Earnings Call: Q4 2017

Feb 15, 2018

Ladies and gentlemen, welcome to the Lifeco Q4 Report 2017. Today, I'm pleased to present CEO and President, Fredrik Carlson. Speakers, please begin. Thank you very much, and thank you for joining in this telephone presentation. And we also have the today, I have the presentation in front of me. If you turn to Page 2, this is just stating that Lifeco is a safe haven for your business. This is just to try to describe why we are an attractive buyer for certain sellers. So a seller who wish to sell this company and then wishes that it continues to work in the same way as it's done and those sudden changes. They like to sell to Lifeco. Let me go to Page 3, and then we see the long term development. You see that the growth that the EBITDA at 18% average growth rate, much quicker than the sales. And that's what we are focusing on. We are not focusing on sales growth. We are focusing on profit growth. And you can also see down to the right, the EBITA margin development, which has been very positive the last 5 years. If you turn to Page 4, we have our financial targets. And Page 5 is something. This is a small table. This is actually information you already have in the quarterly reports. But I chose to present it in this way because also I get the question how much of the growth do you get from acquisitions and how much is organic. And this is a way of calculating it. As you can see, we have increased every year now 3 years in a row our EBITDA from acquisitions. So 118 in 2015, 1, 52, 2016, 198, 2019, 2017. And they it's been 12%, 13%, 14% growth rate from acquisitions. Stable, and it's probably, I would say, that it's easier to see steady growth through acquisitions than organically. And a little bit down below, you can see our fluctuating, 11%, 2015%, 3%, 2016% and 11% to 2017. So organic growth is also possible, but it's you never know when it comes. It's like shaking a ketchup bottle. And events, you shake and shake and shake and when eventually, ketchup up comes out. That is how it sees running an operation and looking at the profit development. We turn to next Page 6. And we have our profit oriented culture, and we run our businesses. And now we look at 2 examples. And these are this is pure organic growth in our acquisitions. When we take the original dental companies, we can see the growth up to 2013. We show this growth at the time of the IPO. And you can see also in the dental, we have continued growing also the last couple of years and achieving ever higher margins. And the same thing goes for Brok. So it seems that our model, how we handle our companies, we can continue growing old entities at a healthy organic growth rate. I turn then to Page 8. We always get a question about our asset allocation. And if you look at the right hand side, you see CapEx is very small. It's not material. The big asset allocation question is that's the acquisitions, and you can see how but it's fluctuated the last couple years, how much we acquired. In the last two years, it's been SEK 1,600,000,000 and SEK 1,400,000,000. Then I would turn to Page 10. And if you look at Page 10, we can see on the left hand side our net debt to EBITA development. And we've been able to achieve this 13% growth for acquisitions by keeping the net debt to EBITDA multiple constant under 2. And that is something I'm very proud of that we've been able to keep the debt under control in spite of 13% average growth for acquisitions. And if you look at the multiples we've paid, we paid about 5x2015 for what we acquired, 8x 2016 and about 7x 2017. And we have our target of acquiring about 8x, so we're staying below our target there as well. Turn to Page 11. And you can see that we have if you take the growth last year, we have 26% growth in EBITDA, and we have 20% growth in earnings per share, which I think is pretty healthy. Of course, we have been in general, the market conditions have been very good. So it helps. So we are very happy with this development. Also, if you look at the return on capital employed, we've been able to increase the return on capital employed. That's very good as well. We're happy with that. Turn to Page 12, the business area performance. Dental, stable business, slower growth. Todes, cyclical business, fast growth. It's also been helped by 2 acquisitions this year. Systems Solutions, good growth, also helped by acquisitions. That was all for me. So we can start the Q and A session. Thank you. And our first question comes from the line of Johan Dahl from SEB. I was wondering it was excellent with a bit of a more disclosure on the contribution from acquisition and what's organic, much appreciated. I was just wondering if you could clarify on the numbers that you presented in the presentation, you argue that the contribution from acquisitions was €198,000,000 in 2017. And you say that you have acquired an annualized EBITDA of €223,000,000 I was just wondering, the $198,000,000 I guess that's from the numbers of these subsidiaries, what they actually delivered in 2017, the 23. Should we view this as sort of pre cost savings? Rolling 12 months. Got you. So those numbers are you should be Yes, I understand. But anything else I think the numbers. Got you. Okay. Could you say something about, in general, some round comments regarding how much you've been able to improve profitability in your acquired companies post the acquisition? Just to make us understand better when you announce an acquisition and when it's realized, I mean, 12 months past. Yes. It's very different. If you make a price increase, it's immediate. And all other improvements take longer time and sometimes take also time to make a price increase. So but one reason why we get these kind of low acquisition multiples, because they are counted on these numbers, is that we do achieve some improvements already the 1st year. Right. But the big improvement comes 2nd year, if we have an improvement. Yes, yes, yes. So would it be possible to say how much the 2 100 that acquisition contributed with in 2017? How much was that at the time of the announcement? No, David. We only have these numbers, which we That's fine, that's fine. Much appreciated. But if you take the if you look at this table, so they will next year contribute with another so the 223, we got 100 and $30,000,000 in this year's results. So next year's results, we will get $93,000,000 I understand. So you have $93,000,000 €1,000,000 growth already in, you can say. Exactly. Can you just talk about the margins and growth in demolition and tools? Was there anything special happening there? Was that or was that a sort of a regular seasonal improvement? And secondly, could you talk little bit about organic growth in the dental business in the Q4? Yes. We can say quarter. I think it's just the markets are good. And you have more volume on the same fixed costs you have previously, and therefore, the profits go up. But then we also made we have 2 week acquisitions in the Hultein and Solzbuy, which also contribute to the profit growth. Yes. Yes. Were there any sort