Ladies and gentlemen, welcome to the Lifco Q2 report for 2018. Today, I am 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. Speakers, please begin.
Oh, yes. Thank you. Welcome everyone. Let's turn to page two. We can see the numbers for the quarter and the first half year. As you can see, the quarter was very good, after a mediocre first quarter. If you look at the first half year, we are on a good growth pace. I think Easter has a bigger effect than we expected, therefore quarter one was worse than expected and quarter two better than expected. All in all, the first half year is good. Let me turn to the individual business areas. I think there's not much to comment. Only within Demolition & Tools, on the half year, we have decreased the margins. One thing is that we have still approximately SEK 10 million receivable, which we wrote down in quarter one, not paid.
Even though if we take that into account, we have a small margin decline in Demolition & Tools. If you go to page four, there you can see our growth, the last three years, the EBITA growth. What's coming from acquisitions, organic growth, we do this every half year, but I think the first half year is in line with the last three years. You turn to page five in the net debt development. You can see we can grow at this pace and obviously it's keeping the net debt level in relation to EBITA, yet a constant around two. I think that's completely good, especially as we now. My feeling is we have too much stock as we still have some delivery problems, missing components, and also too much receivables compared to what we should have.
We have more to do on the working capital. If you look at page six, first half year is in line with the long-term growth. That was all comments I had. We can start the Q&A session. Thank you.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press zero one on your telephone keypads. We have a question from the line of Perry Jørgensen of INT Asset Management. Please go ahead. Your line is now open.
Yes. Thank you. Hi, Fredrik. Congratulations with a fine comeback in Q2. I have a few questions. I can just take them one for one. If you take the change in the way you calculate the capital employed, I know it's fairly okay, but it's not from that. Is it due to the fact that you actually expect acquisitions in the future to be more majority and then with a minority shareholding that you have some options on more than 100%? Is that a way to get more acquisition in?
Yes. You can say so, because two years ago, this sum of future payments, that was like SEK 30 million.
Yeah.
If I remember correctly, now it's SEK 392 million. Our increase in the number of minority shareholders is a little bit like that. We are going down a little bit in size, and then it's good to still have the entrepreneurs working in the company with an equity stake.
Okay.
To keep the multiples, not pay too high multiples.
Yeah. Okay. You expect these entrepreneurs to keep their stake or do you have some sort of Yeah.
Even when the companies are very small, the entrepreneurs are still very important for the business.
Yeah.
It is good to have these minority stakes.
They will keep on working. That's a good thing.
Yes.
Fredrik, just a clarification. You mentioned that the acquisitions is on page seven, that all the acquisitions that you have made will have a positive effect on Lifco's results. Just remind me, when you mention that, is that due that it will be a more positive effect than 5% on the results in Lifco? Is that correctly remembered or how do you define that?
No. The thing is that all acquisitions we do are not material.
No.
An individual acquisition has no material effect on the profit of Lifco.
Yeah.
All together, they can have a material effect.
Yes. How do you define-
That is how it works.
Okay. Yeah. How do you define the material effect? Is that more than I-
I may say 5% of the profit increase has to be, I think it depends, but say it's between 5% and 10% of our EBITA.
Yeah.
As EBITA is approaching SEK 2 billion, we don't know where to land, you take 5% of that's SEK 100 million profit increase. That's material, SEK 100 million.
Yeah.
Everything below SEK 100 million is not material.
No. That's also the way to conclude that the acquisitions that you make are still very profitable if they need to be over SEK 100 million in contribution.
Yeah. To be material, they have to be more than SEK 100 million in contribution. Yes.
Yeah. Fair enough. Okay, great. One last question.
Yes.
If we look at the margin development in Systems Solutions, quite impressive since you have joined the storage teams. Would you say, and that's due to acquisitions and so on, that's what you have stated among other things. Do you think that when you look at, I know it's a mix of companies, but do you think that you have reached a stable level on EBITA % of sales if you look at all these companies for the moment, or is it still due to-
Yeah, I think we have within the project business that in Forest is still a little bit underperforming.
Yeah.
We have, as in terms of profit margin, we still have the interiors for vehicles, VCP things, which we think are a little bit underperforming in terms of profit margin we have within Environmental Technology in one or two units which are not performing as we want to have them. The important thing within if you buy high margin businesses, you'll get the margins up.
Yeah.
For us, of course, right now, today, we would prefer to buy plus 15% margin than not.
No. You buy below 15%, then you try to get them over 15?
Let me try to get over 15, yes.
Yeah.
15 is some sort of If you don't do 15, it's not very good.
No. Okay, great. My question was actually that you expect that the Systems Solutions margin around is close to 16% in the Q2, but 15%-16% is where you see a fair long-term.
The objective, you can say, is to be there. Yes.
Yeah. Great. Okay, great. Thanks very much.
Thank you.
Thank you. Our next question comes from the line of Johan Dahl of SEB. Please go ahead, your line is now open.
Yes. Thank you. Hi, Fredrik. I was just wondering on your tools business, excavator tools business, I think you had some problems with write-downs, some poor receivables, et cetera, in Q1. Did any of that recover?
No, maybe some small ones, but the big one of about SEK 10 million is still to recover.
Okay. There were no really sort of recoveries in line with that type of thinking in Q2 compared to Q1?
No. Not much.
