Good morning, and welcome to the Lifco Q2 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star then 0 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your telephone keypad. To withdraw your question, please press Star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Per Waldemarson. Please go ahead.
Thank you. Good morning and welcome to the Lifco Q2 conference call. We can start with going into page number two directly in our investor presentation and looking at the quarterly performance of Lifco. The conclusion is that we had another strong quarter for Lifco, once again driven by continued positive development in our Demolition & Tools and Systems Solutions business areas. Overall, the sales growth was 22% in the quarter, of which 12% was organic growth. Acquisitions contributed 7% and exchange rates had a 4% positive impact. We also had a small marginal negative effect of the divestment of the Hekotek business, which took place in May 2022. As we've been communicating previously, this divestment is not something we do.
We basically don't do investment. This was a special case where the exposure to Russian market was the reason for divesting Hekotek. If you go further down in the numbers, the EBITDA growth of 20% in the quarter, which then means that we have a slightly lower margin compared to the second quarter of 2021. I would like to remind everyone that the second quarter of 2021 was a very strong margin quarter for us. In that year, we still had some positive benefits of lower cost levels following the pandemic, especially our sales, marketing and administration side.
Another, you know, comment around the margin is that as you all know, the raw material and costs in general have been increasing now for quite some time. It's been a challenging environment from that perspective, but we can now conclude that the vast majority of our companies are adjusting very well to this and are able to pass prices through the system. I would like to also already here highlight that the Lifco portfolio of companies are, you know, typically in strong niche positions, which means that there is a very good potential for pricing power.
The issues we had on the margin side during the last nine to 12 months has been more related to timing effects of passing things through, adjusting to inflation, et cetera, rather than actual fundamental possibility to compensate. We still think that we have a very strong position in the vast majority of Lifco. If we go a bit further down, we can make a comment around the cash flow, which is somewhat weaker than you would normally expect from Lifco. The reason for the decline in cash flow is mainly driven by the increased inventory levels. We saw the same effect in the first quarter of this year.
This basically has to do with the fact that, you know, the underlying demand has been very strong for quite some time, and the supply chain issues are still a factor. It's still challenging to be able to deliver on the strong demand. To do that, many of our companies are basically being forced to increase the safety stock levels, and that's the effect that we see there. Another component, of course, in the cash flow is that the receivables have increased due to the strong sales development in the recent last quarter. Yes, these are the main comments on page number two. We can now move into page number three and look a little bit more on the different business areas.
If we then start with the dental area, we already informed in the last earnings call about one issue, a specific issue we had in our prosthetics business. Basically the lockdowns in China were creating production problems during first quarter. Those production issues have been, you know, up and running. We've been back to normal capacity, but we're still suffering in that prosthetic business from that basically shutdown we had in February and early March. There is a, you know, very hard work going on with the German dentist to create, you know, comfort around the supply and delivery capacity that we now have.
Basically that also impacted somewhat, not to a major extent, to some extent it impacted our sales and the profitability in the second quarter, because of that sort of lag effect. Also here I would like to highlight that Dental in last year's numbers had extraordinary high margins, partly due to the lower cost levels since the lockdown activities were not fully back to normal in Q2 2021. Also there was on the margin a little bit extra sales effect there still from safety products for dental offices. Overall, basically, these are the drivers of the slightly lower margin in the Dental division.
If you go further into Demolition & Tools, you know, we have experienced continued strong market conditions for quite some time now. Sales grew with 26%, and that's a combination of strong organic development and acquisitions contributing. I would also like to go further into the margins to highlight that there was also very strong development in the second quarter 2021. The margins in this quarter is also very strong. We are very satisfied with 27% EBITDA margin, and they were on the 28% level last year, extraordinarily high due to also partly some special product levers that had extraordinarily high margins, which we did not have in this year.
