Earnings Call: Q3 2017

Oct 26, 2017

Okay. Thank you everyone for calling in. I will briefly comment on our Q3 report. If we turn to Page 2, I just wanted to remind you on our long term now 11 year growth of 17 0.2 percent EBITDA. We turn to Page 3, and there you have the numbers. We have, in this quarter, good growth of EBITDA, 28%. We improved the margins. This growth comes, to some extent, organic and also thanks to our new acquisitions. And also return on capital employed is on a good level. And if you take away the goodwill, we even increased the internal return on capital employed. So we continue buying less asset like businesses. Over the 9 months period, we have in EBITA's 22.6% growth, which is higher than our historical level of about 17%. If you turn to Page 4, I'll let Tervaldumarson say some words on Dental. Please, Per. Thank you, Fredrik. So if we look at the Dental development in the last quarter, it was fairly slow growth as compared to the other business areas. And once again, we have a quite slow organic development as we have now for quite some time. And development in the quarter has been mainly increased deposit through acquisition. And this is now the full effect of the Parkhill acquisition that was acquired in September 2016, which is now a full quarter captured in 2017. If you look at the 9 month period, we are developing quite stable, a 9% growth in both sales and EBITDA. And we had a small improvement in the margin, partly thanks to slightly higher share of our manufacturing business this year compared to last year. So I hand back to Fredrik for the other divisions. Yes. If we look at the Emulation and Tools, we have in the quarter, big growth in sales and profits, and it's actually driven both healthy organic growth and acquisitions. The 2 markets which performed for us the best right now is U. S. And Australia, but also Germany is very strong. The 2 acquisitions made this year is Holteens, which makes equipment for forestry machines and attachments for forestry machines and Solesby is the local attachment manufacturer in the U. S. And everyone is performing well. Marcus conditions are good. And we can add that the margin improvement is also good from 24% to 26% in the quarter. So it's not it's a record quarter for us in the Malaysian and Tools. If we turn to Systems Solutions, you can see that the sales growth over the year is only 4 0.2% in 9 months and the profit growth is 24.7%. So the sales growth is pretty weak. And actually, we had in the sawmill equipment business and also in the marine compressor business declining sales organically. So that's the reason why the change in net sales is pretty small. But as you can see, it doesn't hurt us because in the Marine business, profits are up. And the sawmill equipment business is not so profitable, so it doesn't hurt us too much. So overall, we have a very good development in systems solutions also, thanks to the added new companies from the year. If we throw and I will jump Page 5 and go directly to Page number 6. And the only thing I'll comment on this one is that the balance sheet, I could maybe the inventory in the accounts receivable has been a little bit high. We probably have to work a little bit more on that, but the cash flow is healthy. And our net debt to EBITDA ratio is well within our targets, so we can continue acquiring companies. If you turn to Page 7, we have a list of all companies we acquired this year. This year, we acquired a number of small companies. So we go for more and smaller companies. I think it's basically the pressure on the multiples out there in the market. If you're aiming for bigger companies, you have to pay too much. And we have to not we can't overpay because then our acquisition strategy is not working. Next page, we continue increasing our EBITA margins. We spoke organically and that we acquire companies with a healthy margin. Our return on capital is good. The organic development is very good. And if you take the total return on capital employed including Goodwill, it stays above the same level, it basically shows they're not paying too much for the entities they are acquiring. If we turn, we will jump to Page 9, people asking about asset allocation. As you see, the CapEx is very low. So actually, the asset allocation is the acquisition of what companies we are acquiring. The operating CapEx is also important. We turn to the last to Page 10. There you have our financial targets. They are still the same as they were in November 2014, so no changes. So I would like to leave I would like to leave room for questions, please. And the first question is from Johan Huttner from Handelsbanken. My first question is on demolition and tools. I was surprised by the pretty strong growth in the quarter. Was this mainly related to big projects? Or is this the strong growth due to many smaller projects being sold in the quarter? Yes. So in this Evolution Tools business, as you have occasionally, there is not one single big, but you can have several small, little bit bigger than normal projects. And this quarter has been very good. So maybe it's maybe we won't be just lucky next quarter. Are you happy with the margin given the strong growth? Or should it have been even better? We have to be the margin since now. Then on the Systems Solutions business, more or less the opposite question. But you mentioned that sawmills and marine is declining. But is this a deliberate step away from some low performing units or segments where you choose not to sell to protect the margin? Or is it just cyclical that demand has been low in those units? Yes. I think it's the first of all, it's product business demand. It goes up and down, seems a lot in this product, home and equipment business. And it could also be that in our Estonian operation 2 years ago, we had a profit, record sales and everything. Basically, they