 24%. And then we have slightly lower profit before tax due to continued higher interest costs affecting this quarter. We have strong operating cash flow increasing 37.5% and then earnings per share growing by 5%.

If we look at the first 6 months of 2024, we obviously have a slightly lower growth numbers on sales given that we had a weaker start in the first quarter. I just want to remind everyone that as we mentioned in the last call, the first quarter was -- had a negative effect from Easter, especially in the Dental field and part of Systems Solutions, and we now get a boost effect in the second quarter. So you should keep that in mind while we review this quarter as well.

With that, we can go into -- I can also just measure, sorry, on this Page #2 that for the first 6 months, we had a negative organic sales growth of minus 4%. Acquisition contributing with around 8% for the first 6 months. And then we can go into Page #3 and look a little bit more into the different business areas. As mentioned in the previous slide, if we go into the Dental field, there is some effect from the Easter, which we already mentioned last quarter. So we have a bounce back -- a little bit bounce back quarter.

If we then maybe look a little bit more on the 6-month period, we are growing sales with around 6%, helped by acquisitions. And then margin is obviously growing a bit more and better EBITDA growth of almost 10%. And that has part to do with relatively better performance in the higher-margin companies, which typically would mean the old product -- prosthetics on company, old products and/or software companies compared to the distribution business where we have slightly lower margin, obviously.

So that's the Dental field, if we go into Demolition & Tools, we basically are still facing weak market conditions. We have been now mentioning that for quite some time. And in this second quarter, we are declining sales with 8% despite acquisitions in that -- there as well. And then obviously, with that weak organic development, it's basically a negative operational leverage, leading to lower margins.

Still, we are holding up margins pretty well. We are doing a 26% EBITA margin in the quarter compared to 20% last year, which basically is one of the reasons that we have slightly better performance in the high-margin companies in that field. And for the first 6 months, we are then declining quite severely with almost 13% in sales and 23% in EBITA.

And I just want to take a short moment to a little bit describe where we stand in these market conditions. We are obviously facing a tough construction-related markets around -- especially around Europe, where we have the majority of this business. And we saw that the early signs of that decline started already more than 2 years ago, and there's been a slow -- it was a slow sort of negative change -- directional change up until about Q3 last year when we were seeing the market on this lower level condition now for some time.

Then any given quarter can, of course, be slightly different depending on deliveries from certain companies and all that. But the feeling of the underlying market is still the same at low levels as we've been mentioning now for some quarters. So that's important to mention.

If we go on now to Systems Solutions, the last area, we are growing strongly there with 90% in the quarter in sales and 21% in profit margin, obviously, helped by acquisitions. But if you look more on the like-for-like organic development, it's overall a solid development both in the quarter and for the first 6 months. But we should be aware of that it's a very mixed view in different parts of this business area. And it's not really -- it's more on the company level than maybe on the divisional level.

We are reporting also sales on different divisions in that area. But within any given division, there is quite a different type of development. So basically, we have some companies that are facing a little bit of what we see in Demolition & Tools with weaker construction markets. And then we have other companies that have more cost development because of different specific things in their relative niches.

And overall, we can just conclude that we have a very broad diversified business area that holds up strongly also in this economic times, so we're facing right out with very strong margins in this area. So then we go into Page # -- actually, next page, Page #4. And we only update this slide once per year. So I just want to give a little bit of pre information now after 6 months.

We have a negative organic growth for the first time in the first 6 months since the IPO. We're working very hard to hopefully address that, but market condition will be important for the second half. And we don't know where the market will turn or if it will turn in the near future. But I want to also mention here that the acquisition is an important part of our growth than we are. We keep contributing also in '24 from acquisitions.

And then we can go into Page #6. It's also a long-term slide. And I just want to mention that we are very focused on the free cash flow per share. And in this slide, we measure it in the best way, I think, where we actually measure the real cash flow after CapEx. And the only thing that remains is the dividends and acquisitions. And we have been growing that with about 24% on average since the IPO and also growing it this year, as you can see that we are going in the right direction.

Obviously, when it comes to cash flow, we should not be too focused on the individual quarters as that can be varying between quarters, but the long-term direction of improvement of these free cash flow per share is crucial for Lifco.

