Earnings Call: Q2 2018

Jul 18, 2018

Ladies and gentlemen, welcome to the Lifeco Q2 Report for 2018. Today, I am pleased to present CEO and President, Frederik Karlsson. For the first part of this call, all participants will be in listen only mode and afterwards, there will be a question and answer session. Speakers, please begin. Yes. Thank you. Welcome, everyone. Let's turn to Page 2, and then we can see the numbers for the quarter and the first half year. As you can see, the quarter was very good after mediocre first quarter. And 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 1 was worse than expected and the quarter 2 better than expected. But all in all, first half year is good. Let me turn to the individual business areas. I think there's not much to comment. You're not only bringing within demolition tools. We have on the half year, we have decreased the margins. One thing is that we have still SEK10 1,000,000 approximately SEK10 1,000,000 receivable which we wrote down in quarter 1, not paid. And even though if we take that into account, we have a small margin decline in demolition and tools. And then if we go to Page 4, there you can see our growth, the last 3 years, the EBITDA growth. So 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 3 years. You turn to Page 5 and the net debt development. You can see we can grow at this pace, double digit, keeping the net debt level in relation to EBITDA, yet a constant around 2%. So I think that's pretty good. And 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. So we have more to do on the working capital. And if you look at Page 6, first half year, in line with the long term growth. That was all comments I had. So we can start the Q and A session. Thank you. Thank you. And we have a question from the line of Pero Jorgensen of INT Asset Management. Yes. Thank you. Hi, Frederic. Congratulations with a fine comeback in Q2. You changed I have a few questions. I can just take them one for 1. 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 percent is that a way to get more acquisition in? Yes. You can say so because 2 years ago, this sum of future payments, that was like SEK 30,000,000. And if I remember correctly now, it's SEK 392,000,000. So we are increasing the number of minority shareholders. It's 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. Keep the multiples not paid to high multiples. Okay. So you expect that to so you expect these entrepreneurs to keep their stake? Or do you have some sort of yes, so When the companies are very small, the entrepreneurs are still very important for the business. So it's good to have these minority stakes. Yes. So they will keep on working. That's a good thing here. And then Frederic, just a clarification. You mentioned that the acquisitions, it's on Page 7, that all the acquisitions that you have made will have a positive effect on Lifeco's results. Just remind me, when you mentioned that, is that due that it will be a more positive effect than 5% on the results in Lifeco? Is that correctly remembered? How do you No, no, no. The thing is that all acquisitions we do are not material. An individual acquisition has no material effect on the profit of Lifeco. Altogether, they can have a material effect. Yes. And how do you define That is how it works. Okay. Yes. But how do you define the material effect? Is that more than I will I mean, say 5% of the profit increase has to be I think it depends. But let's say it's between 5% 10% of our EBITDA. So and as EBITA is approaching SEK 2,000,000,000, we don't know where to land, but also you take 5% for that, that's SEK 100,000,000 profit. If you increase, that's material, SEK 100,000,000. Yes. So everything below SEK 100,000,000 is not material. No. So that's also the way to conclude that the acquisitions that you make are still a very profitable point if they need to be over SEK 100,000,000 in contribution? Yes. To be material, they have to be more than 100 immediately to jump in. Yes. Okay, great. And then one last question. If we look at the margin development in System Solutions quite impressive since you have joined the storage chains. Would you say and that's due to acquisitions and so on, that's what you have stated among all 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 EBITDA percentage of sales if you look at all these companies for the moment? Or is it still due to Yes. We have some yes, I think we have we think the product business within forest is still a little bit underperforming. And we have as in terms of profit margin, we still have the interior for vehicles, VGP things, which we think are a little bit down underperforming in terms of mind, we undertake only 1 or 2 units which are not performing as we want to have them. So we but the important thing we've been if you buy high margin businesses, you'll get the margins up. Yes. For us, of course, right now, today, we would prefer to buy plus 15% margin than not. No, no. But you buy below 15, then you try to get the lower 15? Let me try to get the lower 15, yes. Yes. 15 is some sort of It's not very good. Okay. So my question was actually, do you expect that the System Solutions margin around ARPU is, say, close to 16% in the Q2. But 15%, 16% is a fair it's where you see your fair long term. The objective you can say, it will be there, yes. Yes. Great, great. Okay, great. Thanks very much. Our next question comes from the line of Johan Dahl of SEB. Yes. Thank you. Hi, Frederic. I was just wondering on your tools business, excavator tools business. I think you had some problems with write downs, some poor receivables, etcetera, in Q1. Did any of that recover? No, maybe some small ones, but the big one, about SEK 10,000,000 is still to recover. Okay. So 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 regarding the organic growth in Systems Solutions, a bit more detail where that actually occurred and