Lifco AB (publ)

STO:LIFCO B

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to Lifco Q4 Report for 2022. [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 the Lifco Q4 conference call. And we can start with moving directly into Page #2 in our investor presentation. On this page, we look at the overall performance of the whole group, both for the whole year 2022 and also for the last quarter.

And we can directly then conclude that for the full year, 2022, it was another record year for Lifco with strong sales growth of 23% and EBITA growth of 26%. The trend with increase in sales continued also in our last quarter with 21% growth, and our EBITA grew with 31%, which means then that our margin actually improved to 22% from 20.5% in the year before for the quarter. In the quarter, specifically, the total sales growth of 21% was generated, thanks to 10% organic growth. And then we had a help from acquisitions of 9% and also a positive effect from exchange rate with about 6%.

I would also like to just remind everyone that we have also a divestment in the spring of '22 of our company, Hekotek in Estonia, which had also impacted sales negatively with about 3% the divestment effect here. For the full year, '22, Lifco growth of 23%, that consists of 11% organic growth, 9% growth from acquisitions, and currency effect was positive 5%. Talking about the full year figures there. And on the whole year, the divestment of Hekotek had negative 2% impact on our sales numbers.

And then if we go further here, after a period of slightly lower margins, due to the effect that we've been discussing throughout the last 18 months of timing effect of not being able to pass through the cost increases into the prices we have now, during the last 2 quarters in Q3 and Q4, 2022 came back to very strong levels. So we are quite satisfied with that effect. And we saw that trend already in Q3, and we're very pleased to see that's continued also in Q4.

And I would like to once again remind everyone that the Lifco portfolio typically consists of very strong niche companies with differentiated products and strong positions. And this means that our products and companies have pricing power and the issues with the lower margins that we saw through parts of 2021 and 2022 have more to do with timing related effects of the timing of making this. So we're very pleased to see that coming back. It's still, of course, the constant work in our companies to continue this work to basically balance and get the margins right.

I'd also like to comment already here on Page #2 about our cash flow, which is very strong in the quarter. We actually had some positive effect from inventory reductions in the quarter. And also, I'd like to highlight that the last quarter is typically quite strong cash flow quarter, but it was even stronger than normal in this quarter.

And I think we also did mention this in previous calls that we have been building up inventory. And for the full year numbers here, the cash flow is only growing with about 5%, which, of course, has to do with mainly inventory buildup in the previous part of 2022. And also, of course, the strong organic growth leading to higher receivables, which is quite normal. But of course, there is hard work going on right now in many of our companies to address this issue. And I think, as I also mentioned in previous calls, this will be more of a step change in addressing the inventory levels, as we still have quite a not perfect situation with supply chains and longer-than-normal lead times still existing for many of our companies, so we have to do a step-by-step approach in working with the inventory and getting our cash flow back to normal levels.

But despite all these effects for the full year, we can, thanks to our high margin business and our relative asset-light business, still generate operating cash flow of more than SEK 3 billion in a year like 2022. And I think that shows that we have a fundamental strength in our businesses.

Going now to Page #3. We look a little bit more into the specifics of the different business areas, and we can start with Dental, which had a quite normal quarter with 10% sales growth and actually slightly higher margin than the previous year, if we talk specifically for the quarter. And the growth in the quarter of 10% consists both of organic growth, also some acquisition, and also positive exchange rates. So it's a quite normal development for Dental business.

We also saw improvement in the Prosthetics business, which we have been suffering from the supply chain issues that we had in the first quarter that led to some reluctance to some of our customers in Germany to trust basically delivery capacity. Even though our capacity was up and running, they were a little bit reluctant there, especially in the second and third quarter. In the fourth quarter, we saw that normalizing, and of course, we don't have future that's built around that, but we hope that this will be stabilizing also going forward. But this is, of course, something that is future and we have to be careful to say too much, but so far, it looks better in that area.

Going further, then we can look at Demolition & Tools, which has had a very strong year, and had strong market conditions for quite some time now. And the sales growth continued in Q4 2022 as well. For the full year, sales grew with 34% and EBITA growth with 27%, and this area is growing both from very strong organic development and also supported by acquisitions.