If we then go to Page #7, just briefly mention our financial position. We are -- our interest-bearing net debt is now at 1.3x net debt to EBITDA, which is exactly the same as 1 year ago, despite the acquisitions we do and despite the dividend. And with that position, we have financial capacity to continue doing further acquisitions where we find the right companies for the reasonable valuations that we look for. We will come back to acquisitions in a few moments.

If we then briefly then pass on Page 8. Also a long-term slide, we are looking for continuous increase on our profits. We have done that for most of the years since Lifco was started in late '90s. And actually now after 6 months, we're also growing the total EBITA profit for Lifco in the first 6 months, you can see that on the rolling 12-month basis. Obviously, with the big negative effect from the Demolition & Tools segments that effectively shrinking quite severely in this year, compensated by stronger performance in Dental and Systems Solutions. So that's where we stand right now.

If we then go to Page #13, which I don't normally present, but I would just like to take a few moments to talk a little bit about what we do. As you all are aware of, we are facing more difficult market situation in parts of Lifco. And I just want to highlight our operating model that is very much based on having really strong management of each individual company.

And this, we've been working on for many years and we constantly work on making sure we have really the best possible management in our companies, and I think we really have that. And I just want to take a few moments to really mention how strong these individual local management teams are working in adapting and addressing the changing mortgage conditions. And they've done a really good job -- continue to do a really good job of being very, very close to the market and take the actions where needed directly.

And they are, of course, supported by a very strong team of excellent group managers that all have been born and raised in Lifco, which really puts the right culture into this playbook. So I want to -- a big thank you to the whole team at Lifco for being very, very good in acting in this type of market conditions.

And then we can go to Page 21. A little bit specific look on the Demolition & Tools segment. We are actually looking at the development here for quite some years. And as you can see from the right-hand side, we have been facing difficult times before. In 2009, it was a very severe drop. The market conditions we are facing now are not even close to that situation. So it's a much softer recession, if you like to call it right now in the Q.

We also had some weaker development in '13 when there was a euro crisis and then in 2020, when it was COVID. So we can just conclude that this is a cyclical area. And from time to time, we are facing this. Despite this, we are still holding up margins, I think, on a quite good level, which is another indication of the great work that's been taken place in all these companies to address the market situation.

And then we can go to Page 23 and do a similar deep dive into the Systems Solutions area. And here, I just would like to mention on the long-term perspective and I think many of you can see that from our numbers. It is a totally different business area now compared to, for example, 2009, where we were severely impacted by the financial crisis. This was a very small part of our existing portfolio that was the Lifco solution back then.

And also compared to 2013 or even 5, 6 years ago, it's a different area. And as you all know, we have a very mixed exposure, but it's a very, I would say, today, well balanced and differentiated business area. Of course, with some challenges in certain areas. Just like we've seen at Demolition & Tools, we have some countries with the same type of problems. But we also have many other companies with more stability and also some countries which -- with some structural growth in their respective niches. That's what sort of compensates in this.

And then I can move all the way down to Page 33 and just conclude a little bit on the acquisition side. We have now, after the first half year, we have consolidated or announced 5 acquisitions contributing with a little bit more than SEK 1 billion in sales. And these are all great niche companies with good margins and a solid historical track record.

And on this line, I just want to repeat myself, which I normally say on this call. We are very active in searching for companies. And we have a very, very good team, a quite small team, but very good team looking for companies. And the timing of when deals materialize, it's always unsure.

And once again, we only acquire companies when we really find the best ones and when we can get them at reasonable valuation. And there are many opportunities out there. We are basically looking all over Europe now. And being broad in the structure like Lifco, first of all, we're very broad in terms of where we are in our industries and our verticals. And also then we are open for finding new great niche companies.

That is a big advantage with that broad look because we can -- if we use this in the right way, we can basically really look at the best companies and be sort of patient in R&D screening around Europe. And the big advantage is that we're never forced to acquire in any specific segment if we don't feel comfortable around that.

Having said that, of course, we often find adjacent business in areas but we also complement it with quite new niche companies in the field. So there where we stand right now. And I think this was the last page, I wanted to present, and then I would like to open up for any questions.

[Operator]

[Operator Instructions] The next question comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

From Nordea. A few questions from my side. Firstly, I mean, the big sequential margin delta in Demolition was a bit surprising to me at least. You mentioned mix effect as one. Is it possible to sort of quantify the special order deliveries in Q2 maybe versus -- or putting the context versus deliveries in Q1 because this was a clear uptick.

