Earnings Call: Q2 2020

Jul 18, 2020

Hello, and welcome to Lifeco Q2 Report 2019 Call. Throughout the call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Paarde Valle Manson, CEO. Please go ahead with your meeting. Hello, everyone, and welcome to the Q2 presentation. I would like to start directly and go into Page number 2 of our presentation and just give a few highlights on the group's financial performance in the Q2. If we start on the top line level on the net sales, it was a good quarter with continued growth in net sales coming from organic development around 4% and acquisitions. And then also, as we had in the Q1, a positive effect from the currency. So it's all in all very good there. If we go to our EBITA level, it's also very, very good with 23% growth in the quarter. And then I would like to highlight when we go further down in the profit and loss that in the quarter, we have an effect of paying out the dividends to minorities in a lot of our acquisitions that we've done in the last few years. We have we keep the sellers of the companies keep some shares and have a minority interest or minority position in the company. And as we now after owning these companies for a few years in humanity situations or paying out dividends, we have done an effect of SEK 46,000,000 related to dividends going out to the minorities. And this, we did not have in the previous years. And the reason for this is mainly that a lot of these companies now have been performing very well, and there is different, so to say, discussions around the dividends that should be paid out. And I can already here highlight that the reason why we don't book this up as a balance sheet position is that the dividends are unknown, so to say, when we start the company that we take over. So therefore, this would be something that we expect to also see in quarter 2 next year in a similar way. But we did not have it in the quarter 2 last year due to the increase of acquisition with this type of setup. We can also highlight, if we go further down, that the taxes, if we go down to net profit for the period, the taxes in quarter 2 last year were lower than normal because we made a revaluation of our tax debts following new tax rate announcements in Norway, UK and Sweden in Q2 2018. And that had a positive effect of SEK 22,000,000 last year. That effect, we don't have this year. If we go even further down and look at the operating cash flow, we have one specific effect related to prepayments. In the last year's numbers for 2018, we had a positive effect of increasing prepayments in our project business in the Forest division. And in this year, that those prepayments have been going down basically due to the fact that the projects have been started and are being sort of booked into the P and L, and we don't have the same amount of new projects coming in. So this is impacting our cash flow from the project business. And then I also would like to highlight on Page number 2 that the return on capital employed, excluding goodwill, has an effect from IFRS 16 in the way that now from January 2019, we have to include also the right of use assets in the capital employed definition. And therefore, the numbers between this year and last year are not fully comparable. And this will then, of course, at the year end, be fully implemented so that when we're going to next year, we don't have that comparison problem. The effect of IFRS is SEK 477,000,000 that is then included in the capital employed definition. If we now turn to Page number 3, looking at the different business areas, starting with Dental. We had, as we mentioned in the last report, some small negative effect from the Easter in this quarter. But that's being then offset by development in the acquisitions and the currency effects. And then generally, a good improvement in the EBITDA numbers in Denthold. In the Emulation of Tools, we have continued strong effect from acquisitions that we made in the beginning of the year as well as good organic development and also their currency is helping us. And if we look at Cision Solutions, it's all in all a good development. It could be worthwhile highlighting Cision Solutions that the product businesses that we have in the Forest division and also in the Environment Technology, where we have a recycling business are then showing a little bit different patterns. The forest is slightly down and their recycling is up. So it's basically offsetting each other in this. But all in all, solid development also in Systems Solutions. And then actually, if we turn then we can skip Page 4 and go directly to Page 5. Commenting on the balance sheet, we can then comment that we have the IFRS 16 effect in our tangible fixed assets of SEK 4.77 and the same effect down in interest bearing liabilities increasing by SEK 4.77 due to IFRS 16. And also, just to comment on our net debt to EBITDA, it's actually lower than 1 year ago. We all then if you include the full net debt definition, we have 2.0 net debt to EBITDA, and our interest bearing net debt to EBITDA is 1.6 as of now. And then I will actually go all the way down to Page 27 to comment on our acquisitions. And we have now, after the end of the Q2, also announced 2 new acquisitions. 1 is a Norwegian based company called Rustybuzz, which is a niche company making surface preparation tools in the marine segment, basically removing rust on ships. It's a global business based in Norway with different sales subsidiaries out in the world. And then we have also just recently announced a new acquisition in Germany. It's also a niche company that is the world leading manufacturer of machines for pallet strapping, mobile and ergonomic machines to be used basically in warehouses when you strap pallets. And then I'm just also then coming back to our net debt to EBITDA numbers that was previously mentioned. We are then, as always, continuing to search for profitable small niche companies where the owners are seeing a value in the Lifcos corporate philosophy and the way we work. This is an ongoing task that we continue to put a lot of work into going forward. And with that, I would like to leave it over for any questions. Thank And our first question is from Alex Kavriksen from ABG. Please go ahead. Your line is open. Hi. Thank you. I just had a few questions about the recent acquisitions. They've been of quite substantial size if you look at historical companies or at least from last year. And I was wondering sort of if you're seeing a difference in pricing or competition for these sort of deals of larger size. And then maybe if this is the level of company size that you want to be at going forward or if it's just by chance that they've been of this, well, this big size? Yes. I think in general, you could say that we are we have a pretty open minded approach when it comes to acquisitions. And of course, we like the company to contribute with as much EBITDA as possible. But as you mentioned, the valuation is a very key component for us. So there is an obvious limitation to that. And in this last 6 months, we've been able to acquire companies of, so to say, medium sized from our perspective at valuation that we still think are reasonable. And I think we will continue to see a little bit of mix going forward that we do some smaller acquisitions and some that are maybe a little bit, from our perspective, a little bit larger. But it's very difficult to say, by definition, the way we operate. We are looking at many different companies all the time. And they have to meet our criteria, which are kind of strict when it comes to financial performance and historic development and the niche dimension. And