Lifco AB (publ)

STO:LIFCO B

Earnings Call Analysis

Lifco Reports Growth Amidst Mixed Conditions

Lifco has shown resilience with a Q4 net sales growth of 7% and a significant EBITA increase of 13%, leading to improved margins. Despite an organic decline in sales by about 5%, acquisitions contributed a substantial 10% in the quarter, offsetting negative organic growth and currency effects. Full-year figures tell a strong story with sales up 13.5% and EBITA by a striking 21.5%. Organically however, sales were flat across the year, but EBITA still grew organically by 6%, reflecting a strategic focus on profitability. Lifco's cash flow improved markedly by 45% for the year after a tough 2022, while dividends increased with a recommendation of SEK 2.10 per share for 2024. These results suggest Lifco's adept navigation through mixed market conditions, maintaining growth through strategic acquisitions and effective financial management.

Sales and Earnings Growth Show Positive Momentum

The company experienced strong performance in the last quarter, with a 7% growth in net sales and a remarkable 13% growth in EBITA, an indicator of healthy profitability and improving margins. Across the year, sales grew by 13.5%, and EBITA impressively surged by 21.5%, even considering a slight organic decline of about 5% in the quarter.

Mixed Market Conditions Present Both Challenges and Opportunities

Despite some areas of the company encountering weaker market conditions with declining sales, there's an acknowledgment of the company's historic periods of strong organic growth. Special orders with higher profitability have contributed positively in the latest quarter, helping to bolster margins during a period of mixed market conditions.

Strong Year-Over-Year Performance Despite Slower Organic Growth

The company's year saw a 22% EBITA growth, largely propelled by strategic acquisitions which accounted for 12% of this increase. Organic growth contributed 6%, which is noteworthy given that it follows a period of exceptional organic growth in previous years.

Cash Flow Resurgence and Dividend Growth

Cash flow has significantly improved, with a robust 45% increase over the full year. This financial health has enabled the company to propose a dividend of SEK 2.10 for 2024, reflecting a strong cash flow generation and relatively low debt levels, providing headroom for future investments and shareholder returns.

Acquisition Strategy Driving Profitability and EBITA Growth

An aggressive, yet selective acquisition strategy is paying dividends, with the company managing 18 transactions in the previous year. The discussed EBITA multiple indicates a 17.8% yield on investment, indicative of the strategic and value-centered approach to acquiring businesses.

Prudent Financial Management and M&A Synergies

The company has been able to secure acquisitions at favorable EBITA multiples, averaging 6.3 times in the last three years, below their historic average of 6.6 times. This demonstrates a combination of prudent financial management and the ability to capitalize on market opportunities for sustained profitability.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to Lifco Q4 Report for 2023. [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 our Q4 conference call. We can directly move into Page #2 in our investor presentation and just on a very high level, look at the group's financial performance, where we had net sales growth in the quarter of 7%. We had an EBITA growth of 13%, obviously leading to better margins.

And if we then look at the full year numbers, we grew sales with 13.5% and EBITA with 21.5%. If you look at the quarter specifically, we had an organic decline in sales of around 5%. We will come back a little bit later to reasons find out. We had a positive effect from foreign exchange of 2.5% and acquisitions contributed with 10% in the quarter.

If we look at the full year numbers, the organic sales development was flat, and we had a positive effect from foreign exchange of 4%, acquisition helped with 10%, and we had a slight negative effect from a divestment that took place in Q1 2022 of minus 1%. I can also -- already here just mentioned, we publish every -- on a yearly basis, the organic EBITA development and EBITA development organically was plus 6% for the year, which is basically in line with our strategy. It always focusing on the profitability and profits in our companies.

So despite a flat year in organic sales, we are still developing our profit with 6% organically. Just a short comment on the cash flow. We have a strong cash flow in the Q4 2022, also a good cash flow in this quarter. On the full year basis, we have a big improvement of 45%, mainly related to weaker cash flow in 2022 due to the material supply situation and the inventory situation that is now gradually reversing in the right direction for us.