[Per Waldemarson, executive]

Yes. I think in this quarter, there were some what we call special deliveries, but not big enough for us to mention that specifically in our report. But the main effect was that the companies where we have higher margins are holding up slightly better than the lower margin companies in this field. And I'll give you one example without going into, too, many details. We have, for example, one business that is quite resilient in this area with very high margins and that company is, of course, just being stable, helps on the proportion of mix.

And then we have some of the sort of machinery companies that have been performing slightly better than a little bit lower attachment CapEx. So that's basically the main driver of this. And this, I would say, could vary between quarters. Deliveries -- we have slightly low deliveries to Q1, maybe coming a little bit more a push in Q2. So I wouldn't make, too, big thing around it because it's not -- yes, it can vary between quarters. Having said that, I think in the sort of slightly lower margin part of our business, I would say that's the area where we are mostly exposed to pure construction-related business as well. Whereas in a little bit higher margin areas, we have a little bit more broader in push. Also there exposed to construction, obviously, but not only. So that's it.

[Carl Ragnerstam, analyst]

It's very clear. And also, I mean, I know that you don't disclose order but on the market sentiment. Could you give any sort of indications of the quotations or if you see differences between quotations and firm orders. Maybe if you split it between Brokk and sort of the attachment companies, can you sort of perhaps.

[Per Waldemarson, executive]

Well, we don't really communicate quotations and we don't consolidate on the group level either. So it will be a very direct anecdotal information if I talk about that. I think it's -- Carl, I think it's maybe more -- to give you a clearer picture, we feel that our construction-related weaker part of our business has not -- has not changed very much since last fall. It's still a tough market out there. It's still not catastrophic as it was in 2009, for example, but it's on a weak low level.

And it has -- in Q4, it jumps between different weeks and different months. If you ask the people around in my team, sometimes they can be a little positive and a few weeks later, they have a little bit more negative view when it goes up and down like that. But I would say, overall, the underlying feeling in the market has not changed much since last year -- since end of last year, as you say.

And then obviously, we also now have been in a slightly tougher environment for quite some time, which, of course, means that the order books have been and are now on a level where we don't have much buffer left. We had a little bit of buffer maybe 15 months ago in the system when things were slightly going down. And now we are in a level where it's not much. But I guess your -- what you're really asking is how would the market sentiment be in 3 or 6 months, we don't know basically. And we just -- we prepared for a similar market condition and we take it from there basically.

[Carl Ragnerstam, analyst]

Okay. That's very helpful. And finally, on Dental. The mix you're referring to it sounds like it's coming from prosthetics companies, right? Is it purely the prosthetics companies? Or is it anything else that is driving the mix?

[Per Waldemarson, executive]

No. I think in this quarter, it was a little bit more than that. But I think we shouldn't draw too much conclusion from one quarter around this. It was slightly better deliveries and sales in the higher-margin quarter business, which is, once again, the manufacturing, the software and the prosthetics. Prosthetics has been quite good now since we had the slowdown after COVID. So helps a little bit. But it's a short period of time we're measuring right now. So...

[Carl Ragnerstam, analyst]

But is it the onetime big order that you -- I mean drove mix? Or why shouldn't we sort of extrapolate it or?

[Per Waldemarson, executive]

No. Because if you take the manufacturing business, these deliveries there to -- they sell to distributors, that can vary a little bit between quarters. We get a little bit bigger order from 1 distributor in 1 quarter or next quarter. So we have to take a little bit longer perspective on that. And then -- yes, but I think the prosthetics business has been in a good momentum in the last -- since we have these problems after COVID has been in pretty good momentum, mainly perhaps helped by inflationary environment and our relative attractive offer to patients.

[Operator]

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

[Zino Engdalen Ricciuti, analyst]

I'm just -- I'll start with your question on acquisitions as if you like count the number of them, they are running a bit lower. But when you're looking at sales, they are running at a quite a nice pace. Would you say that these larger acquisitions are a result of some kind of intentional push? Or is it just more of a coincidence?

[Per Waldemarson, executive]

I would say that's more of a coincidence. If you look at the deals we've made this year, they are still in our range. Maybe they are as a group a little bit on average higher than previous years. But I think that mainly has to do that we maybe didn't do as many of the small adults that we typically would do as well. In a given year, we typically would do, let's say, 60%, 70% of the deals will be stand-alone niche companies and then maybe 30%, 40% will be of sort of deal volume. And then we have done slightly few of the small add-ons that come from time to time. So we haven't changed any way working or any way of thinking on this. We are still working in the area where we think we can find the best type of businesses for the most reasonable valuations. And that hasn't changed for many years.

