Lifco AB (publ)

STO:LIFCO B

Earnings Call Analysis

Lifco Reports Solid Growth Amid Acquisitions

Lifco's third quarter depicted a determined climb with sales growing by 17% and EBITA rising by 23%. This growth was fueled by acquisitions contributing 11% to sales, alongside a favorable foreign exchange impact of 6%, despite a marginal organic decline. The first nine months exhibited consistent progress with a 16% sales hike and a notable 25% EBITA advancement, interlaced with a 2% organic improvement. The Dental segment displayed strength, returning to form post-market issues in China, signaling normalization ahead. Contrarily, the Demolition & Tools segment faced softened market conditions, although infrastructure and industrial sectors demonstrated resilience. System Solutions excelled with robust organic and acquisition-led growth. Moreover, Lifco's strategic acquisition spree, totaling 15 for the year, underscored its prowess in expanding while maintaining a strong cash flow. Financially, the interest-bearing net debt-to-EBITDA ratio was comfortably positioned at 1.1x, declining from last year's 1.3x, demonstrating a solid financial foothold ready for future expansions.

Eyes on Stability: Lifco's Q3 Performance Demonstrates Resilience Amid Market Fluctuation

Lifco's third quarter showed robust numbers despite challenging market conditions. Sales grew by 17% with a fair contribution of 11% growth from acquisitions, an impact of around 6% from positive foreign exchange rates, yet faced a marginal organic decline. Notably, EBITA soared by 23%, combined with a significant increase of 1.2 percentage points in EBITA margins compared to the previous year, culminating in a healthy 14% increase in profit before tax, despite rising interest rates. Year-to-date figures echoed this strength, recording a 16% sales increase with positive organic growth of 2%, suggesting a sustained performance over the longer term. Lifco's three business segments—Dental, Demolition & Tools, and System Solutions—reported mixed but generally strong results, reflecting market variability and strategic focus on high-margin products and services.

A Delicate Dance with Market Demand in Q3

The conversation indicated that while October is too early to forecast for the final quarter, the trends observed in Q3 are expected to continue. The Dental segment returned to normalcy, while Demolition & Tools faced a market correction compared to high demand periods previously accelerated by supply chain disruptions. This dynamic, particularly in construction-related markets in parts of Europe, resulted in weaker sales conditions. However, a positive product mix in Demolition & Tools, skewed towards more profitable products, mitigated some negative impacts, facilitating margin growth despite organic declines. This strategic emphasis on profitable segments hints at adaptability that may allow Lifco to maintain relatively stable margins amidst market fluctuations.

Grasping Gross Margins and Backlog Nuances

The Q3 gross margin reached an all-time high of 44.7%, which, while partially attributed to new acquisitions bringing in higher gross margins, was also driven by a company-wide strategy of selling high-value products. Regarding backlogs, Lifco's typical levels span 2 to 3 months, with recent trends indicating a shift to normal levels after experience with inflated backlogs in past years. In the pricing domain, Lifco seems to have recovered from initial lags in adapting to raw material price increases and inflation. While still upping prices in response to rising costs, the rate of increase has moderated from the extremes seen in late 2021 to mid-2022.

Acquisition Strategy and Capital Allocation Reflect a Sustainable Approach

Lifco's approach to acquisitions remains disciplined and long-term oriented. They focus on companies occupying strong market positions, often with specialized situations that allow for sustainable growth, without an absolute requirement for extremely high EBIT margins. The companies acquired do not always exhibit higher capital intensity; even those with extraordinary margins maintain impressive cash conversion capabilities, ensuring that each business can independently generate strong cash flow, especially important during periods of organic growth.

Closing Thoughts: Lifco Poised for Continued Growth

The executive team concluded the call expressing gratitude for participants' engagement and reaffirming their commitment to continuing Lifco's growth trajectory through both organic and inorganic strategies.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Lifco Q3 Report 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. Good morning, everyone. This is Per Waldemarson, CEO of Lifco.

And we will jump directly into Slide #2 in our investor presentation, and go through the numbers -- the high-level numbers for the whole group for the third quarter. And if we start by looking at the sales numbers, we have a growth of about 17% in the quarter. And that is built up by acquisition growth of 11%. We have a positive effect of foreign exchange of about 6%, and we have a slight negative organic development of just below 0% or negative area.

If we then go further and look at EBITA, we have a solid development of 23% growth and also a very strong margin development actually ending up at 1.2 percentage points higher than last year. We also, despite higher interest rate costs, as you all are aware of, we are still able to grow our profit before tax 14%. And if we go a bit further down in the table, you can also see here on this page that operating cash flow was very strong in the quarter, which has to do with a very solid cash flow quarter, but also has to do with the previous year's numbers being a bit lower than normal due to the working capital buildup in 2022.