And with that, we can go into Page #3 and look a little bit more specifically on the different business areas. If we start with Dental, it's both a solid quarter and a solid year for Dental. I would say, back to normality after a period of time where we had the COVID and, yes, mix effects happening due to external factors that are now being stabilized for us.

So both the quarter is developing strongly and -- as we wanted to do, and the same for the full year numbers. Basically, a combination of organic growth helped by acquisition and also we had foreign exchange contribution in this business area. If we then go further down to Demolition and Tools, we have a decline in sales in the quarter, and that is now the -- basically the third quarter in a row with slight negative organic development, and we basically are facing weaker market conditions.

We do have in Q4 some positive effects from, what we call, special orders that have slightly higher profitability than the normal orders. So that's helping us in the quarter, which also helps the margin development in the quarter. But overall, we can say now also on a more high-level perspective, that we had a period of time with very strong organic growth in this business area in '21, '22 and in the early part of '23. And now we have now seen more of a weaker market conditions that we are currently in.

But despite that, we end the year with 16% growth in profits, partly thanks to strong focus on profitability organically, but also helped by acquisitions. And in the third area, Systems Solutions, we have a very strong full year development, where basically all areas organic development was positive, acquisition helped and also foreign exchange.

In the quarter, specifically, we have more of, I would say, more mixed market conditions. We have many companies doing very well. We have a few -- and some companies having a little bit more challenging market conditions due to the business cycle that we're currently entering into. Also here, it's important to highlight that this is an area we also had very high organic growth in '21 and '22.

So we can -- with that, we can go into Page #4. And this is now a slide that we normally only look at year-end. So now we have summarized another year in Lifco. We follow the development of Lifco's growth in profits since the IPO. And you can see that '23 was another very strong year for us, 22% EBITA growth, constituting of 12% coming from acquisitions. So that's basically in line with our average of this period since the IPO.

We have been growing our company profit-wise from acquisition with average 12%, and we do the same in '23. When it comes to the organic development, we are, in '23, growing 6%, which is slightly lower than the average, but we're also coming out of a period with extraordinary high organic growth in '21 and '22, as you can see in this slide, where we grew 21% in '21 and 11% '22. This year, we only grew 6%.

And we had also -- if you look at the very left column here on this page, we can then conclude that the average of Lifco has then been 12%, acquisition growth 8% on average -- every year 8% organic growth on average. And then we have been helped through the weak Swedish krona, you can say, during this long time period. Yes. And with that, we can go to Page #5 and continue looking at some long-term development trends. We have been growing with a CAGR EBITA with 22% since the IPO.

We have been growing earnings per share with 19%. We have basically reduced our net debt to EBITDA, which means that we had very strong cash flow generation during the period. And so we grow our interest-bearing net debt with 17%. The operating cash flow has on average been growing with 21%.

And once again, [ can remind ] we had some problems with cash flow during the raw material crisis, supply chain crisis in '21, '22 and now '23, we are back to normality, again, which is very pleasing to see. We've been growing our dividend with 17%. You can also here just mention that the recommended dividend from the Board to the shareholder meeting is a dividend of SEK 2.10 for 2024 dividend, which would then be decided in Annual Meeting in April.

On the bottom part of this page, there's a lot of data here, but we also put in a data for acquisition spend. And as you can see here, we don't put a CAGR on that because that's a more -- it should be a more volatile number. It could go a little bit up and down between the years. But during the last year, we spent -- we actually spent SEK 3.7 million and then the enterprise value of the acquired companies that we acquired were SEK 4.3 million. The difference there is obviously that we have some options agreement for future payments that will come in the next 5 to 15 years on these companies.

And then we have then the estimated impact on EBITA of the acquired entities of SEK 659 million. Obviously, not everything coming in '23, some, of course, coming to '24, which you can see further information in our note in the annual report about acquisitions. And then we can quickly go into Page #6. And this is another way of looking at cash flow. We have now break out -- or broken out the cash flow -- the free cash flow per share, where we actually also deduct CapEx.