As I've mentioned in previous calls, the exact specific margins of this area have been a little bit volatile, but on a very high level for quite some time. There is, of course, always the effect of product mix effects that can come into play. We are very happy with the development in the second quarter of 2022. Going further to our third business area, Systems Solutions. There's also very strong growth in sales and profits, once again, driven by strong organic development in many of our companies, complementing with acquisitions, that's contributing positively. Most companies in this segment had a very solid quarter and this growth also translated into the strong margins.
I think in this area, we can also conclude that the ongoing work of adapting and managing the higher cost levels have been done in a very good way, and we've achieved good results here. With that, we can go further down into page number five. Just briefly comment on the financial position of Lifco. We are ending the quarter with a net debt to EBITDA of 1.9x , which is slightly above the level from one year ago. The interest bearing net debt level is, compared to EBITDA, 1.3x , also slightly above the level of 1.2x one year ago.
We have still this, you know, strong balance sheet position despite the fact that we've been very active in acquiring companies during the last 12-month period. With the current debt levels, we have a strong financial capacity to continue acquiring companies, when we find the right ones, the ones we want to own for a very, very long time and at reasonable valuation levels. I also already here would like to highlight that for Lifco, it's always more important to buy the right companies, rather than maximizing acquisition growth in any given quarter. The reason obviously is that we're going to own the companies forever, so we better find the right ones. Going to page number six. Just to give the long-term history and the perspective on where we are.
We've been, you know, having a strong development for many years, and this development has continued in the first six months of 2022. This has been for many years a combination of organic development and acquisition growth. We think that's very important. We are doing this while still paying dividend every year and not so far asking our shareholders for any money via capital infusions. This is one that we aim to continue for years to come. Then we can also on the bottom of this page follow the margin development, which has for many years been positive. During the last 12-month period, it's still slightly below the 2021 numbers.
As you can see in this report, we are working very hard on getting back strong margins in Lifco despite inflation problems in that short term and also the extraordinary low interest margin costs that we had during following the pandemic. If we can then move all the way down to page number 17. Just looking at the same type of graphs but for different areas. Here we can then, on dental, see the effect of extraordinary high growth following the pandemic in 2021, and this is now slightly then going down in the last 12 months. Still we are on a level that is quite comparable as 2019 numbers. Of course, obviously higher sales, but the margins is on that level.
I just want to give that perspective. As in dental, if we take a very long perspective, just to remind everyone, the reason the margins are on a totally different level than five-10 years ago is that Lifco has over the years increased our dental business in own manufacturing and in prosthetics and software, whereas 10 years ago, we were mainly a distribution company. That by definition has slightly lower margin potential. And going further, we can go to page number 19, looking at the Automation Tools area, which is an area where we actually have experienced the highest organic growth in Lifco over a very long period.
This is an area where we are in very interesting sub-segments, where the potential for organic growth development is high, and we have been taking benefit of that for many years. In this area, the development and also both in terms of sales and margin can be more volatile. It doesn't come in a straight line, but over a long period of time, we are achieving a very good result also in this area, and also the last 12 months numbers are strong in this area. Then if we go to the same type of picture in page number 21, looking in our Systems Solutions business area.
This is the area that, when we went public in 2014, was a collection of companies that had, relative to Lifco today, had slightly, you know, lower margin potential than we have today. Since 2014, we've been adding a lot of very strong highly differentiated companies with strong market positions. Many of them actually, or quite a few of them are global market leader in the niches. That has generated, in combination with lot of great organic development, both in sales and in margin, to this area that today has about 20% EBITDA margin.
I often also highlight here to new investors in Lifco that the companies we own today, who will own them, let's say in 2014, the margin would have been substantially much higher than the reported numbers of the portfolio we own back then. We have totally changed the type of companies we own in this area through our acquisition work over the last eight years. This is all I wanted to share in this presentation, and now I'd like to open up for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Your first question comes from Carl Ragnerstam from Nordea. Please go ahead.
Good morning. It's Carl Ragnarstam here from Nordea. Firstly, as you said, you are building quite a bit of working capital this quarter as well. Could you perhaps comment which segments this is primarily related to?
