Lifco AB (publ)

STO:LIFCO B

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to Lifco's Q3 Report 2022. [Operator Instructions]

Today, I am pleased to present CEO, Per Waldemarson; and CFO, Thérese Hoffman. Please go ahead.

[Per Waldemarson, executive]

Thank you very much, and good morning, and welcome to the Lifco Q3 Conference Call of 2022.

We can start directly by going into Page #2 in our investor presentation. And on this slide, we present the data for the quarter and for the last 12-month period. And we can conclude that the third quarter of 2022 was another very successful quarter for Lifco. The trend with the increasing sales continued, and also the margins came back to a stronger level for many of our companies.

And for the group as a whole, sales grew with about 21% in the quarter, of which 10% was related to organic growth. Acquisitions contributed with about 7%. And then we also had some help from exchange rates that helped us with 6% positively. Also, I'd like to highlight that we had a small negative impact on the sales from a divestment that we made in the second quarter of the company, Hekotek, which impacted sales negatively with a bit less than 3%.

Going further down and looking at the profit level, the strong growth in sales translated into a very strong development in EBITA where we had a growth of 28% in the quarter, and also the EBITA margin increased to 22% compared to 20.7% in the similar quarter in 2021.

And here, I could then comment that general inflation and then, of course, the very specific price increases from our suppliers have been a challenging situation for us for quite some time and, not only for us, for many companies in the world. But we have now, after a period of time, can we conclude that the vast majority of our companies are adjusting very well to the increased cost levels and basically being able to pass these through, through price increases.

And here, I can already here mention also that the Lifco portfolio of companies are typically in very strong niche positions with high value propositions to our customers. And that helps us in this period of time because it means that our products are very valued by the customers, and we have a pricing power position. And the issue that we had experienced in the last, let's say, 12-month period has been more related to timing effects of increasing our prices rather than the actual ability to do that. And I think now in this quarter, we can show that this works very well.

Going further down on Page #2, looking at the cash flow. And there, we are still a bit lower than normal, I would say, and also lower than the Q3 in 2021. And this has to do with the same explanation that we had now for a few quarters that the increase in inventory levels has been necessary for our companies to basically create some safety stock to compensate for the difficulties that we have experienced in the supply chain with unstable deliveries from our suppliers because of, obviously, supply chain constraints. And you're all very aware of this situation.

And many of our companies are now in a mood where they're trying to gradually reverse this effect step by step, but this also takes some time because the supply chain issues have led to a situation where some of the goods that we receive now have been ordered quite early in the year. So it takes some time to reverse it. And also here, in the cash flow situation, it's worth reflecting on that we still have very strong demand and strong sales growth. So it's not something that will dramatically change into lower inventories.

But also here, despite the higher inventory levels, the increase of that during the last 12 months, we still managed to generate a very healthy cash flow. But of course, we want to improve on this and manage it going forward.

Just to round off Page #2, we can also then mention that for the 9-month period, accumulated numbers in -- for 2022, sales has grown with 24%, of which 12% is organic growth. And then EBITA has also grown with the same percentage number, 24%, for the whole 9-month period. So a very strong first 9 months in 2022 for Lifco.

And then we can move over to Page #3 where we highlight the different business areas. And going directly into the Dental area, we had a slightly weaker quarter here compared to the same period last year. And the trend from the second quarter basically continues. And within Dental, we are still suffering a bit from the production issues that we had in China earlier in the year due to the COVID-19 restrictions. And this actually took place in the first quarter, and the production issue itself has been working -- has been solved for quite some time now.

And -- but basically, we still suffer from lower demand by dentists. Basically, it seems to favor more locally produced dental procedures. And we think that time will be helping us here, and we're working very hard to get the customer comfort back and that deliveries actually works, and they do work very well right now. But that's something that is an ongoing work for our company if you're getting that trend reversed basically. And the reason we bring this up is that it's not a very big part of Lifco, but it's highly profitable for the dental groups when we have lower sales in the dental procedures. Basically, it affects also profits and margins quite quickly.