also, the sellers have to value Lifeco. These are the 2 things that really has to be there to get the match. And that is why we are continually looking for as many opportunities as possible, in this case. But once again, difficult to forecast. I understand. And so just to follow-up a bit on the pipeline and recent acquisitions. So now you have done 2 acquisitions within demolition and tools and then 3 in system solutions. Is that something you've been targeting? Are you or are you also looking into Dental? Or where are you laying focus at this point to get the mix of the company in which you have? Once again, we are looking very broadly. And obviously, in the areas where we are and have more companies, we have, of course, closer connection to it, but we are also very open minded and work through many different ways to get new niche companies into LIFO as well. So there's no we are continuously looking for dental companies. We are continually looking for the emission tools companies. But what we do see and what you can expect is that the number of opportunities will always be bigger in Systems Solutions area, given the fact that we have a very broad definition of that business area. Yes. Understood. All right. Yes. So one last question for Demolition and Tools. I was just a bit curious about I mean, it's my understanding that this is quite a cyclical business and so forth. And I was just wondering what your sort of visibility is there. So from when things are starting to slow down, for example, till you see it in your P and L, for example, could you give a flavor of just the visibility you have in this segment? Well, if you're talking about first of all, we don't have any forecast, so we don't spend enough amount of time trying to forecast. But in terms of order books and so things, it's rather short, so to say. It's not that we work with we have some areas in especially in the rock piece area where you have some basically special machines that could take longer to deliver. But normally, it's not enormous amount of time that we take. So it's rather short. And our next question is from Per Jorgensen from INT Asset Management. Yes. Thank you. Hi, Per. Two questions from my side. The dental business is still performing very well margin wise. Is it still the newer acquisitions, the products companies that's increasing the margin? Or how is the old distribution business doing margin wise? That's my first question. My second question is system solution that has performed lately or in the last couple of years very, very well and margins have increased also above your expectations as I gather and quite fine organic growth. But we can also see in the back in the accounts that it's very differentiated from the different areas in the system solutions. Could you put a little bit of flavor on the Systems Solutions side just in the general perspective, how you see it organic in the next couple of quarters or maybe into next year? Or is the visibility like in Demolition 2 still very low? All right. So if I start with the first question about Dental. It's actually it's true that we had, in the last 12 months a positive effect of acquisitions, basically high margin companies that are added to the profit development. On top of that, our strategy of always focusing on the profit and not on the top line is a continuous strategy that we always have. So it could be that in distribution that in certain companies and certain countries, we even have a slight decline in top line, but we are extremely focused on our EBIT numbers. And this goes back and forth over time like this. But you can say, overall, the distribution business, and I've been commenting this before, it is a slow growth market, and we are not focusing on the EBIT level. It's not something where we see dramatic fast improvement in this area. And then in the more manufacturing side and also in the process business, we have slightly better sort of portfolios in that area overall. But this can vary a little bit between quarter on quarter. This is more general comment around that. Going over to the Systems Solutions area, it's true that it can be a fluctuating business area with all these different divisions and with different type of dynamics. I think what we can say throughout the first half of the year is that it has been pretty good across the line. And that's why also there's not enormous amount of details in our report about this because we think there's no major effect that we had to comment on this. And it may be a good thing to remind everyone, if you look at the 1st 6 year month figures that from time to time, there will be effects from the product business that can go up and down. And then to expect that all these areas will develop positively all the time is not realistic. So it's been a good first 6 months for this year. And to forecast, Parrot, it's very difficult for us to have forecast because the visibility is not that long. No. But it's fair to assume that if you take the whole I know you look at differently internally. You don't look at it as a system solution business. But from external an external view, it's maybe fair to assume that the whole business area is actually, as a portfolio, more stable than once you think due to all these moving parts in the different companies. So it's actually, from a top line perspective and especially from a margin perspective, maybe more stable than one should think. Is that a fair assumption? I would answer the question a bit differently because I think from a cyclicality perspective, we have cyclical risk also in system solutions. And that is we haven't sort of recession tested that portfolio in the Lithgow ownership structure yet. So that's a little bit of an unknown exactly how that will play out. But what we have said and what we will continue to say is that on average, the portfolio we have today has, so to say, higher what we think quality in terms of earnings potential and margin potential and cash flow generation potential than it was maybe 5 years ago. But that's also explaining why the margins are concentrated today. We have acquired new niche companies into the group. Yes. Yes. So it's fair to assume that unless one expect a fairly big recession, but one says, okay, it's muffling through what we are seeing now. It's actually a more stable business that one should think due to this portfolio in many different companies. Sure. But we still have in the product business that even though the relative size of that is going down as we grow other fields, it's still something that can be extremely volatile from quarter to quarter. And you can see that now from the sorry, about my cash flow comments in this quarter. Now it's cash flow that we are commenting, but that has such a big impact that is actually impacting the cash flow of the whole group. You can also, from time to time, see that also on sales and profit numbers, not to the same extent maybe, but but this we have to expect also going forward that, that can vary between quarters. Yes. But it's still mainly in the forest parcel, that's project business and then also in Recycling. Yes. We have 2. In the Recycling, yes. And I think in this first 6 years, we saw a slow somewhat a slowdown in the forest part for us, and then the recycling is compensating in that. Yes. Okay. Fair enough. Great. Okay. Thank you. And there seem to be no more questions. I will hand the word back to you Per for some final comments. Okay. Thank you very much for calling in. And I think we end the conference call with that. Thanks very much. This now concludes our conference call. Thank you all for attending. You may now disconnect your line.