Well, Carl, it is preliminarily related to, or primarily, I should say, not preliminary. It's primarily related to the initial tools and parts of Systems Solutions. The reason for this is very simple. You know, when you have a product with many different components being assembled in a difficult entity, and you have a very difficult supply chain situation for quite some time, the need to increase the safety stock is there if you have, at the same time, a strong online demand. We've been basically forced to act like this in order to fulfill deliveries.
I think, as you can see from the numbers, thanks to this strategy, we've been able to deliver quite well to the demand we have over the last few quarters. It's been a sort of obvious strategy to take in this path. I think we're reaching a point now where we are, you know, of course, carefully evaluating how long will the supply chain issues remain and will it ease up. But we're still in the sort of evaluation phase around that. But this is basically the main areas. But also, to be fair, also even in dental, there's been supply chain issues, so it's also some effect there. I think it's pretty much across the board.
The main major effects has been in the Dental, Demolition & Tools and Systems Solutions area.
Is it too soon to say or to tell whether we should expect this pattern in sort of H2 as well, or is it?
Well, I think at some point when the inventory levels, the safety stock has now been increasing, at some point, hopefully we will get to a situation where we can feel more comfortable about our delivery capacity. Exactly when that you know sort of point will be achieved, I'm not 100% sure. We are in the discussion phase internally around this point quite frequently the last let's say three months. We have to prepare ourselves for being ready with this and you know getting you know back to normal or at least not increasing levels more. We cannot, we're not you know guiding on this specific, but we are in the mindset of looking at that very carefully.
Mm-hmm. Sounds fair. In dental, you had 280 basis points margin contraction. You mentioned the sort of effects from the prosthetics disruptions in Q1 lingering in Q2 as well. How big could you quantify these effects in Q2? Should we expect these effects to sort of ease going forward gradually, or is it something that will take some time to win back your German dental clients again, or?
Well, I think it's difficult to give clarity around it because what we saw was that, first of all, it's not a major effect in terms of sales, but given that it's a highly profitable part of our business, it has impact on this business area. That's been my first comment. We hope that, you know, we feel that in the, you know, later part of this quarter, it's getting slightly better. We're working very actively with our customers and as longer the time passes by since we had this disruptions in deliveries, it should become hopefully easier, but we don't really have a clear view on exactly, you know, when things will be back fully to normal in this segment.
Gradually better, hopefully, yeah.
We're talking about a slightly lower market demand due to this sort of risk that dentists have experienced of not delivering. Our delivery capacity has been very good since end of or mid-March, basically. We are, you know, still working on getting the comfort back. As you know, once again, we also have this uncertainty on what happens, you know, what will happen in China regarding the COVID reaction to COVID outbreaks and so on. It's still an unknown in that respect. We hope that time will be our friend in this matter.
Okay, very good. Also on the Demolition & Tools, obviously quite strong Q2 numbers. I'm more interested in getting to know more about whether you have seen any changes in demand during the quarter, and also if I mean, if you have seen any sort of slowdown in demand. I mean, is it maybe no news that the outlook for European construction market is a bit so-so given the inflation and we read news about postponed projects. Is this something that you see currently or it too early maybe, or?
Well, we haven't seen any effect. As you can see in our numbers, we haven't seen any effect. Of course, there's an order book effect that we don't communicate, and there's also in the order books, as I mentioned in many of these previous calls, there's different type of companies have different type of order book situations. If you look at what we actually got in orders, it's still on a good level, maybe not as extreme as it was at a certain point during the last 18 months. On the other hand, if you compare to what we get in and what we deliver out, we're still feeling quite comfortable in the situation so far.
Okay, very good. The final one from my side is a bit on M&A. You're lagging a bit last year's level. It was of course a very good level last year. Is it more difficult M&A market currently, or how should we look at it?
Well, I think, you know, when it comes to M&A, there is of course, there's always this volatility involved in this. Some quarters we have more outcome than others. The actual underlying work is constant and increasing in Lifco and the number of companies we look for. There's still a lot of companies, interesting companies for sale, but there's, you know, many things that have to be right for us to feel fully comfortable making acquisition and also to get the type of valuation that we feel comfortable around. I don't think it's so much different than a year ago in that sense. There is this, you know, normal volatility effect and that's coming into play.