The slightly lower margin, both in the quarter and the full year numbers, is mainly explained by business mix effects. This area is overall a highly profitable segment. And then within that segment, there is also some variation. All of our companies here are profitable and strong, but some are even more so. And basically, different growth profiles in quarters or between years can make an impact there. And I think we have seen over many years now that the EBITA margin here will vary on a high level. So we have been, for many years, on very strong margin levels, but it can vary depending on quarters due to both general business mix effects, and also, in some quarters, some special projects that have even higher margin, normal currency impact. This was not the main effect for 2022 numbers, but we've seen that in previous years.

If we go further down to our last business area, System Solutions, we had another very solid quarter with sales growth of 21%, driven both by organic growth that was very good and also acquisitions. And also here, I would like to just remind that the growth of 21% is also offset by the divestment of Hekotek, which belongs to this division. So the growth actually is higher than the 21% when you adjust for that. EBITA in the quarter grew by 44%, once again driven by strong organic development and acquisitions. And I can just say that for the full year 2022, we had a very strong development in many of our companies in System Solutions. So we're very pleased to see that.

Going into Page #4. We take a little bit different perspective on Lifco. This is basically summarizing our development since the IPO in the end of 2014. And I'd like to just put some focus on the average annual growth in EBITA. So during this time period, Lifco has grown, on average, every year, 22% in EBITA. And one very important reason for that is actually our organic EBITA growth, which on average has been 8% per year, which basically is an indication that, of course, we had strong and nice market condition during this time period. But also, we have had very strong development in our companies, really good work been carried out in many companies.

And also the companies that we required have been selected very carefully, and these have been able to also continue to grow and develop well during the Lifco ownership. That in total leads to 8%. And then if you go to the acquisition perspective, all of you are aware that Lifco has been sort of an acquisition company for many years, and we have here an average contributed 12% annual growth from the acquisition coming in, in a given year. And then also during this time period, we had some positive effect, on average 1%, from inflationary effect, which, of course, can vary from time to time. And this in total leads to 22% performance. So I think that's, talking about just perspective, I'd like to show that we are growing both organically and through acquisition, which is, of course, very fundamental for our strategy.

And then we can go into Page #5, also continue to look at the longer term or at least medium-term development, 2015 to 2022 development for Lifco. And I'd like to -- we still -- on this slide, we list EBITA growth, average growth per year of 22%, but it also translates into earnings per share growth of 19%. And we've done this development, while thankful to our strong operating cash flow that has been growing year-on-year, I can say here in 2022, the inventory buildup led to slightly lower growth, but over the time period, we grow still 18% on average per year.

Yes, once again, we've done this while actually decreasing our net debt/EBITDA ratio. It used to be 1.5x in the start of this period, and now we're down at 1.1x net debt/EBITDA. And as you see at the bottom of this slide, we spent a substantial amount of money on acquisitions, which we have basically been able to do that through our strong cash flow and through the very strong performance of the companies we have had for many years and also the new companies that gradually have come in to Lifco.

And also, just to remind everyone, we pay the dividend every year. That dividend has grown by, on average, 16% a year during this time period. And I think there's many perspective on this development. One is, of course, that organic development in our job in our companies. We have many good managers doing a very good job. But I think it's also the fact that we are very selective in the acquisitions we're bringing. So we have strong fundamental companies that can step-by-step develop. Most of our companies don't grow enormously high growth, but they have development opportunities and can do the step-by-step improvement.

I think the last remark on this slide is that another important reason that we have been able to do this growth from acquisitions on a quite high level, while still being able to reduce our net debt levels or ratios, I should say, is that we've been very disciplined in valuation. And 1 of the reasons here is that we can be very selective, and we are also willing not to buy companies in our 6 segments if we don't think the valuation and the quality of the company is good enough for Lifco to take care of the capital going forward.

So after Page 5, I would like to go to Page 6 and just basically conclude once again that our net debt position is relatively low. And despite a number of acquisitions and some stock buildup in 2022, we ended the year with the same net debt/EBITDA ratio of 1.1x, if you look at interest-bearing, and also the same, if you look at the total net debt, including all the IFRS 16 effects and the option debt that we have in our company is still at the same level as the previous year.

And we can here also conclude that Lifco has a strong balance sheet and a strong financial capacity to continue to acquire companies when we find the right companies to buy at reasonable valuation levels. And once again, I repeat myself here, we are very focused on quality, and that's more important than maximizing short-term acquisition growth in any quarter or any given year.