Going further to the next area, Demolition & Tools, we had continued strong market conditions now, and we have that for quite some time. And also, the third quarter '22 was a very good quarter with sales growth of 33%, thanks to a combination of strong organic development and acquisitions. And then EBITA grew 31%, and also a very strong EBITA margin of 26%.

And the reason why it's actually slightly lower than the previous year is more related to a mix effect that last year, we saw a little bit more of the high margin or even more high-margin products compared to this year where we have high growth of the more just high-margin products. So that's basically a product mix effect.

And then going into the third area, Systems Solutions, also, I would say, an excellent quarter with a sales growth of 23% driven by also there a combination of organic growth and acquisitions. And then profit grew even more by 47%, leading to a very strong margin. And also here, it's a combination of very strong organic development in our companies, but also, of course, acquisitions that are helping the margin development. And here, we can also conclude that the ongoing work on managing the higher cost levels with price compensation to customers have resulted in very good results.

And then we can move over to Page #5 and look a little bit about -- to our net debt situation. And if you take the longer -- well, actually starting about the situation right now. Lifco ended the quarter with a net debt-to-EBITDA of 1.9x, which is slightly above the level for 1 year ago. And the interest-bearing net debt-to-EBITDA is now at 1.3, which is also then slightly higher than the 1.1 we had 1 year ago.

So here, it's worth mentioning that Lifco has been very active in acquiring companies in the last 12-month period. And also, we can look at the graph on the left-hand side to also look at the -- that Lifco has kept the debt ratios fairly constant over quite a long time now since the IPO while being able to grow our profits both organically and through acquisitions, quite substantially during this period over the last 7, 8 years.

And also worth highlighting that Lifco has paid a dividend every year. And with the current debt level situation, Lifco has a very strong financial capacity to continue to acquire companies, if we find the right one. And I would like to remind everyone that we try to buy very good companies by reasonable valuations. So it's always more important for us to buy the right companies rather than maximizing the acquisitions in a given point of time. And this work is continuous and ongoing as usual within Lifco.

On Page #6, I'd just like to round the whole presentation off by looking at our very long-term history. And here, we track the long-term development of our profit. And our target is obviously to every year improve our profits. And for the very most part, we have succeeded with this through a combination of organic development and then complementing that with acquisitions. And we have been doing that, once again, while still paying a dividend every year, and we have never requested any money from our shareholders via capital infusions to Lifco. And after 9 months in 2022, we can then conclude that we are now on a record high level. And it's also very pleasing to see that the margin now on the bottom of this slide is back on track, actually on par with 2021. And also, as you can see from the last quarter, a very strong momentum.

And I think this is the last point I'd like to make. And instead, I'd like to open up for any questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. Just coming back here on the Dental margin, so is it fair to assume that the full year-over-year decline in the margin is sort of driven by the lower prosthetics volumes? Or is it anything else we should sort of consider in the margin drop, maybe it could be raw material headwinds, et cetera?

[Per Waldemarson, executive]

I think the majority of the effect is related to that. Then there are -- and we -- if you drill really deep down, there are, of course, some companies with some longer, for example, public tenders that have some lag effect on price development that makes a more minor impact on this. But the major explanation to the quarterly performance comes from the continued sort of lag from the business on the prosthetics that we're still working very hard to get the normal situation back.

[Carl Ragnerstam, analyst]

And also coming back to the prosthetics business, have you sort of started to win back some practitioners? Or will it -- obviously you said it will take time. How will you do it? Is it one by one? Or -- and what's the response so far when you sort of try to convince them to come back?

[Per Waldemarson, executive]

No, I think it's one-by-one situation in itself that typically, a dentist would have -- in any given situation, they would use us as an alternative, and they would have a local laboratory basically next door as they have the option. And here, we've seen a little bit of shift there. And it's not that many customers just stop by, but on the margin, they shift a little bit more volume to the local situation because of the uncertainties and the experience after the first quarter. But we are working very hard on this. And we don't know exactly when it will be coming back to normal, but of course, expect that time will be our friend in this market situation.

