Ladies and gentlemen, welcome to the Lifco Q4 Report 2018 call. Today, I'm pleased to present CEO and President, Fredrik Karlsson. For the first part of this call, all participants will be in listen-only mode. Afterwards, there will be a question and answer session. Fredrik, please begin.
Thank you very much. Well, I will go through the quarterly numbers. If everyone turns to page two, you can have a look. We are basically happy with most of the numbers apart from the cash flow. The cash flow has been, maybe building too much stocks and too much receivables, especially at the end of the year. We had a very good sales month in December compared to last year, of course that built receivables. On the stock level is that they've had delivery problems. We have some delivery problems. What happens is that we have a lot of sales subsidiaries, and the managing director of the sales subsidiary is responsible for his own balance sheet and P&L. When he loses the confidence in that the factory can deliver, he's overstocking or she's overstocking.
That's an explanation on the cash flow, and we hope that we will get this under control next year then. If we turn to page three, I think we can comment dental, not much to say, stable development. Demolition & Tools, the margin is a little bit weaker than last year. When we have delivery problems, sometimes we are forced to source a little bit more expensively. When you are at this level, this 25% profit margin, you also sometimes go down a little bit in price to take an order. That's the reason why it fluctuates a little bit, and now we are a little bit down on Demolition & Tools. Assistance solutions, we have a good improvement. Last quarter was especially good, and half of the profit increase comes from project sales. We have three companies, pure project sales companies.
There's two for the Forest, in the Forest division, that's Hekotek, Heinla, and then Eldan in Environmental. Forest can go up and down a little bit from year to year. In the Environmental, there's also a structural change in the market. What's happened is that a lot of scrap, and Eldan is producing equipment that take care of scrap, copper, tires, and things like that. A lot of the scrap was during the last 10 years, shipped to China, and China took care of it. Now China has blocked the import of scrap because of environmental reasons. There is a structural change, and basically, the scrap yards in Western Europe and in the States, they have to take care of the scraps now locally. They have to build, to purchase equipment for taking care of the scrap.
On a yearly basis, these three businesses, they account for 25% of the profit increase, approximately. If we turn to page number four, there you can see how big part of the profit increase comes from acquisitions, how big part is from organic growth. This year, even though we haven't acquired so much, the last row is SEK 110 million. We had a contribution from acquisitions for SEK 197 million, more than half has come from last year's acquisitions, the acquisitions we made second half year, last year. We needed to fill up for 2019, luckily enough, we made two acquisitions here in the beginning of January. Now it looks pretty good for 2019 as well on the acquisition part. 2018 was from organic growth, a very good year.
Of course, the cycle is very good, we had some good profit improvements in a number of companies. There's the explanation there. Let me go to page five. There you can see that the net debt to EBITDA level has dropped because we basically made two few acquisitions in 2018. There is a lot of space to do more acquisitions in 2019. We have the financial power to do that. We can turn to page six. You see the graph. We were listed on the Stockholm Exchange 2014. You see that the graph looks nicer after 2014. Two reasons. First of all, the cycle has been good, secondly, as we are public, we pay more attention, we want to grow our profits. We turn to page number seven. If you look at the capital employed levels, they're very good.
I would actually go back to look at the acquisitions. I will comment on the acquisitions we made 2019, the two acquisitions made. First of all, it's a company called Hammer. That's an Italian company. They are a challenger in the business of hydraulic hammers. They export about 85% of the production, they are growing very rapidly. It's a good complement to Kinshofer's range of products. We're very happy to acquire that. The second acquisition is Indexator, they are making rotators primarily for forest machinery, it's about 85%. They have a very high market share there for rotators. It's about 90%, the uniqueness with their product is that the lifetime of their rotators is much longer than the rotators of their competitors. That's why they're having such a high market share. I'm very happy with that acquisition as well.
The company we acquired a couple of years ago, called Hultdins. Between the forest machine and the equipment of Hultdins, you have this rotator. That was everything I had to say, I will leave you to ask some questions. Thank you.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press zero one on your telephone keypad. There'll just be a brief pause while any questions are being registered. The first question comes from the line of Johan Nilsson from. Please go ahead.
Yes. Hello. I can start to congratulate on a strong report indeed. I have some questions on the margins in System Solutions. If you can help me out there a bit, to split it out in terms of leverage on volumes, price increase, and cost control.
Oh, that's very difficult because there are so many businesses, the managers are doing that individually. You know what? We don't have any targets or margins, but everyone who's not achieving our average margin of 18% is under a lot of pressure to increase his or her margins. They have to take actions to improve the margin. When we acquire a company, of course, we don't want to lower our average margin. We prefer to acquire companies with higher margins. It's not always possible, but on average, we always try to be at least our average margin in the acquisitions.
Okay, I see. I understand it's hard to say, is it largely related to price increase? On an aggregate level, could you?
No, on price, you can't say that because these managers, they're working with price all the time. Sometimes it can be small things and big things, and sometimes they even lower prices. Of course, their objective is always to increase the total margin. You can't say that. It's a lot of volume increase. I think if you have a volume increase with the fixed, and you have fixed costs, of course it's good to have a volume increase also for the margins.