As you know, as I mentioned many times before, if we don't feel fully comfortable, we have a tendency of not buying the company because, you know, we're gonna own the company forever, so they better be really good.
Sounds great. Okay, all for me. Thank you.
Thanks.
Thank you. The next question comes from Fredrik Karlsson from ABG Sundal Collier. Please go ahead.
Thank you and good morning. Most of my questions have been answered, but just, if it's possible to mention whether or not you felt that any particular business has really stood out in the quarter. It seems to be strong growth in Contract Manufacturing, Environmental Technology, and service and distribution, for example.
No, I think as it's been the same picture for quite some time now. It's pretty strong across the board. It's not, you know, different between different type of businesses and no major difference between geographies either. In the geographies we operate, I should mention, which is mainly then Europe or Western Europe, I should mention, or partly U.S. as well. The main exposure is to European markets. No real sort of big differences that is worthwhile mentioning from our perspective.
Understood. Have you received or heard any indications from your subsidiaries or group companies that they've felt any kind of weakening demand towards the end of the quarter?
Well, I think there's been a few companies that there's always some volatility. When I look at the aggregated numbers, it's as I mentioned in the previous question. Okay, there was a period maybe in you know, six, 12 months period. There was some months that order intake was absolutely astonishing. I think in the later part of this quarter, it was you know, strong but not crazy strong if you like. We feel you know, actually the visibility we have now. We feel that the markets are holding up well for the most part. It's maybe there was a period in the past where we were you know, more astonished by some of the order intake coming in.
That's maybe one extra comment on this.
Okay. That's all for me. Thank you.
Sure.
Thank you. Again, if you have a question, please press star then one. Your next question is from Riccardo Romiati from One INVESTMENTS. Please go ahead.
Hi, good morning. Thanks for taking my question. Maybe just coming back on pricing to make sure I fully understand the pricing trajectory. Do you think that you have achieved all the price increases that you need to fully restore the margin at this point? Or do you see further price increases coming in H2? The second question would be on this comments about your orders. Could you say whether the book-to-bill in Q2 was still above one or this like not a strong trend that you commented? I mean, if you can maybe elaborate a bit more on that, please. Thanks.
Yes. When it comes to pricing, it's an ongoing process, you know, quite some months. If the question is will there be further price increases in the second half of this year? Yes, there will be further price increases in the second half of this year. This is, you know, many companies, it may be the fifth or sixth price increase in the last 18 months that is being implemented. You have to keep in mind, it's not only about raw material anymore, it's also about the general inflation that's coming into the economy. Obviously pricing is really a very important topic for us. It's a normal part of the daily work of our operating companies.
It's an ongoing exercise and you're seeing inflation throughout the businesses, so you're still, let's say, catching up?
Yeah, I mean, but I mean the inflation is obviously here right now if you look around the society. Obviously, pricing has to follow that. Exactly.
Sure.
In each individual company, there's of course different situations in terms of cost exposure and all that. Then I expect the pricing to be continuous, which is always, but even more so in this type of environment we experience. It's an ongoing thing that basically being evaluated in every single subsidiary all the time like that. I think I'm very happy to say in this quarter we are getting you know better in terms of margin than we were in quarter. We are going in the right direction. Still in some companies, the longer order books and obviously it makes it difficult to be extremely quick in adapting to these things. Overall we feel quite comfortable about the situation and that's it.
The book-to-bill. We don't communicate order intake. I can't really communicate that, but I think I just refer back to my answer to the previous question is that we had periods over the last eighteen months around, and we had months where the order intake was on an astonishing high level, which we could barely believe. I think in this quarter, the order intake was strong and solid for most of our companies. It was, you know, it was not far off from the revenue that we have recognized this quarter. That's basically where we're standing right now. We don't communicate the exact order book forward.
Great. Thanks a lot.
Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you for attending today's presentation. You may now disconnect.