And the only thing that remains after that is then before dividends and acquisition. And if we look at this from the time of the IPO, the average growth of Lifco operational cash flow after CapEx has been 26%. So that's also a solid number. And you can see here also '23 was a good comeback year in the cash flow. And if we look then at Page #7, when we are looking at our net debt and financial position, we have, during the last 3 years, been on a very stable level, basically mean that we have used our cash flow generation and standard on acquisition and paying our annual dividend.

[indiscernible] level, we sit at 1.7 debt to EBITDA including all the IFRS 16, leasing items and also the future option agreements. If you look at purely the interest-bearing net debt, we are at 1.1x EBITDA. So once again, we can conclude that there is plenty of financial rooms to continue looking for excellent acquisition when opportunities arise, which is a constant work within Lifco trying to find these great companies to buy.

And then on Page #8, is once again an even longer-term perspective on Lifco, and we have been growing our earnings, both from very strong organic development in profits and also helped by acquisitions during the last decade. And as you can see also at the bottom of this page, we have been growing our margin every year since the IPO, and this is not a coincidence.

We strive for always improving our margin in our existing companies, and our appetite for very high-quality companies has basically increased. However, I would like to also here -- we put a statement out that we are not necessarily in acquisitions -- going to always have a higher margin on the acquisitions. Now we're on a level where we think there's companies that could be good enough for Lifco with slightly lower margins. So the outcome here can be quite -- could be a little bit different in the next coming years.

However, we have a preference for very high-quality companies, so we still strive for that. And then we can look on Page #9. There's not much to say when it comes to capital employed. We have a very solid numbers both in -- included the goodwill at 22.6%. And also now where we see a little bit of release in our working capital. We are now getting our numbers back up when it comes to return on capital, excluding goodwill, sitting at 139% at year-end, which is also an explanation of why we have been able or constantly able to generate very strong cash flow, both in years with -- also in years with very strong organic growth, we have been able to do normally high cash generation.

And then we can move all the way down to Page #19 and just briefly look at the long-term development of Dental. As many of you know, we have been following -- we had some turbulence in the Dental area for the first time in many, many years during COVID and the years following COVID. And now in '23, we had more of a normal year, which is pleasing to see so the profit growth is back and also the margin is coming back to what we think is more normal levels.

And then we can look at the similar graph on Page 21, where we have the Demolition and Tools area, which has been, once again, the area with the highest organic growth historically. It's also the area where we have the highest cyclical exposure. As we mentioned earlier on in this call, we are now facing some slightly weaker market conditions, which is impacting the organic development on sales at Lifco. But we have also a very strong group of companies that are able to generate good profits over time with some cyclicality, of course, between quarters in that, but still sitting at a very good level in this area.

Page 23, we are then -- just look at the same graph on Systems Solutions. And this is the area where we had the biggest change of our business since the IPO. If you look back to 2013, it was a fairly low-margin business, partly because of operational issues that were fixed over the years. So many of the companies we have back then, they are doing much better organically right now so -- and that's -- thanks to great management in all these subsidiaries, doing excellent work.

And then we have, as you also know, been constantly looking for better margin businesses with high differentiating factors. And the portfolio we have today, if you would do a pro forma back to 2013, 2014, would be way, way, much higher margin than we had back then. So it is a portfolio that has a high margin generation also historically pro forma.

And with that, we can move back all the way to Page 32 and just look a little bit about the acquisition. We had a solid and good acquisition year. We look a little bit at the EBITDA generation before, but we actually had 18 transactions made during last year. And we found a great group of companies in different areas, just like we want to do in Lifco for once again reasonable valuation and very strong margin characteristics. So we are happy about that. And we, of course, continue to work very hard on doing acquisitions.

But as I always mentioned in this call, the timing of acquisition is always unpredictable, and we only buy companies where we feel we have a good company for a reasonable valuation that we would like to own for every Lifco and therefore, the timing should be a bit volatile when it comes to acquisition like -- but the activity level remains very high and of course, increases every year. So that was my final comment. So with that, I can open up for any questions.

[Operator]

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

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

[Zino Engdalen Ricciuti, analyst]

Just to start off in Demolition and Tools, could you give some more background to the special orders and their impact on EBITDA and margins?

