Earnings Call: Q3 2020

Oct 22, 2020

Thank you, and welcome, everyone, to this Q3 update call. I'd like to start by going into Page number 2, where we present a high level overview of the group's performance in the Q3 of this year. And I think to summarize the quarter, we had a very solid and strong quarter, and I think it's very nice to see this, especially with the perspective on how things felt and were back in April, May. We had a very strong, I think, comeback quarter in that respect. So we're very happy about that. If we go into a little bit more around the details, we are growing net sales with about 3%. And we have virtually flat organic development on the entire group. There are, of course, a lot of differences in the various entities. I will come back to that shortly. When it comes to the quarter, we had growth from acquisition of about 7% and negative impact from currencies of about 3%. And if you look at the year to date figures, we have an organic development of negative 7%, which obviously has to do with the severe problems that we had in demand in especially in April May in Dental, specifically the Dental part but also in some of the other areas. And if you look at the whole year, the acquisitions has contributed about 7%, and we have done on the whole year numbers a negative exchange rate of about minus 1%. With that, we can turn more into the Page number 3, where we look at the different business areas. And coming back then to the Dental area. In this quarter, we do see some growth of 6%. But more importantly, we have very strong profit development. And here in the dental area, we see obviously some effects of the fact that the COVID situation makes it makes sales and marketing activities quite different to another quarter. So that impacts us positively. And then I think also the situation that we had in the spring has also created a lot of saving activities in the various companies. It's kind of rolling over from the previous quarter there. I think if you look at the whole dental area this year, it's very pleasing to see there that we had a very negative market situation in April May. But other than that, things have normalized and stabilized. And giving a little bit more flavor around the dental area, we see that we are mainly exposed to the European markets, which have been quite strong since June, which we reported the last report as well that things came back in June, and we see that continue now in the Q3. And then I can move on to the demolition tools area where we had a weaker market than last year. It's quite obvious now that things in this area started to weaken already, I would say, May, June of last year, and this has now continued throughout the last 12, 15 months and, of course, was even more negatively impacted by the COVID situation in the spring, and we see still a weak development. And I want to highlight here in demolition tools that we see an even more uncertainty and a weaker situation than for the more capital intensive products, those products that are viewed as more of an investment product for our customers, they are, of course, having a more difficult market situation. I would also like to highlight there that we have very tough comparison numbers here in this quarter. So last year, we had very strong both sales and margin in Evolution Tools. So I think it's you can look at this area from different perspectives and also conclude that things are still okay, but they're not as strong as you would like them to be. That's how to summarize that. Going further then into system solutions area, it's a very mixed situation. As you know here, we have a lot of different companies in various industries. On the high level for this area, we see very good development in the quarter, both from sales and from especially from a margin perspective. Most companies have had been exposed to quite stable situations, so they have been a stable demand situation. But some companies that sell what I call more indirect products, things that are not being used to produce things here and now, those have been suffering weaker market conditions throughout the period since March, April, and that continued also in this quarter. And then obviously, we also have some companies, especially in the contract manufacturing side, where we also see a positive effect from the COVID-nineteen situation where demand has increased, and that has to do with exposure to health care and medical sectors, etcetera. So with that, I would like to move over to Page number 4. I think I've been through most of the COVID effects already. But just to summarize, the Dental impact was very negative in April May, especially the recovery started already quite strong in June, and the European Delta markets have been on a quite good level. And we use the word returning to more normal levels for this quarter. And once again, Safety Solution has been, as a whole, relatively unaffected, although there are quite big differences between smaller operations in this area. And once again, the demand and the markets in demolition tools remains uncertain, and it was weaker than previous year, which was, once again, a very strong quarter in Q3 2019. Yes. And with that, I would like to move over to Page number 6. Sorry, before we do that, once again, remind everyone that the sales and marketing activities, not only in Dental but also in Specialty Systems Solutions area, has been on a lower level, and that has to do with COVID-nineteen. And it's very difficult to know will these things come back to normal level and when. I think there will be certain things that will take a long time before those costs will increase and certain things will come back quicker. So we just have to follow that as we go along. And then we can move over to Page number 6 and a little bit talk about our balance sheet and cash flow. And we have had a very strong cash flow the entire year and also in this quarter. And the cash flow now from the operating activities is close to SEK 2,000,000,000 for the 1st 9 months compared to SEK 1,200,000,000 last year. And that has to do with, obviously, that we have been increasing the efficiency on the working capital and reducing inventories, among other things. On top of that, also good profit development in this year. And that gives us a net debt to EBITDA situation, including all the debt to our option agreements and the IFRS 16 effects of leasing to SEK 1,900,000,000. But maybe more relevant measurement of the interest bearing net debt to EBITA is now down to 1.3, which is a very low level. And here, we have to keep in mind also that we have made quite a few acquisitions also this year, maybe not as many as we would like to do in normal year, but and on top of that also paid a dividend in this quarter. And then we can go on to Page number 7. And this is more of a reminder of our most important target to Lifeco, which is to increase profits every year. And we have had some challenges. Historically, in 2,009, we had difficulties where we dropped quite a lot in results after the Lehman Brothers collapse and all the things related to that. We had a problem in 2013, and we have had quite big problems early on in this year. But as you can see now, our rolling 12 month numbers are now above last year's figures, which is very pleasing. And we will then see how the years ends in the next few months. And with that, I go to Page number 8. And once again, just to remind everyone about our very strong focus on the return on capital employed. And