And then on the last slide, I would like to show on Page #7. This is taking an even longer-term perspective of Lifco, which I think is important. And we can see, if we look even longer, that we also had strong development. Since 2006, Lifco has an average kronor EBITA of 19% per year. And our most important target is to grow our profits in every given company every year. And for the most part, we have succeeded with that through a combination of very successful organic development, and also, of course, helped by acquisitions that have contributed positively.

And I would like to highlight, once again, the very important fact is that most of our companies perform very well also after Lifco takes over them for many years to come. And then, 2022 was another record year where we grew our profits once again, despite some problems in the Dental area, which we've been referring to in previous earnings call. But I think the quarter 4 numbers there were more stable and back to more normal levels.

So with that final comment, I would like to open up for any questions.

[Operator]

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

[Carl Ragnerstam, analyst]

It's Carl from Nordea. A few questions. Firstly, I mean you said that you start to see normalizing volumes in your Prosthetics business in Dental. Could you give some percentage where you are now versus sort of a normalized level? I guess you're not fully back right now. And I'm also a bit curious to know, I mean, how you managed to sort of convince the German practitioners to sort of come back to you, I mean, in a period of still uncertainties in China?

[Per Waldemarson, executive]

Well, first of all, the reason we used the word seeing it to come back is that it's been 1 quarter. We had 3 quarters with some lower development, and now we had 1 quarter with strong development. So we just wanted to take a cautious approach to that. And normally, back, it means that we're not growing that business on previous year, but we are closing in numbers. So the gap has sort of shrinked a lot if you compare it to Q2 and Q3.

Once again, now we have to remind everyone, we are now in a very specific subpart of Lifco. We are a big company now, we're down there. The reason we are committing on this is that it's a very profitable business. Sorry, Carl, the second part of your question, can you just remind me that one?

[Carl Ragnerstam, analyst]

No. I mean how did you manage to sort of win back the German practitioners? They sort of left you when you had supply chain challenges in China. But of course, during the period, when you obviously managed to win them back, Q4, we still had, I mean, uncertainties in China, I mean, if anything, with that, I mean, a lot of COVID spread. So I am a bit worried how...

[Per Waldemarson, executive]

I would say that it's not like customers left us totally, but they shifted part of their volumes back into the local production. So there's been, of course, a few customers that probably stopped buying. In any given year, you will have that kind of case. But this has been more of an effect that there was in general more waiting and seeing load for our dentists. And in this last quarter, we saw those volumes being more back to normal. But once again, it's 1 quarter. We have to be careful to accept like that, but it at least is a good indication that things are normalizing in that sense.

[Carl Ragnerstam, analyst]

And you haven't seen any big change so far in Q1? Or I guess you would have communicated in that case, or...

[Per Waldemarson, executive]

Yes, I think we would have been a little bit more careful in our communication if we saw a big change. So basically, we see so far that the pattern from Q4 is holding up. But also now it's a bit special period. Chinese New Year is just taking place. So it's a little bit special season for this business. But yes, so we will track it, of course, very carefully.

And I would just like -- without talking too much about this specific issue, our company here working has been very, very active throughout the year, also in the quarters where sales were not back to normal, been very close to our customers and very, very active in trying to get the comfort back.

[Carl Ragnerstam, analyst]

Okay. Very good. And also on, I mean, Demolition & Tools continuing to deliver quite solid numbers volume-wise. I mean, with the high uncertainty in the European construction market, could you shed some light on where order intake is heading currently? Or if you have seen any changes in some subsegments of Demolition? Yes, if you could give some highlights on that.

[Per Waldemarson, executive]

Well, I think our order intake, which we don't report, we do mention them from time to time in our calls here, has been more affected by what type of order books you had and what type of order time that we're talking about. And the good news for us is that the companies that have relatively shorter order intake, they have been performing quite well, where some with very long order books have been able to basically go through their order books and make, in some cases, some adjustments into it because it's been too long.

And this has to do with companies that basically are dealing only through distribution sales or OEM sales. And they are, of course, a little bit different, the type of orders you get there versus the companies that sell directly to the end user. So we can only say that -- same comment as in the previous quarter, the order intake in some of our companies were extreme for a certain period of time up until about a year ago, and then it's been on more normalized strong levels, you can say. And then it's been a little bit more tricky to evaluate the order intake in the companies that have very long order books and more OEM distribution type of customers that don't have the end user direct effect in their order making, whereas we see quite strong development in the campaigns with more direct sales, which is pleasing.