If we then also just comment briefly on the 9-month period, accumulated number for this year, we had a sales growth of 16% year-to-date, with 2% positive organic development for 9-month period, 10% acquisition growth and 5% coming from currency effects. And the EBITA growth year-to-date is 25% and also the EBITA margin is increasing for the 9-month period, so these numbers are all for the entire group of Lifco.

If we then go to Page #3, we can look into the different business areas a little bit. If we start with Dental. We can just conclude that this quarter was a normal solid good quarter for Dental -- Lifco. The growth of 16% in sales and 30% in EBITA, partly to do with the slightly weaker development we had in last year where we had some issues with our highly profitable Prosthetics business that due to the China situation in the beginning of last year, we had some problems with the market. Deliveries. And that basically came back in the last quarter of last year. So from here on, we will sort of meet normal numbers also in the comparison figures.

If we then go into our Demolition & Tools area, we have a growth of 9% in sales and 12% in EBITA. And as we already pointed out in our report, here, we see in some areas, especially the more construction-related areas, we see some weaker market conditions. And we have also commented in previous calls that we don't report the order intake. But if you would look at the indicative data that we do gather from some companies, the order intake during last year and '21 was extremely high due -- especially in the areas where we have distributors and OEMs in between us and end users. And there we have seen on the reversal of trend. And now we're sitting on more normal, what we call order books with quite low visibility.

But even with that, we see a big picture. Some part of this business area is holding up well, especially in the more infrastructure or industrial segments, where more of the construction-related markets in parts of Europe are seeing a weakening -- now for some time.

The reason we are -- despite some lower organic development, increasing our margin here is that we have a positive product mix, basically means that our more profitable products are holding up better and the sort of slightly lower product areas are than the ones that are more affected by the slightly weaker market conditions. Also, I'd like to comment here on Demolition & Tools that we had some acquisitions that have some marginal positive impact also on the margin this year.

If we go down to our third business area, the System Solutions, we reported very strong numbers, 22% sales growth and 27% EBITA growth. So overall, a very good quarter. Also here, of course, supported by acquisition growth as well as organic development. However, I think it's worthwhile pointing out in a division on this area like this with very diverse end market exposure, there is, of course, as always, a lot of differences about our different market characteristics. But on the total, it's very good development in this area.

If we then go to the next page, #4, we actually only update these numbers when we talk about the EBITA growth in the different years, splitted by organic and acquisitions. We will do that in next quarter. But on the high level, we can now look at the first 9 months and conclude that we are growing EBITA with 25%. And that's, of course, in this 9 months period supported by organic -- some very solid organic development in EBITA for the 9-month period. Also some positive foreign exchange as [ we can understand acquisitions or ] contributor. We will give you the exact numbers once the year is finalized. But so far, 25% is actually higher than our average for the period since we were listed in 2014.

And then we can go over to Page #6. And just briefly look at our balance sheet positions. We will not go into each position, but we can basically look at net debt development. And as you can see from the black line in the graph, we've been now for quite some time on a stable level. In the graph, we listed total net debt, including all the leasing positions in IFRS 16 and also the option debt or future payout of minorities. If we look at the maybe both relevant area, the interest-bearing net debt-to-EBITDA, we sit now at 1.1x, net debt to EBITDA, which is actually lower than 1 year ago when we had 1.3x. So we have a very stable situation when it comes to our financial position and obviously totally room for further acquisitions going froward. And I can also comment that as we said in the beginning of this presentation, we have made strong cash flow in the last quarter [indiscernible]

So if we go in then to the next slide, Page #7, which is a very long-term [indiscernible], which I think is important to have also in this type of calls. We are continuing to improve Lifco step by step. And we do that over the years by very good work organically in our subsidiaries. So most of our subsidiaries, the vast majority of our subsidiaries are increasing the margin step by step by working on becoming even more differentiated, even more specialized in their niches, which basically is focusing on the areas where we can be very, very specialized and profitable for the future, and then we complement that with acquisitions. And over time, as you all know, we have our appetite for very specialized high-margin companies is sort of increasing as well. So that [ has also bit to effect on that. ] If you look at the bottom of this graph, you can see that our margin is now also in this year on a rolling 12-month basis, close to 23%, which is on a record high basically in line with what we try to achieve.