I would like to highlight the right hand side of this graph where we have the operating return on capital employed where we exclude the goodwill. This is pretty much where we look at our each individual company and sum them up on the fixed assets, inventories, receivables minus the trade payables. And here, you can see that we had a big drop in 2019, which was basically related to the change of reporting method where we have to include IFRS 16 and all the leasing effects. But now in this year, we are now turning this ratio up again from this level. And you can also see that we have this dotted line of 50%, which is our sort of what we call the rock bottom where we can feel okay to have a company on the 50% level. The reason why we are so extremely focused on this is that Lifeco has an ambition to continue to grow every year from acquisition. Also in years where we have strong organic development. With a high return on capital employed, we can maintain the cash flows also in years where we have strong organic growth. This has been fundamental to our historic success and also will be very crucial in the future going forward that we can keep on acquiring continuously without having increasing net debt ratios. And then we can move all the way down to Page 23. And this is once again a little bit of a more long term perspective. I quite often get questions about our Systems Solutions business area. And here, you can see on the right hand side that we have developed this area quite a lot since we went public in 2014. And we have now a much stronger group of companies here with higher margins and also much better return on the capital employed. So we can see here that we continue that development also in this year with increasing margins and also growing the top line. And obviously, quite a lot of this has been coming from acquisitions over the years. And speaking about acquisition, we can then turn to Page 29. And just to summarize how this year has been, we carried out quite a few quite a lot of acquisitions in early on in the year, basically in January February. And then there's been obviously quite difficult to carry out acquisitions in the Q2. And now in the Q3, we have, of course, increased the activity. We did one acquisition in July, and we're working very hard now to get the acquisition pace up again. But as always, it's very difficult to talk about a pipeline. Acquisitions is, by default, very difficult to forecast. And some acquisitions come from long term discussion, but quite often also, we get acquisition in Solifco that are coming in quickly, and we act very quickly from the first time we meet the company. But activity is going up here, and hopefully, things will material. But it's very difficult to say when that happens. So with that, I would like to open up for questions. Thank you. Thank And our first question comes from the line of Karl Rangestan of Nordea. Please go ahead. Your line is now open. Good morning. It's Karl here from Nordea. I have a couple of questions. First of all, I mean, obviously, quite strong margins in the quarter. But could you help me with elaborating a bit on these which of the segments that are the most positively impacted by less marketing and travel expenses? Also, I mean, how should we look at SG and A for the quarter? I mean, should we expect slight cost ramp up already in Q4? Or how is how do you view that? And the final one on that note is also how much of the SG and A in the quarter you would say that is or could be defined as temporarily and how much is more permanent? Yes. I think all these questions are quite difficult to answer. I mean, the first question, which segments that have been more impacted by savings? I think Dental is obviously one area where all the Dental exhibitions for this year has been canceled. A lot of other sales and marketing activities that we carry out is on a very low level. Traveling is going down, etcetera, etcetera. But we see that also, I think, more apparently also in parts of System Solutions that operate in similar ways, quite sales and marketing driven operations. So it's actually bits and pieces of the solution has the same effect. And I think that so that's not so difficult to answer. The more difficult question is how what's going to happen going forward. I think that's what you're trying to get a hold of. And there, it's very, very difficult because we don't first of all, we don't know when exhibitions, normal select activities will open up again. That's number 1. Secondly, will all things be the same once it opens up? And That's not really sure because not only we, but the whole industries are taking shifts into more digital way of working. And I'm not sure if exhibitions will be the same way they've been in the past. That's who knows? We'll see how that goes. So very difficult to say. On top of that, we have also maybe what's more special in this quarter is that given that things were very, very crazy back in April, May, all companies were saving as much as they could in all areas because back then, we had no clue how things was going to go in this year. We were very, very I wouldn't say paranoid, but we were very, very cautious about this. And I think that mentality has been rolling into this year. So a lot of companies have done minor reduction of staff and go through this. That's, of course, more sustainable at least in the near term. So that also comes into this picture. But I think the major part are related to more, what I would call, more variable costs. And they're difficult to say when they come back or not. Okay, perfect. And also, I mean, you reported slight negative group organic growth in the quarter, but could you possibly give any flavor on the organic development month by month? What I'm trying to understand is whether the recovery came sort of it came back early in the quarter or maybe late in the quarter and how it's looking sequentially, if you will, month over month as well? Yes. But I think there I know what you're getting at, but I don't think we have much more to say than it was relatively the same throughout the quarter. Obviously, it's week by week, it goes always up and down, but there's no and the problem is also that in July August, in most parts of our business, there's a weaker market condition due to the holiday season as well. So it's a little bit difficult to take we normally don't look so much at July figures even though it's 1 of 12 months. So I can say that there's no huge impact on that things were much better in July or much better in September from my perspective. It started coming back in June already, please. Okay, perfect. And on the recovery in the Dental business, is it fair to assume that the distribution sub segment is recovering faster than, for instance, prosthetics? Or how should we look at the sub segments there? Yes. So there, we have I mean, that's one area where we have a little bit of differences. That's the distribution and also the manufacturing of normal consumables that we also have in this is coming back a little bit quicker. And the prosthetics, especially the more complicated work, seems to be a little bit being postponed to some extent. But it's not terrible, but it's a little bit there's some differences there, I should say. Okay. Perfect. All for me. Thank you. Thank And we currently have no further questions via the teleconference. I will hand back to Per for any further comments. Yes. I'd like to thank everyone for listening. And yes, wish you a good day. Thank you.