[Zino Engdalen Ricciuti, analyst]

Very good. And then just a quick on Systems Solutions. You highlight that it's a significant part of your company specific. But you mentioned that there was a kind of a bounce back also on the Easter effect in some companies. Would you say that this -- how material is that, so to say?

[Per Waldemarson, executive]

I think Systems Solutions is not material. It's more obvious in the Dental field, where we really are -- we're taking business and we're -- the Dentist take a few days off just before Easter and close their offices in various countries, that has a bigger impact than Systems Solutions. So I think it can do the math on the working place more, I think. In Dental, it has a little bit bigger impact than pure working days because the Easter has sort of -- there are some -- the case and time of dentist also plays into that equation. So this solution is a smaller impact.

[Operator]

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

[Karl Bokvist, analyst]

My first one is just on the -- what you mentioned there a bit earlier that the one store, the most exposed to construction and so on are possibly also ones with the relatively lower margins. I'm just thinking here, how should we anticipate, if we assume that the market gradually improves, what kind of impact that you have from a kind of negative mix effect point of view? And the following -- the follow-up would be, I mean, you disclosed that broadcast is very impressive, 40% margins. But when you look at the lower end, should we think about some companies running at 15% perhaps orders, some are running even lower?

[Per Waldemarson, executive]

Well, if you take the margin question first, actually, the variety of margin is actually slightly lower than you described because the Brokk margin you see in our investor presentation is for the Swedish entity only. And if you take the integrated margin of Brokk, it's slightly lower because of all the sales companies integrated sales. It's actually slightly and I'm talking about in normal market tradition. And of course, if the market goes really, really weak, obviously, margins can be tougher when you have a huge volume. But if you take a sort of normal market division, the spread of margin is actually slightly than you described. So the first part of your question is customer. So to answer the second part here.

[Karl Bokvist, analyst]

Yes. No, it was just -- if we assume that just the construction market, for example, gradually improves. How one should think about the effect from a -- in lack of better words, negative mix effects if those units benefit from an improved market?

[Per Waldemarson, executive]

Okay. Well, I mean -- so maybe I should a little bit go deeper into that explanation. I mean the companies that are doing slightly better now, they have both construction and maybe some other segments. So they will also benefit from construction coming back. Of course, a little bit not as direct maybe as this one. So yes, there could be some effect around that. But on the other hand, if you come back, then you also have the operational leverage playing in our favor again. So how that plays out exactly, it's a bit difficult to describe.

[Karl Bokvist, analyst]

Yes. No, understood. My final one is just on the acquisition strategy. There's been a couple of acquisitions in the U.K., Germany, Italy. Now we've seen a couple in Denmark. Just -- now I'm potentially cherrypicking a bit here, but any particular reason have you strategically chosen to recruit a few more people there or promote people internally to scout for more M&A in that region?

[Per Waldemarson, executive]

Not really. I mean, yes -- I mean we have 1 dedicated person for couple of years or not dedicated, but someone is coming to the market more actually. Maybe that has some impact. And I think when it comes to the announced acquisition, you really see the tip of the iceberg. So what's happening behind the scenes is that we look for companies in many geographies. And we are in active cash flow in geographies. And then where we find the most attractive targets for the most reasonable valuation is where we strike. So -- and that can vary. If you look back, we did a lot of deals in Norway when there was an oil prices, we did a lot of deals in the U.K. when there was Brexit. So we are -- I'm saying that Denmark has any specific problems. So let's make more random, but it backs up a little bit in Denmark now. But that basically how we do it.

We look very broad. And then, of course -- yes. So I think it's a combination of both. And maybe we'll do a little bit more active work in Denmark. So that helps, but we do also active work in other markets where you maybe haven't seen the results yet. It might come or might not come in the next couple of years. We will see. So I think the way to look at it is that we are every year trying to increase our capacity as we grow Lifco. Not dramatically, but slightly. And that, of course, leads to better coverage in more and more geographies as we go along.

[Operator]

[Operator Instructions] 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, everyone, for listening, and thank you for your questions, and I wish everyone a nice Friday and eventually a nice weekend. Thank you very much.