If we then go to Page #8, just a few comments. We are then -- one of the reasons we can continue to be successful acquisition companies that we have very strong cash conversion in our operations. And if we look at the right side, we have a quite [ asset-light business ]. And now after some time of building up inventory and supply chain issues for the last 2, 3 years, we're now seeing the momentum change upwards in better return on capital also in our portfolio step by step.

And then we can go all the way down to Page 31, and just look at what we have done so far. And Page 31 actually list down all the acquisitions we have announced in this year. And in total, we have announced 15 acquisitions. It's been a very active year for us, and we have been acquiring companies in all business areas. We have geographical spread around Europe. And yes, I probably will get questions here soon enough about how is the market condition for acquisition. We think it's very similar to what has been in previous year. We worked very hard and very actively trying to find great companies around Europe to acquire. And obviously, as I always mentioned, the timing and exactly when acquisition will happen, it's always difficult to predict. But I can only show you that it's a very important area for us, and we are working very hard to continue developing this goal to step by step.

And these are all the comments I had from my side. And with that, I'd 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, just on a higher level, could you give any flavor whether you saw any particular development in the organic growth or volatility month by month during Q3. And I guess you're not willing to shed any light on October as per usual, I guess.

[Per Waldemarson, executive]

Well, October, we're only roughly half into October, so I think it's too early. Even if I would share that information, it's early to make strong conclusion around it. Well, so your question is related to if we saw a difference between July and the September market.

[Carl Ragnerstam, analyst]

In the demand situation, yes.

[Per Waldemarson, executive]

Well, I think it's difficult to do it month-by-month comparison. I think the trend that we've been in now for quite some time is that -- and I think you are referring to Demolition & Tools mainly here, I guess .

[Carl Ragnerstam, analyst]

All segment, but of course, that as well, yes.

[Per Waldemarson, executive]

Say again, sorry?

[Carl Ragnerstam, analyst]

All segments, but also, of course, Demolition & Tools .

[Per Waldemarson, executive]

But I mean if you take Dental, it's very stable. And I think my commentary is that it's back to normal now is roughly 1 year ago. So it's a stable development.

Within the Demolition & Tools, as I tried to mention briefly before, is that we see obviously a situation now after extreme development demand and the supply chain issues in '21 and basically '21 and 2022. We had in some of the business, very high demand and orders were flowing in to the extent -- especially from the OEMs and distributors and [ don't ] we have the end user demand directly call it with their order. We saw that reversing step-by-step from about spring, summer of 2022, up until there where we're now on a lower level. So now we are, of course, more depending on what happens month by month, quarter by quarter going forward. If you look at the situation then on the last quarter, I think it's been in the similar level throughout the quarter, basically.

[Carl Ragnerstam, analyst]

Okay. Very good. And also on Demolition, you said you had a favorable mix effect, more profitable subsegments holding up better. Would you say that this is a sustainable mix effect? Or would you say that it was unusually favorable during the quarter? And I guess, would you also perhaps shed some light on the magnitude of the order intake drop in the quarter for Demolition?

[Per Waldemarson, executive]

So we don't comment on specific order intake. And one of the reason is that our order intake [ collection of data in ] a diverse group of 200 companies is not -- we don't have the same follow-up as well the rest of the financial numbers. So that's one of the reasons. But if we go specifically into the Q3 reported numbers and why are we seeing a positive mix effect in Demolition & Tools, but the reason is basically related to the products and things we offer for maybe more infrastructure, more industrial applications are holding up [indiscernible] high mortgage.

The mid-quarter is not related to one specific project in our Demolition Robots business, and it's more the mix effect between different parts of the companies we have in that area. So we could basically conclude that we see a weaker sales development in the areas with slightly lower margin, which basically don't have to do mainly with the construction equipment market in Europe.

[Carl Ragnerstam, analyst]

Okay. Sounds fair. And looking at the gross margin, 44.7%, I mean, it's seemingly an all-time high for an individual quarter. How sustainable would you say that is? I mean also -- I mean, we're looking in Q3, it's on average over the past 10 years, been a tad lower than Q2 obviously, acquisitions coming into play here. But how should we look at the current gross margin level also? I mean maybe seasonality-wise entering Q4. And also, we've seen SG&A as a percent of sales continuing to rise a bit here. So, yes.

[Per Waldemarson, executive]

I think part of that effect is also acquisition-related, but not the whole effect, obviously, but there is some effect on buying higher-margin companies with high gross margin coming into the effect. But they could then also have bringing in some higher SG&A effect. That's a small part of it.

I think there's also an effect here of the continuous focus on selling high-value products. And we also -- we just talked about Demolition & Tools, we see also effect that this is on more of the high-margin things. We have that effect also in the gross margin side. So I think if the market stays on the same level, and we don't have an enormous decline in demand in the next -- period, I think there is a good chance that we can stay on high cost margin levels. We have -- there's nothing in this quarter is totally extraordinary in that sense.