[Per Waldemarson, executive]

Yes. We don't give specifically any information around that. But we can say it was big enough to make mentioning. We have these orders from time to time. And sometimes they are more in the immaterial level. In this area -- in this quarter, it was a little bit higher than normal, and therefore, we mentioned that.

But it is not super significant, but it has some impact on this. So you should be -- it's more of a highlight for remainder of next year that the margins held up maybe a little bit better than it would have been otherwise without these orders. So this -- I mean, if these orders would have been postponed in quarter, you've had that effect in this quarter instead so -- with that.

But we're not talking about enormous amount of effect, but normally in the range of -- let's say, it can be ranged from EUR 2 million, EUR 3 million, EUR 4 million profit impact when we start commenting these type of things.

[Zino Engdalen Ricciuti, analyst]

Okay. And sticking to Demolition and Tools, could you talk just in general about the mix? And I guess that is more of the low-margin product that has declined and also maybe how you view the environment ahead in terms of product mix?

[Per Waldemarson, executive]

Yes. For Demolition and Tools, specifically, we have seen -- it's basically a reversal effect where we saw the highest strongest organic growth, was in the areas where we have the indirect sales channel so where we're selling through distributors, and that's mainly related -- or distributors or OEM, I should say, where we had a combination of very strong markets and also inventory buildups in our customer level.

And now we see them in the last, I would say, 3 quarters now, a reversal effect, both due to market conditions and then partly due to probably stocking effects or destocking effect of this. So this is mainly related to our attachment business, which goes into truck cranes, to excavators and to forest machinery, basically. These areas are -- is where we saw the strongest organic growth in '21, '22, and early '23. And here is also where we see the sort of reversal effect now in that area.

And here, it -- then the next question would be, so what's the exposure there? It's -- partly it's construction, but it's also infrastructure, material handling and recycling in other areas in that where we are exposed. And of course, forestry equipment.

[Zino Engdalen Ricciuti, analyst]

Okay. And just lastly, ending on Dental, which is performing pretty well. How do you see the underlying demand for 2024?

[Per Waldemarson, executive]

Well, first of all, we don't -- we are not better than any else in forecasting markets. But in general, I can say that in Dental it's typically a very low growth, stable market. That's the general statement always for Dental. So we're talking about low single-digit growth historically in this area. We don't, at this point in time, see any other situation on that.

[Operator]

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

[Karl Bokvist, analyst]

My first one is on Systems Solutions. You mentioned that some areas saw a bit of weakening in their markets. But in the report, when you go through the segments, you say that most showed a good sales trend. I was just curious if it's possible to say which end markets or anything like that, where you see a bit of a weaker market condition?

[Per Waldemarson, executive]

That's a good reflection, Karl. We have a large number of companies and the clustering into the divisional areas is sometimes helpful. And in this quarter, it's actually maybe not so helpful because there's a lot of things happening within each subdivision. So there are specific companies that are growing a lot, and there are specific companies that are declining a bit. So the aggregated picture here is maybe not easy to say.

And we will not go into individual companies in this area. It's not something we historically have done. But basically, in a high level, you can say, maybe it's not the most relevant part to look at subdivisions. Maybe it's better to look at the companies that are more CapEx oriented to the end customer or having a little bit more difficult time in general, just like we saw in the aftermath of COVID in 2020 so it's the same effect.

The higher interest rates impacting some decisions, especially -- and also products that are more, I would say, indirect. Could be, for example, within environment, technology or other areas where you are able to little bit wait and buy something later, where else the companies will have more input material into a normal production chain, maybe are holding up quite well in this area.

So it's a lot of different things if we go further down. So it's difficult to give some general statement, but I think that's the type of economical environment we're in. We have a lot of companies also being supported by -- or some companies being supported by positive trends or general market trends that are growing very strongly, whereas others might still be having the same good exposure, but having more problems with interest rates and CapEx decisions and so forth. That's more explanation, I guess. And I think that, in this area, is very diversified. You have to keep in mind. It's almost Lifco and itself you can say.