[Carl Ragnerstam, analyst]

Okay, very good. And also on Systems Solutions, I think the margins there stood out quite a bit in the historical sense as well. You mentioned it's a combination of a little bit of everything. Could you perhaps try to be more, if possible, be more specific? What's M&A-driven and what's organically-driven in this and also if it's any mix effects?

[Per Waldemarson, executive]

Well, I think the most important reflection on the Systems Solutions area is that most companies are doing really well, basically. And they do really well both in sales and also really well in handling the margins in this period of time. So that's the starting point.

And then we are also helped, which I tried to highlight here in the presentation, that we're also helped -- but as we have done now, not every year, but for most of the time, we actually have also helped -- that the companies that we acquired have been a little bit higher margin than the average, but that also helps it. So it's really across the board strong performance in the Systems Solutions area. So it's -- when we go through the list of companies, it's many companies that are doing very strong performance.

[Carl Ragnerstam, analyst]

And in Demolition & Tools, the market, at least looking at the quarter, is seemingly holding up quite well, right? I mean looking at construction-related indicators, it looks like you and your competitors might face a tougher situation ahead. I mean I wonder, have you seen any signs so far of a weakening market in sales orders or quotations? And could you also perhaps remind us how much of the segment that is related to sort of new production of either commercial or resi?

[Per Waldemarson, executive]

Well, first of all, we have a lot of companies in this business area. And -- but if you want to generalize, I would say that we are mainly related to infrastructure and commercial construction, both, of course, renovations and new build in the commercial. And -- but not -- I would say, to a less degree to the residential side to take the whole business area. So that's the starting point of the exposure.

But when it comes to the indicators that you are trying to find out about, we can only say that same picture as we had in the 3 months ago in our last earnings call, where basically the order income and the activity is still on a healthy good level. It's not as crazy as it was maybe 12 months ago when orders were coming in month by month in an extraordinary way and the order book was building up, I would say, too quickly like then due to the situation.

So it's still running well, but of course, it's a little bit more, I would say, normalized. And also maybe a little bit more, I think, at this point of time, a little bit more different also by different countries and sectors, but still on the solid level. That's all we can see right now.

[Carl Ragnerstam, analyst]

So it sounds like you have positive organic order intake in Demolition then? Or is that...

[Per Waldemarson, executive]

Yes, but we don't present order intake for various reasons. One is that it's something that is -- that will require a lot of -- in such a diverse group like Lifco, what is an order and how do you value an order, since we don't publish that. But we still feel that the third quarter was on a healthy level in the order intake.

[Carl Ragnerstam, analyst]

And also you mentioned it varies between geographies. Is it possible to give any flavor on where you see sort of a weaker market or where you see perhaps a better market?

[Per Waldemarson, executive]

But it's more random than that, I would say. We cannot -- we would have -- if we saw that very clearly, we would have written something about that in our report. So it's more random, and it's a little bit more 1 month here, 1 month on the other one. Overall, we have felt over this year that U.S. has been stronger to some extent. So that's something that you may be -- but that's not talking about a longer period, not specifically for the quarter here, but over the time period. But also in Europe, where we have lots of business, it's still holding up or it's on a solid level.

[Carl Ragnerstam, analyst]

And you also mentioned that, that sort of a normalization of inventory levels may take some time. Is it possible to give any guidance on that when we should expect you to sort of -- when the inventory levels should come down? Is it in Q4? Or is it too early, rather next year?

[Per Waldemarson, executive]

I mean the reason why it's difficult to give an indication on that is that still, our companies are struggling with the supply chain. And still, our companies -- many of our companies are having a very high demand situation. They have orders that should be delivered. So they are working on this, but they have to maintain the balance between making sure they can deliver and also getting the inventories slightly down to a more normalized level.

If that will happen in October or December or in February, it's difficult to say on the whole, I would say. But we are working on it. If you've seen, that has been in place for quite a few months now. But it's not happening as dramatic as maybe you would have hoped in terms of normal inventory reduction level. So we have to maintain this in a balanced way, I think.