[Operator]

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

[Karl Bokvist, analyst]

My first question is a bit on kind of backlog or orders. In your view, over time, what is a normal backlog level or a rolling 12-month book-to-bill when you compare it for your businesses?

[Per Waldemarson, executive]

Well, if we take the period '21 and the '22 away, and look back to '17, '18, '19 situation, well, basically, it depends on the business area. In Dental, we basically don't have order books. We sell consumables or tailor-made prosthetics or software directly to that business. No backlog there.

Within the areas where we have backlog in Demolition & Tools and [ Partner Solutions ], a typical backlog would be 2 to 3 months, and that's where we're sitting on right now, and we used to be theoretically in a much higher positions in that level. Although some of the very long order books that we were seeing internally a year or 2 ago, well, the relevance of those are difficult to forecast because if you have an order book to work, not an end user, those type of order books can be -- orders can be postponed or drag along if they don't want [indiscernible].

So I think now we are in a situation where we are on low order book levels, which is typical for our business. So it's very -- and then we have some very specific companies, which is a marginal part of Lifco that has typically long order books, but they are a rounding area in the total. For the majority of our business, we have either no order books in the more consumable related business or we have not very long order books. And that's where we are sitting in right now.

[Karl Bokvist, analyst]

Understood. And then on pricing, and that's always been a focus area of yours, but to the current environment, how would you assess the kind of price actions taken by your companies compared to the cost increases that you also see?

[Per Waldemarson, executive]

Well, I think there was a period of time, if you go back to the last 2, 3 years. First, the raw material price increase came and then we had the inflation starting. And then we were a little bit behind in '21. And [indiscernible] the summer of '22, we got back into -- we sort of caught up for that effect, and then we'll be running on [indiscernible] Now, I think what we're seeing now is more high to -- medium to high increase on prices, not the extreme the high increases in price that we had to do in end of '21 to mid-'22 situation. But of course, all other companies have to still increase prices to make sure we compensate for inflation and other things, but maybe not to the extreme than it was a year ago. So we also will meet, I think, also to highlight on where we need -- the coming quarters. There was -- a year ago, there was a big effect on price in the organic numbers. That effect is then gradually going down. Still an important part, but not to the extreme there was a year ago.

[Karl Bokvist, analyst]

Understood. And then my final one, a similar question to one I asked a quarter ago, but still year-to-date, the margin acquired businesses are running above 30%. It's a very strong level, of course. But again, is it a kind of a group of companies that are delivering this very high margin? Or is it 1 or 2 that stand out in this group of 13 businesses year-to-date?

[Per Waldemarson, executive]

There is maybe 1 or 2 with extraordinary high margins, but we don't reach -- margin, if not every company is about our average, you can say. So maybe 1 or 2 is more on the average. But it's been a little bit more than normal from a margin perspective.

And I think just to add on that, we don't necessarily need to only buy companies earning 40% EBIT margin, which we haven't done this year either. But sometimes, we find companies with very specialized situations. And then if we think they're stable and we can be a [indiscernible], will do that. So we don't want to promise that we will always buy companies with this type of margin, but we can promise that we will only buy companies that we think are very [indiscernible] a very good position in the market. That's it.

[Karl Bokvist, analyst]

Just a quick follow-up on that. Those 30%, 40% margin businesses, do they also have a bit more capital intensity? So we return on capital employed is still well in line with your targets, but or our return on capital employed also extraordinarily high for these businesses?

[Per Waldemarson, executive]

It's different. But every company we buy. The only time we make exception with that is that we are so well acquainted with the business. So basically a pure add-on there, we could compromise a little bit and think we are basically being able to do something with the working capital of the business. But normally, and for the vast majority of companies, they are basically before we acquired [ them and have very ] solid return on capital in their own operations.

So -- but you're right, you could have a little bit more capital intensive, you have extreme margins and still have very good cash conversion situation. So that could be -- but there's also examples of a company is very high margin, still very low asset base for enormous month. But now it's a mix of many different deals there. So I don't think we should go through all of that.

But we -- the most important thing for us is that every company standing on their own feet has a strong cash conversion capacity also in times of organic growth. And to do that, you need a very high margin in relation to asset base. And that, of course, vary exactly between companies' outlooks. But all our companies meet [indiscernible]

[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 very much for listening in, and thank you for your questions, and we look forward to have this another session here in the beginning of next year. Have a nice [ continued ] day. Thank you.