of other structural measures taken, such as price hikes or any sort of cost out actions? No, I think it's not that. It's more volume, I would say, which is driving profits right now because we already have high margins. And then the higher margins we have, the less the more important is volume growth actually, not margin growth. And these is here, it's so important to win the next order. Exactly. Then I just had a question regarding organic growth in Dental. Any outlook there? I mean, it seems to have been pretty flat in 2017. Per, can you give your comments? Yes. So organically, 2017 was a small, very low growth organically for us. And we also had in the last quarter, it was a little bit impacting us because we have volume bonuses sometimes related to our growth in the distribution business. So we have a slight negative impact on the profit in the last quarter. But now these are really material impacts, so it's a small minor fix. But all in all, it's a low growth for the year in that top. Got you. And then final question from me. I was just wondering what is the basis of selecting these examples on Slide number 9? You choose a couple of companies that show organic growth. So the reason we use that is because these are our original dental. This was part of our IPO package when we presented Lithgow. But we've just been continue to follow the original 5 dental companies that were part of Lifeco in 97. And we want to see the 20 year development of these trades. It's not the only organic development in the Dental Group. This is now a subset, but these are the regional ones. We continue to track them also now the last 4 years after the IPO. So it's the only reason that these are the only ones we can follow over a 20 year period. And the other stuff come in during the last 10 years or 15 years. And our next question comes from the line of Robert Reddin from Carnegie. Two questions. Is open. I'm sorry to interrupt you, Robert. Can we ask you to speak up? We cannot really hear you on this side. All right. Sorry, it's better now maybe. So two questions, if I may. First on Dental, on that organic growth in Dental in Q4 and 2017. Did you feel that calendar effects had any effect on Q4 and maybe 2017 overall fewer business days? And what do you see looking into Q1 in terms of business days business day effect? That would be my first question. So maybe I should answer this question. In terms of Q4, it was not material. I think that we had a low growth organically in the Dental sales segment, and we had that for quite some time. And then we the profit, as I said, has a slight impact that we didn't reach the volume bonuses, especially in the German market. This has not a huge material effect on Lifeco, but it's just giving some more flavor to it. When it comes to Q1 2018, it's worth highlighting that the Easter will come just at the end of March. So it could have a slight negative impact. If I remember correctly, Easter was in April last year. Right. Okay. Cool. And on System Solutions, I mean, you still had forest being a negative in the quarter. Is that right? Or was that No, no. ForEx has stabilized now. So maybe it was more or less flat last quarter. And what would you say if you would look through the different parts chain system solution? What would you say the outlook is, for instance, in marine, which is some positive data points as of late? Yes. So as you know, I can say, if you look at the market subsegments there and if you look at Marine, there is a clear you can see the number of ships ordered. They are it's increasing right now. So for example, we have marine compressors, so we sell more and more marine compressors. The thing for us is that we live on the spare parts and not on selling compressors, you can say, because selling compressors is a way of generating future parts sales. All right. Positive for sales. Not so positive for margins? Not so positive for margin, positive sales, yes. And in the other vehicle, 18 installed base. And if you look at the forest, what has happened now this year, I think there was an article about Vida Timber, for example, a big private group in Sweden. They have record profits sawmillers have record profits, normally, they invest afterwards. And I also have commented that some bad projects and they're all ending now. So we are through that phase with bad projects as well. So it sounds positive, too. Any other subsegments where you expect a pickup or a slowdown in Systems Solutions? I think the is just business as usual. If you take some sub mix where you have something happening in the markets, it's the forest and the marinas. Our next question comes from the line of Christian Hellmann from Nordea. A question on demolition and tools. I'm just trying to sort of understand the margin here. You did almost 30% in the quarter, which is obviously fantastic. Congratulations. And looking historically, I mean, it's those have been quite high, it's some quarters, it's been around 20% and then 25%. And yes, some ups and downs, and now you're at 30% almost. How should we view the business going forward in terms of further margin expansion potential? Is it even possible? Or what do we make of this? Yes. That is really tricky to say. But the only thing we can if you turn back to page which page is more, on Brok, we have a page on Brok. And this is only the mother company in Sweden, but you'll see that they this is Page 6. And it seems that they flattened out at 40% margin. The only information I have because if you get these very high margin plus 30%, the incentive to sell more is very high. And the management pays too much attention margin anymore because the margins are so high. It's more important to sell and achieve higher margins. Right. So So you can see it's left out at Page 6. Okay. So we're close to the top then in terms of margins. Yes. Most likely. Most likely. Okay. So fine. And organic growth, do you have that number for the demolition tools business? No, no, no. The only thing we have is that presented on the total. But you can probably figure out something. Just look at other companies. The remarks have been very good this last quarter. Yes, obviously, obviously. All right. Okay. Thank you very much. That was the only question I had. Thank you. And our next question comes from the line of Erik Golanda from Randelsbanken. So obviously, we have touched on that on the previous questions regarding the emissions until it was very strong during the quarter. How do you see this market outlook in 2018? Has something changed? Or do you see a very strong demand also in this year as well? I can't say much. It's very difficult to say. But I don't if you look at all other all around, there is nothing which is which says that we will have a decline this quarter in the market in general in the end markets. But who knows after, who knows? Yes, exactly. So at the moment, at least, it seems to be quite good, the number out there. Yes. And as there are no more questions registered, I now hand back to you, speakers. Okay. Thank you very much for calling in and listening to us.