sold too much. And now they have to finish these projects, so they don't have really time. So they have been full of finishing these finishing off these old products, and they really don't have time to take on habitat time to take on new projects. But now those old projects are fine more than will be finalized this year. So I think this is a bad year for swarming equipment. It's probably the only division within Lifeco which is not performing as it should be is the Soam and Equipment. So looking at the Lifeco in total, are you pretty happy with most of the units you have? And with that, is it only a fee? A very limited volumes that you don't want anymore because profitability is too low? So going forward, you should probably grow more in line with the favorable market conditions that you have? Yes. I think so. We, in general, we are happy with the markets. We are happy with the performance of most of our companies. Yes, it's basically so many equipments, companies which were already struggling a little bit. That's the only where only is it actually been the only companies where they had a major improvement potential. Okay. And then on working capital, you tied up a little bit more than last year in Q3 despite not really growing organically. But maybe this is due to some parts growing strongly. Yes. Yes. And it's human. You grow strongly, high margins, and then you pay less attention to the working capital. You're not worried this will come back? Or I think it will come back. Okay. And my final question. You mentioned multiples looking more at making maybe many and smaller acquisitions. But if you find attractive acquisitions higher up in size, how much could you stretch yourself in paying in EV EBIT or whatever multiple changes? Maybe. It's We want to make good I think you could we say on average, we want to be around 8 times EBITDA by a company and then we took up maybe go up a little bit or down a little bit. But about 10 times must be very, very, very special if we ever would buy a company, about £10 a day. Okay. That's very clear. Thank you. Those were my questions. And we have a question from the line of Yuan Dao from SEB. Just interested in the Dental division. I mean, if you look on the 9 months to date, I mean, it seems as if growth really organic growth is fairly weak. What sort of conclusions do you take from that? Also, margins are fairly flat ish. Can you just dwell a bit on the improvement potential there going forward and what's impacted 2017 numbers? Should I take that, Farid? Yes, please. Yes. So Johan, basically, you're right. There is no and we haven't had that for quite some time, high growth in the Dental division organically. And I think it's important due to our strategy of being a premium distributor in the European markets. There's not a high growth in that segment. So and we have also, as you know, from historic development, reached a very strong margin position. So it's not an easy growth case for those companies. Where we see more growth is, of course, in the manufacturing companies in other fields where we see more opportunities for organic growth. Having said that, you also have to remember that the group market as a whole is not growing a whole lot. It's a quite slow growing group market. I appreciate that. In the past, when you've seen weak organic growth, you could argue that you've raised prices because margins have gone up. And in the current year, since we're both slightly negative organic and slightly flattish on margins. Am I totally wrong here? What do you mean flattish on margins? No, it's just well, we'll see where the year ends up. I guess your 9 months is slightly up on margins, sir. Yes, you're up 18.4%, right, from 18.3%. But yes, just as you think of the combination of flat margins and no growth, just if you had any sort of conclusions on that. But I may hear what you're saying, Per. Yes. So I would I can make that some comment. The Dental business, we have very good margins compared to our competitors. So we've done a very good dental business historically. And sometimes in any business, you reach a level where it's more difficult to improve things a lot. So then you have to use the cash flow from that business and invest in other businesses instead. If you don't find it's a very good cash flow business and it's stable cash flows. I mean, if you would have bad times, Dental will always continue to deliver cash flows. Is that something you're going to accelerate if we look forward, just acquisitions in the Dental business? Rob? So, Pavel, will you comment on acquisitions? I saw Johan, I didn't hear your question. Can you say it one more time? Is that a particular area you aim to accelerate if you look on acquisitions in the Dental business? It seems as if what you've compounded so far looking into next year, I guess it's fairly flattish on acquisitions. Yes, of course, we would like to do more acquisitions in Dental, and we are working very hard on that. But also, we have very strict rules strict principles on how we can what type of valuation we can apply to companies we buy. So it's hard work that we're constantly trying to get the right match, the valuation and the assets we're getting. Got you. Thanks. Yes. I just have a comment on that. So you see that and we had our 2 years ago, Systems Solutions was really problematic business area for us. It was basically the first company we had in the group. But now it's performing very well, and that's a lot thanks to the acquisitions. And without the stable cash flows from the business, we wouldn't have to be able to acquire more high quality companies in the Systems Solutions business And we know it as we've done. And there are currently no further questions registered. So I'll hand the call back to the speakers. Please go ahead. Okay. Thank you very much for listening to us. Thank you.