[Karl Bokvist, analyst]

Understood. And then on Dental, I believe the commentary you made about, for example, the Chinese headwinds that were resolved quite some time ago, and yet Dental profitability still keeps on going up. Is there anything in particular here worth highlighting just how we should think about Dental in 2024? Or is just stable volumes and you continue to do as you've always done in terms of pricing and so on?

[Per Waldemarson, executive]

Yes, I think it's pretty much business as usual, but the exact margin and the exact organic EBITDA growth can, of course, vary between quarters. It's not always super stable. You have the calendar effects and different things coming into play. The only thing that we maybe could say that if you're referring to the prosthetics business suffering in 2022 after the China locked down there early on. They are fully back and have a very good momentum right now.

So it's actually growing also a little bit from previous levels, but it's not so significant. And these type of trends are not -- so in Dental, it's -- I would look at it as a stable low-growth area, if you look back the last 10 years so we don't see much difference. Of course, any given quarter, things can be a little bit more or lesser.

[Karl Bokvist, analyst]

Understood. And then on M&A, which we talked about this before, but full year kind of aggregate margin of what you've acquired at around 30%, very impressive. But is there any segment or division between Dental, Demolition and Systems in particular where you feel that, let's say, some more of the high-margin companies, acquired this year, have been grouped into just how we should consider the M&A effects going into 2024?

[Per Waldemarson, executive]

That's a good question. I have to actually just be careful. Yes, I don't jump too quick into conclusion. But I would say my immediate reaction is that we had a very strong year, if you look at that perspective, pretty much across the board. You can say all the companies we acquired were very high margin, except for maybe 2, and I'm not going to go into details here in this call, but maybe 2, there were more sort of linked to one of our existing business.

There, from time to time, we sometimes make more add-on type of acquisition where we could enter in a little bit lower margin position. What we do -- and we do in all areas. We do fully, I would say, independent acquisitions that are really new subsegment even within our business areas. And when we do that, we tend to be very careful and only acquire companies with very proven and strong margin track record.

It's a way of actually limiting our risk also, having a very solid financial history in companies. And the only time we might compromise on that is on the exceptional more of add-on deals that are typically smaller in size as well. But I would say, if I look at this year, it was a year that all areas were a little bit helped by good margins in acquisitions. But it was -- I think it was a record year when it comes to margin. So I wouldn't forecast that we, every year, will have this type of margin on the acquisition that we are getting.

[Operator]

The next question comes from [indiscernible] GMBH.

[Unknown Analyst]

Congratulations to a fantastic result there. It's very interesting to see what you paid for your acquisitions in total and compare it to the profits because your cash flow effect was SEK 3.7 billion you paid and you acquired SEK 659 million in rolling 12-month profit. So that indicates an EBITA multiple of like [ 5.6% ] or something like that. That's fantastic. That's 17.8% yield on your investment.

[Per Waldemarson, executive]

Yes. But I think you have to look at the full enterprise value. We -- the SEK 3.7 billion is not -- we also have some future depth of the difference between the SEK 4.3 billion and the SEK 3.7 billion. But even with...

[Unknown Analyst]

So that adds SEK 600 million...

[Per Waldemarson, executive]

Yes.

[Unknown Analyst]

Yes. But that still puts you at a multiple of about 6.

[Per Waldemarson, executive]

Yes, it's 6.6...

[Unknown Analyst]

So that's acquisition...

[Per Waldemarson, executive]

But as you know, it's always a challenge and every deal is unique, and there's always hard work behind this. It's not just buying a company in a normal process that gets these results. We have to find the right type of sellers that appreciate the Lifco and the right...

[Unknown Analyst]

Yes. I understand. And then as a shareholder, I'm a little bit dependent on the dividend. And I think you're a little bit too cautious. You've got very strong balance sheet and you continuously increase profits and cash flow by over 20%. But the shareholders are rewarded with a 16.6% increase...

[Per Waldemarson, executive]

Yes. We look at -- we think it's a good balanced dividend payout ratio in this and we also want to be able to continue doing acquisitions in the future. So in total, this is a recommendation from the board.