All right. Would you care to explain slightly, Fredrik, regarding the organic growth in Systems Solutions a bit more to where that actually occurred and how sustainable that is?
Yeah. I think part of it is from the project business in Forest, and that is not sustainable, goes up and down.
Otherwise, as you know, business conditions in general in the economy is pretty good, so many companies are growing.
For sure.
Yeah. Part of it is coming from this project business within Forest.
Yeah. Got you. Finally, I just noted that in previous reports, I think you've written what the effect from acquisitions would have been if they were consolidated from January 1st. Am I correct that you skipped that in this report?
I think we do that. We do this thing at year-end, the interpretation page four.
We do at year-end once a year because if you do it, when you buy a small company normally their accounting is not too good.
All right.
At the start. Many companies, they don't have monthly accounting from the very beginning, so it's no point in doing the quarter because we have to get their accounting in shape.
Got you.
It is therefore only once a year.
Right. Am I correct, alluding to the discussion earlier here, that acquisitions were generally accretive to margins rather than dilutive in the first half?
Yes. In general, they are accretive, but sometimes we do, if we have a business and we buy, we make an add-on, we can buy an add-on with bad profit margins which we hope to increase, so to say. If we go into new business, always good margins, you can say. We don't want to go into new businesses with bad margin.
All right. I understand.
How do you feel about the progress on acquisitions for the rest of the year?
We don't know. It's never, it's like to look into a crystal ball. We don't have a clue. We're working hard. The first half year was maybe a little bit disappointing in terms of acquisition, because you tend to forget all the small ones we are doing through all small add-ons. We've done a number of small add-ons, and it helps to have these small add-ons from our current businesses.
I understand. Thank you so much.
You're welcome.
Thank you. Our next question comes from the line of Emmy Östlund of ABG Sundal Collier. Please go ahead. Your line is open.
Hi, Fredrik. I think you mentioned that you still have some sort of delivery problems or bottleneck.
Yes.
Could you maybe elaborate a little bit on that, please?
I haven't put any numbers on that. We have in some businesses running, they can't get all goods out because components are missing and stuff like that.
Do you think, is the situation better or worse than the last quarter?
I think it's improved a little bit because last quarter, because of Easter, we got the holiday problem and people are not working and stuff. We have very few working days in March, and then the problems with First, we didn't have components, and then you have a lot of holidays in March, and a little bit of that. A little bit of the turnover first quarter went into the second quarter.
Okay.
We still have some problems, I think not the same magnitude as in quarter one.
Okay. My second question is regarding the dental business. I think you mentioned that, well, the early Easter had a sort of positive effect on Q2. Would I be correct to assume that it's still sort of a moving sideline to sort of likely down if we would sort of remove that effect?
Per, can you answer that question?
Yes, I think that's a fair statement. We are moving sidelines and have been for quite some time. I want to emphasize, as I always do, that we don't focus on top line, we focus on profit in all our businesses, especially in the distribution business. In dental, you have to be very much focused on the profit, not on the sales, because we can always drive sales, but we have to make sure we have the margin up. We are not, as we said before, it's a very stable business for us. Also maybe worth just to comment on this, that now we had in the recent six-month period a little bit of a sort of a positive spin on the currency.
On the other hand, that was a negative for us, the Nordic business, especially in Sweden, we have done some problems regarding that when the currency go the wrong way. We have sort of an internal hedge in dental there. We gain something from translating our profit outside Nordic into Swedish krona, but we also lose short term when the EUR becomes more expensive in that.
Okay. Thank you. That's all for me.
Sure.
Thank you. May I remind everyone that if you want to ask a question, you will need to press 01 on your telephone keypad. Our next question comes from the line of Daniel Lindkvist of Handelsbanken. Please go ahead. Your line is open.
Yeah. Hi, guys. Just one quick question on the Systems Solutions part and the Environmental Technology. We only find one acquisition of Silvent and still a quite large delta between the Q2 2017 and 2018. Is there something else we should keep in mind with that business area or something that's happened of more of a one-time character?
No, I don't think it's something I try to refresh my memory if all the businesses we have there that's something extreme this quarter, I don't
Has the Silvent business just gone ballistic from the acquiring?
I think we can say the Silvent business works very well. Maybe you want to comment, Per.
I think your conclusion of product is correct, that it's been very good and even better than we maybe thought initially.
Overall, it seems like if you just add the volume from the acquisitions compared to what the acquisitions has given, it seems like the acquisitions has been successful and maybe even more successful than normally this period. Is that the correct observation that they've added quite some volumes and started out well?
Yes. I'm trying to see the overall picture. I think, yes. I think all acquisitions, we have no big failure in those acquisitions. Most are performing well, and Silvent is doing extraordinarily good, you can say.
Just lastly, on the contract, we've been through the Forest and Environmental Technology and building materials, that's almost exclusively the acquisitions. The Contract Manufacturing is just something special with that. Apart from the spokes, it seems to be good growth as well.
Yes. In the Contract Manufacturing it's a little bit like that. You have some big customers, you lose some, and you gain some, and it goes up there and goes down there. You have some business in Contract Manufacturing doing very well and some doing less well.
Yeah. Okay, it's as usual with just strong market.
As usual, yes.
Yeah. Okay. Well, perfect. No further questions from me. Thank you, guys.
Thank you. There are no further questions at this time, please go ahead, speakers.
Okay. Thank you very much for listening in to us. Thank you, Per.
This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.