But also, once again, means that the visibility is not that long, because if you don't have long order books, you're very dependent on the order intake in the coming quarters for the success of this year.

[Carl Ragnerstam, analyst]

Okay. Very good. And also the final 1 from my side is a bit of working capital, quite impressive release though from high levels, but still given the organic growth you're delivering, I mean should we expect you to continue to sort of release working capital and reducing inventory entering first half of '23 as well?

[Per Waldemarson, executive]

Well, we don't give any forecast call, as you know, but we are working on it. And I think my comment here in the call earlier was that I think I will most likely see more of a gradual step change in this. It will not be something that we go from 1 day to the other and just squeeze, because we still have good demand, we still have some companies with longer than normal lead time from suppliers. So we have to be careful here, but it's a common -- every company in Lifco is now addressing this issue.

Having too high inventories is not what we like to have. But we have been forced, like many other companies, in the last 2 years to do that. But yes, we're happy with Q4 and we will work on it, but we don't promise that everything will come in certain months, but the work and the focus is on this issue for quite some time.

[Operator]

The next question comes from Karl Bokvist from ABG Sundal Collier. Please go ahead.

[Karl Bokvist, analyst]

More of a, well, partly technical thing. I appreciate the transparency here on the components of the EBITA growth. On the SEK 401 million from acquisitions, does that include the negative effect from the divestments of Hekotek?

[Per Waldemarson, executive]

No.

[Karl Bokvist, analyst]

Okay, okay. So it's only from the kind of 9.3...

[Per Waldemarson, executive]

We don't see a divestment as a typical part of our business. So we didn't include that in our... Yes, it was more of a one-off effect that had to do with the Russia situation.

[Karl Bokvist, analyst]

All right. Understood. So by that reasoning then, your organic EBITA might have been even better in 2022, if you do the...

[Per Waldemarson, executive]

No, I think -- no, no. So if you look -- if -- you're referring to Slide #4 now in our presentation.

[Karl Bokvist, analyst]

Correct.

[Per Waldemarson, executive]

Yes. So no, no. So the EBITA growth from acquisition should be the correct number here, in this.

[Karl Bokvist, analyst]

Okay. So -- sorry, but -- so the total kind of net impact from acquisitions and divestments is the SEK 401 million, that's -- yes, we can talk about it later anyway. I'm just curious about the organic earnings, but okay, I'll move on instead.

The order book then -- you mentioned here now the companies with shorter order books have been performing very well. But otherwise, when it comes to like component shortages, supply constraints, do you feel that this has gradually improved, that lead times are coming back to a more kind of normal lead time process?

[Per Waldemarson, executive]

I think if you ask some of our companies, they are still struggling. But on the overall difficult level, I think we are in -- it feels like we're in a better situation now than in the previous period that we've been going through here. So I would say it's getting better. But if you go into individual companies, there is still some companies that are struggling a bit, especially with electronic components and certain things.

But it's not a major problem overall for Lifco. And I think also during this time period, we had these challenges. We've been -- our small, very focused operations has been very successful in adjusting to this and been able to find solutions.

But I can give you 1 -- 1 reflection is that during 2022 as a whole year, many of the Lifco companies with own products had to put a tent on the yard to be able to put almost finished products out there that have been assembled and then bring them back in when they get the final components. Hopefully, that will be less and less of an issue going forward, but that's been the situation for many companies. But it's been not so noticeable in the overall numbers because they've been doing a very good job in handling this. And maybe what you can say about it is that we kind of have grown perhaps even quicker in the early part of this growth period if we didn't have this constraint. But I think now we're getting to a better situation, luckily.

[Karl Bokvist, analyst]

Understood. And then on System Solutions, my final question here. Are there any areas here that you could highlight, which you are particularly pleased with, so to say. I mean, in terms of total sales growth, it seems like environmental technology is growing very nicely year-over-year, for example.

[Per Waldemarson, executive]

Yes. But I have to say, when -- I look at every individual business and then we sum up the numbers in this division of things to make some kind of reporting structure. But if you look at 2022 as a full year, it's been many companies developing very nicely. Of course, part of the growth, of course, has to do with some price increase effects, but also volume-wise, it has been a very good year. And it's really across the board, I have to say, obviously, with some differences, but not something I would like to think about.

But you're right, the environmental technology has had very strong development in many of the companies, and many of these are very good, important companies for us. We're pleased to see that.