how sustainable that is? Yes. I think a part of it is from the project business in ForEx that is not sustainable goes up and down. But otherwise, we otherwise, as you know, business conditions in general in the economy is pretty good. So many companies are growing. For sure. Yes. Part of it is coming from this product business within Forests. So Yes. Got you. And finally, I just noted that in previous reports, I think you've written what the effect from acquisitions would have been if they were I think we do that I think you do. We have the we do this thing at year end, the interpretation phase, Page 4. We do a year end once a year because if we do it when you buy a small company, normally, their accounting is not too good. All right. It's a tough 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 a company in shape. Got you. So it's the depth of the 1,000,000,000 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, I would say. But if you go into new business, always good margins, you can say. We don't want to go into new businesses with bad margins. 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 crystal ball. We don't have a clue. But we're working hard. And also, the first half year was maybe a little bit disappointing in terms of acquisition. But because you tend to forget all the small ones we are doing through all small add ons, and so we've done the number of small add ons, and it helps to have these small add ons from our current businesses. You're welcome. Thank you. Our next question comes from the line of Emmy Ostlund of ABG Sundal Collier. Please go ahead. Your line is open. Hi, Frederic. I think you mentioned that you still have some sort of delivery problems of bottlenecks. Could you maybe elaborate a little bit on that, please? No. I haven't put any numbers on that. But we have in some businesses around, they can't get all goods out because components are missing that like that. And do you think is the situation better or worse than the last quarter? Yes. I think it improved a little bit because last quarter, because of Easter, we got the holiday problem and people not working and stuff. But we have very few working days in March and then the problems, yes, firstly, I didn't have components and then you have a lot of holidays in March and then and that's a little bit of that. A little bit of the turnover in the Q1 went into the Q2. We still have some problems, but I think not on the same magnitude as in quarter 1. Okay. And my second question is regarding the Dental business. So I think you mentioned that, well, the early Easter had a sort of positive effect on Q2. Would I be correct to assume then that sort of it's still sort of a moving side line to sort of slightly down if we would sort of remove that effect? Can you answer that question? Yes. I think that's a fair statement. We are moving sidelines and have been for quite some time. And I want to emphasize, as I was too, that we don't focus on top line, we focus on profit in our all our businesses, especially in the distribution business. We don't always 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 margins up. So we are not as we said before, it's not it's very much stable business for us. And also, maybe worth just a comment on this, that now we had in the recent 6 month period a little bit of a sort of positive spin on the currency. On the other hand, that was a negative for us. The Nordic business, especially in Sweden, we had some problems regarding that when the currency go the wrong way. So we have sort of an internal hedge in that order. So we gained something from translating our property outside Nordic into Swedish kroner, but we also lose short term when the euro becomes more expensive in that. Okay. Thank you. That's all for me. Thank And our next question comes from the line of Daniel Lindqvist of Handelsbanken. Please go ahead. Your line is open. Yes. Hi, guys. So just one quick question on the Systems Solutions part and the environmental technique. We only signed one acquisition of Silvent and still a quite large delta between the Q2 'seventeen 'eighteen. Is there something else we should keep in mind with that business area? Or something that's happened of more of a onetime character? No, I don't think yes, I don't think it's something. I tried to refresh my memory, it's all the business we have raised, but something extreme this quarter, I don't know. Or has the Silvent business just gone ballistic from I think we can say the Silvent business works very well. Maybe you want to comment. Yes. I would just add it to the conclusion or probably correct that it's been very good and even better than we maybe thought initially. And overall, I mean, just it seems like if you just add the volumes from the acquisitions compared to what the acquisitions has given, it seems like the acquisitions have 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 in all the acquisitions, we have no big failure in those acquisitions. No, they are performing most are performing well and SIPANT is doing extraordinarily good, you can say. And then just lastly, on the contract, we've been through the forest. I mean, when we implement the technique and building materials, that's almost exclusively the acquisitions. The contract manufacturing is just starting special with that. Apart from the SPOCs, it seems to be good growth as well. Yes. It's 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. So you have some business in countermeasures and doing very well and some doing less well. Yes, okay. But it's usually with a general margin. Yes, yes. Okay. Well, perfect. No further questions from me. Thank you, guys. Thank you. And there are no further questions at this time. So please go ahead, speakers. Okay. Then thank you very much for listening to us. Thank you, Matt. This now concludes our call. Thank you for attending. Participants, you may disconnect your