Yes, sure. Because it's a bit tricky. When looking on a quarterly basis, it's hard to see the leverage from volumes, because sometimes even when the organic growth seems to be very high, it doesn't translate into EBIT increase.
Yes. It depends, basically, if you have a lot of fixed costs, it translates into EBIT immediately. If you have more variable costs, it doesn't translate into EBIT. All different businesses are a little bit different. We don't do this analysis ourselves. We run each individual business on its own, and I think even we ourselves can't. We even don't try to analyze it.
Yeah. Okay. I understand. Okay, we can let it go, but just to finish up with, let's say, if we see organic growth of about 2%, 3% going forward, is it reasonable to think there is more to get on the margins? Because it's on really high margins now, historically.
Yes. We try our best. We don't know where the limit is.
Yes. Okay.
Yeah.
Okay. I see. Great. Just if you could mention, is there some major project orders, something that impacted in an extraordinary way or something that one should be aware of in the quarter?
Of course, these project business, we had a very good quarter in the project business, and that can fluctuate from quarter to quarter. Half of the profit increase was on project business.
Yes.
That can fluctuate.
Yes. Okay. Thank you. Looking at the cash flow, the inventory increase, it's also related stronger sales in the end of the period in December, right?
Yes. Also that people are always talking too much in the sales companies. We need somebody we have to work with to improve.
Okay. I see. If looking at December, if you could put it in perspective compared to December last year and also November, how is the activity?
The activity is very good. The world hasn't fallen apart yet.
No. Great. I agree. You don't mention anything about book-to-bill and so on, but could you.
No, because we can't. We've been thinking about measuring it, but different companies do it differently. For example, if you look at the forest machinery, if you would give the forest machinery suppliers a call now, and you want a quote for a new forest machinery, you will get a delivery time of 14 months. If you have a 2009 scenario, the forest machinery suppliers would have negative order intake.
You understand? Because you can't trust the order book. You can't trust the 14 months order book, because if something happens, the order book disappears.
I see.
You understand? I think that happened to Volvo last time.
Yes.
In general, in many of the industries, we have extremely long lead times, and many companies are running at full capacity. I'm speaking about customers and suppliers as well, not only us.
Okay, thank you. That was all from me. Thank you very much, congratulations again for this report.
Thank you.
Thank you.
Just a reminder, if you do wish to ask a question, please press zero, one on your telephone keypad now. The next question comes from the line of Daniel Lindquist from Handelsbanken. Please go ahead.
Hi, guys. Just two quick questions. In the improvement in system solutions, should we interpret it that the environmental part is more sustainable than the forest part that are more fluctuating back and forth?
We have always had one company environmental called Eldan, and they are producing this equipment for scrap yards.
Yes. That seems to be something that will be in demand more than before.
Yes, some of that is actually due to that China stopped import from scrap. In the civilized or the Western world, we have to build more scrap capacities to take care of the scrap. Yes.
Yes. Just a very quick question on the demolition tools. After your Q3 report, you discussed a possible reversion of the credit losses from Q1 coming in the Q4 report. Was that the case?
Yes, I don't remember if it was in Q3 or in Q4. It was in Q4 or Q3?
Q3.
Q3. Was it in Q3 or Q4?
We reversed it in Q4.
Q4 it was reversed.
It reversed in Q4. Okay. By the same amount, approximately, as in Q1 then?
Yes.
Yes. Okay. Great. No further questions from my part. Thanks, guys.
The next question comes from the line of Per Jansson from INT Management. Please go ahead. Per Jansson, your line is open. I don't think there's any response. There is no further question.
There is. Yes, sorry.
Oh.
No, I'm here now. Sorry about that. Fredrik, congratulations with the results. Again, very strong. Impressive. About the cash flow you mentioned, do you see, let's say, any signs that it will actually do with the raw materials and spare parts and so on, it will be a bit slowing down, so it will be easier for the companies to get hold of all the things that they need? That's my first question. My second question is actually on this project business where you have been a bit reluctant before. Have you decided to put more capital to work in the project businesses, or are you still trying to run them for cash and use the money elsewhere?
On the project business is that you don't need any capital for the project business, especially if they grow.
They basically produce cash for you because the prepayments, they get negative working capital due to prepayments.
The beauty of them is that you get a lot of cash, of course, from them.
Sure.
The cash flow without the project business 2019 would have been even worse because they helped the cash flow, not in Q4, but in the first three quarters.
Yes.
We have these three companies, and we are keeping them, and this year is a good year. For the stock levels, I think now we are sorting out the supply problems, there is a lag. As I explained to you, we still have high stock levels in the sales company.
It'll be settled during the year, not in the first two quarters.
Yes. During the year. We don't know if there's another 30% or 10% organic growth we will have problems. It depends.
Yes. Okay, great. Thank you.
As there are no further questions, I'll hand back to the speakers.
Okay. Thank you very much for listening to us. Thank you