[Operator]

The next question comes from [ Anna L. Wiström ] from Handelsbanken Capital Markets.

[Unknown Analyst]

Firstly, I have some questions on the cost development in the group and maybe some details on each of the divisions. On group level, the gross margin looks very solid and quite high. Could you maybe explain sort of what your cost development has been in the recent quarters? And maybe if you have sort of details on when your companies have increased your prices and so on.

[Per Waldemarson, executive]

Well, it's a very tricky question because the cost development is, of course, very different between different parts of Lifco companies. But as a common theme, the companies with a higher raw material impact had, of course, a much quicker impact on the cost increases. But also, in the recent quarters, and 2022 has been getting more and more effect of a general inflation, energy prices effect. So we see more -- and also some of the companies where you maybe are selling goods that are not so high raw material, they also start to see price increases coming in maybe now or a bit later. So it is, of course, the general price increase effect there.

As you can see, in our last few quarters, we have now, after a time period of adjusting, with longer order books than normal, that we'll be able to get our price increases implemented into the sales numbers and generating profit. But it's, of course, a very difficult question to answer because it varies a lot between different companies, how big the cost increase has been and also between countries, how our energy prices and also cost of general cost inflation is impacting us.

But it is a common theme, I think, for every company, also for Lifco, and we are adjusting. And I'd just like to remind that the good news for us is that we have -- the vast majority of our company has a strong pricing power position. So we are able to basically lift our prices when needed to compensate for this.

[Unknown Analyst]

That's very clear. And have you started to see any sort of indication of prices or costs in some segments coming down? I mean, we started to see that in raw materials, but not that much in maybe components.

[Per Waldemarson, executive]

Yes. I mean, you can say the closer you are to the raw material, you start to see some emerging effects of that. But there's also timing effect for that inventories, lead times, all that. So that's something. But you have to keep in mind that most of our companies have an outsourced supply chain where there are some suppliers, so we cannot, in all out, see a direct link to that immediately, so to say.

So we will, of course, see, in certain pockets of Lifco there could be areas where we see slightly lower raw material prices. But then we have all the other things that are still going up. So we take a cautious approach on that when it comes to that. And we are still in a price increases mode and compensating mode, so to say.

[Unknown Analyst]

Okay. Great. And then my final question is just if you have any more details and descriptions of the product mix effect in Demolition & Tools compared to the same quarter last year.

[Per Waldemarson, executive]

Well, what I'm trying to explain by the product mix comment is that we have certain parts of Demolition & Tools with very high margins, and certain parts that I will characterize as high margins, but not as high as the average margin. And if you grow sales higher in the slightly lower margin sales, then you have this impact. And this is the main explanation. Also, if you look at the full-year numbers, we were not fully compensating for all our cost increases in the beginning of the year. So this was more maybe a comment on the last quarter.

For the full year numbers, you can also say that there's been some difficulties in the beginning of the year for all our companies to sustain the margins, which is now coming back. So we are quite pleased with that, and looking company-specific in the last 2 quarters is going quite well there. But the mix effect has been that you're growing quicker in certain parts, and have slight low margins, which can happen in certain quarters, and it can have the reverse effect and, of course, that has an impact. So it has more to do with that. But I think once again, this area has always been a little bit volatile quarter-to-quarter in margins. And I think we will continue to see that on a very high level, obviously.

[Operator]

The next question comes from Robert Redin from Carnegie.

[Robert Redin, analyst]

A small detail question on the sales mix for Demolition & Tools. And so you introduced sort of other categories in addition to the Demolition and the crane and excavator attachments. But I was wondering about the crane and excavator attachment, so if you could say something about the split there. Of course, the excavator attachment has grown a lot over the last couple of years. What's the relative size now? Are they approaching the 50-50, crane and excavator attachments business, or it's -- product figure.

[Per Waldemarson, executive]

Robert, just to answer your question, we don't publish the exact numbers around that. But you're right, we have grown more as we have developed Lifco into acquisitions in this field. And the crane attachment basically is consisting of the old Kinshofer Group that are very strong in that. But also Kinshofer organically developed into more excavator applications and other type of attachment applications.

And then through the most part of our acquisition in the attachment and crane segment has been basically in excavator or even forestry machinery and other type of applications. So the bigger part of that is now sort of non-crane attachment, if you like, on that subsegment.

[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 thank you for the questions, and we will hear back in for the next quarter call later on this year. Thank you very much.