[Unknown Analyst]

But your debt level is super low, but in reality, 1.1x. And if you take in all the debt, it's 1.8. So there's easily room to increase dividends more than 16%.

[Per Waldemarson, executive]

Yes. Thank you for that input. We will take that into the full picture.

[Operator]

The next question comes from Robert Redin from Carnegie.

[Robert Redin, analyst]

So I also did take a look at those EVs. There's a new line in that graph, and I calculated that you paid on average in the last 3 years on EV EBITA of 6.3. And in 2015 to '20, so the prior 6 years, 7x. And yes, in the prior period, the EBITA margin on average of the acquired entities, I think, was about 22%. And in the last 3 years, 29% or 30%. So is it so that when times are good and when some kind of cyclical peak years, you get a 10% discount on your acquisitions for buying higher-margin businesses than in the past.

[Per Waldemarson, executive]

Thank you, Robert. No, I think you cannot draw that conclusion. every deal is unique. Every situation is unique. Here, we are just mentioning a 1-year estimated EBITA earnings. When we look at the company, we look at the financial history last 10 years, and we not value them on last quarter or last year's earnings. So every company is unique.

Some companies that we've acquired are cyclical, some companies are super stable, is all different. So we cannot jump to that conclusion. So I guess the question that you're also asking is so has the market changed? I actually don't think it has changed significantly. And we have also companies here that are performing very well in '21, '22, '23.

But when we acquire a company, we also look at it performed in '17, '18, '19 and the multiple -- and what we pay should also be justifiable based on those earnings. Maybe not, of course, on these levels that we're referring to here, but it should also be a company that we're happy to own the profit, for some reason, will be on the low earnings back then.

So we have a very long-term perspective and risk averse in acquisition making. And I think it's a little bit dangerous to jump to conclusion, looking at 1 year earnings and the multiple -- because every company is unique and has different characteristics, and we value them very differently also based on that.

So basically, the market is not significantly easier for us to buy companies now than it was 1 or 2 or 3 or 4 years ago. It's very stable over this 10-year period, I would say. But our activity level is significantly higher now than it was only 5, 6 years ago and it's increasing, and we have to increase our activity level with -- if we grow EBITA with 12% per year, we have to at least increase our activity with 12% per year, if we grow from acquisitions. So that's what we do.

[Robert Redin, analyst]

Yes. Because you would imagine in good clients, especially buying higher margin business than in the past that you paid more, but that capacity from Lifco must have been increasing maybe faster than the 12% per year pace. You must have a strong set up now than in the past.

[Per Waldemarson, executive]

Yes, we have a significantly stronger setup than we had at the time of IPO. We had basically 0 acquisition set up. And now we have a well-functioning -- not a huge team but a very well-functioning team, yes. And a lot of the operational group manager is also contributing in this work.

It's not only the acquisition team itself. But the outcome of acquisition -- sorry to interrupt here, but the outcome of acquisition is always unpredictable. It's always difficult to buy great companies so the reason evaluation is always a challenge. So we are constantly battling with this. We have done that for the last 10 years, and we continue to battle with that. It's never easy.

[Robert Redin, analyst]

Of course, of course. But you continue to scale that organization. You don't see that growing the capability is [indiscernible] harder and harder.

[Per Waldemarson, executive]

No, I think we've said many times before that we want to grow Lifco from acquisition, not too quickly, obviously, not too slow either, but growing it in a -- reasonable amount of growth rate is very important because that's how we build our organic organization because taking care of all these great companies we acquire is based on a purely a channel of Lifco people growing up as many directors and gradual stepping into the Chairman of the Board position and that we don't want to stress that process.

But we have a significantly high number of people involved from the operations side that are gradually moving up in that -- in those roles. But that's happening every year a little bit. It's not -- and there, I think it's very wise to grow step by step and not to grow too much in 1 year because then you will have a different type of risk control and way of handling new business.

So we do that intentionally very gradually facing up people. And the bigger [indiscernible] the more opportunities we have with great people in the portfolio. That's something people also forget sometimes.

[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]

Thank you very much for listening, and I wish everyone a good Friday and eventually a nice weekend. Thank you.