And exactly what month we will see the major effects of this, it's still not 100% clear because it's so many different companies, so many different situations. And some companies are actually still building up some safety stock for certain products where they have components, where they have -- still have huge problems. So it's not one answer on this. But I think the key message that we are working on it, and we would like to see that gradually go down.

[Operator]

[Operator Instructions] Our next question comes from the line of Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

So my first question is just on what you mentioned there, Per, with mix in Demolition & Tools. I was just wondering if it's possible for you to say if it's overall a slight negative mix effect from various reasons across a number of businesses or if it's a business mix within Demolition & Tools.

[Per Waldemarson, executive]

It's a business mix. So we have certain companies that have even higher margin than the average. And then we have companies that have very good margins, but slightly lower than the average. And these companies with slightly lower than the average margin grows even stronger in the quarter in terms of sales, then you have that mix effect. But it's a relatively small effect. We cannot over -- maybe make too much noise about that. But that is the explanation if you compare the differences in last year, which was also a very strong quarter in Q3 2021.

[Karl Bokvist, analyst]

Understood. And just a bit of a technical one in Systems Solutions, the divestment of Hekotek. Should we assume that perhaps if Hekotek would have been part of Systems Solutions, it might have been a seasonally stronger Q3 and Q4 for them? I'm just thinking about the other margin effect from divesting that particular business.

[Per Waldemarson, executive]

Sorry, can you repeat that question? I didn't really understand the...

[Karl Bokvist, analyst]

No, sorry -- yes, sorry, let me just clarify directly. The divestment of Hekotek, do you think that has meaningfully also supported margins positively in Systems?

[Per Waldemarson, executive]

It has supported margins meaningfully. I wouldn't maybe say that, but it has supported margins. So it was lower than the average.

[Karl Bokvist, analyst]

All right. Understood. Then just most demand questions have already been asked. So if I may then just perhaps stick a bit in some more technical aspects. If I look at the year-to-date consideration you've paid for acquisitions, it seems like the consideration paid is a bit higher than perhaps last year compared to the earnings that have entered the group. So I'm just a bit curious if you think there's any meaningful deviation to the multiples you paid so far or if Q4, for these businesses you acquired this year, will be greater, so the multiple still will end up in kind of normal multiple ranges.

[Per Waldemarson, executive]

No, I don't think it's significantly different than previous years. I think maybe just to highlight that the outcome of the 2021 numbers were extremely good in terms of multiples paid because we've seen development on the first year's earnings in that year. And we will see where we end up. We still don't have the full year earnings of the companies we acquired this year. So in the note that you're probably looking into, we only present so far after 9 months, so you're missing 1 quarter on the earnings data there.

So it's not significantly different. And we've been -- every deal is different. Every company has different situations. And it's, of course, different multiples for all companies we acquire. And then, of course, the mix can be a little bit different between the years depending on what we buy. But I think in general, everything has been, up until now, at least the same over the last 5 years in how we value companies and so forth.

[Karl Bokvist, analyst]

All right, fully understood. And then my final question, that just relates to outside of the prosthetics business in Dental. Is it a stable performance there or anything that should be worth highlighting?

[Per Waldemarson, executive]

No, I mean it's not, as you can imagine, it's not an extraordinary good performance because then you would have -- maybe have been compensating this. But it's quite business as usual across the board and nothing that we have been deciding to lift up specifically in this.

Then of course, in every -- there's always some variation between quarters and between different companies. And there's always -- when you drill down to many small companies, there's always some effects here and there, but there is not something that is here.

The only thing that I did mention in the previous question is that maybe there is some effects in the companies in the Nordics where we have some tenders that we start getting the prices through as quick as we would like because of the contracts that we work on. This is not extremely a very big, big part of our business, but it's -- in some companies in the Nordics, it has some impact. So that's maybe the other thing that we could mention on a high level.

[Operator]

And as there are no further questions at this time, I will hand the word back to the speakers for any final comments. Please go ahead.

[Per Waldemarson, executive]

Well, thank you very much for listening, and we will look forward to make another call after the fourth quarter. Thank you.

[Operator]

This now concludes today's conference call. Thank you all for attending. You may now disconnect your lines.