Hello, welcome to Lifco 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 am pleased to present Per Waldemarson, 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 two of our presentation, and just give a few highlights on the group's financial performance in the second quarter. 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. Then also as we had in the first quarter, a positive effect from the currency. It's all in all very good there. If we go to our EBITDA level, it's also very good with 23% growth in the quarter. Then I would like to highlight, when we go further down in the profit and loss, that in the quarter we have a effect of paying out the dividends to minorities.
In a lot of our acquisitions that we've done in the last few years, the sellers of the companies keep some shares and have a minority interest or minority position in the company. As we now, after owning these companies for a few years in many situations are paying out dividends, we have then an effect of 46 million SEK related to dividends going out to the minorities. 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 discussions around the dividends that should be paid out. 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.
Therefore this will be something that we expect to also see in quarter two next year in a similar way, but we did not have it in the quarter two 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 two last year were lower than normal because we made a revaluation of our tax debts following new tax rate announcements in Norway, U.K., and Sweden in Q2 2018. That had a positive effect of SEK 22 million 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. In this year, those prepayments have been going down basically due to the fact that the projects have been started and are being booked into the P&L, and we don't have the same amount of new projects coming in. This is impacting our cash flow from the project business. I also would like to highlight on page number two 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 asset in the capital employed definition.
Therefore, the numbers between this year or last year are not fully comparable, and this will then, of course, at the year-end, be fully implemented so that when we go into next year, we don't have that comparison problem. The effect of IFRS is SEK 477 million that is then included in the capital employed definition. If we now turn to page number three, 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. 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 Dental.
In Demolition & 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 there currency is helping us. If we look at Systems Solutions, it's all in all a good development. It could be worthwhile highlighting the solution that the project 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 the recycling is up, so it's basically offsetting each other in this. All in all, solid development also in Systems Solutions.
Actually, if we turn, we can skip page four and go directly to page five. Commenting on the balance sheet, we can comment that we have the IFRS 16 effect in our tangible fixed assets of SEK 477, and the same effect down in interest-bearing liabilities increasing by SEK 477 due to IFRS 16. Just to comment on our net debt to EBITDA, it's actually lower than one year ago. 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. I will actually go all the way down to page 27 to comment on our acquisitions. We have now, after the end of the second quarter, also announced two new acquisitions.
One is a Norwegian-based company called Rustibus, which is a niche company making surface preparation tools in the marine segment, basically for removing rust on ships. It's a global business based in Norway with different sales subsidiaries out in the world. 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. I'm just also 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 Lifco's corporate philosophy and the way we work. This is an ongoing task that we continue to put a lot of work into going forward.
With that, I would like to leave it over for any questions.
Thank you. If you would like to ask a question, please press 01 on your telephone keypad. If you'd like to withdraw a question, you may do so by pressing 02 to cancel. Our first question is from Oskar Wikström 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. I was wondering if you're seeing a difference in pricing or competition for these sort of deals of larger size, and then maybe if this is a 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 big size. Thanks.
Yes, I think in general, you can say that we have a pretty open-minded approach when it comes to acquisitions. Of course, we like the companies to contribute with as much EBITDA as possible. As you mentioned, the valuation is a very key component for us, so there is an obvious limitation to that. In these last six months, we've been able to acquire companies of, so to say, medium size from our perspective, at valuations that we still think are reasonable. I think we will continue to see a little bit of mix going forward, that we do some small acquisitions and some that are maybe a little bit, from our perspective, a little bit larger. It's very difficult to say.
By definition, the way we operate, we look at many different companies all the time. They have to meet our criteria, which are kind of strict when it comes to financial performance and historic development and the niche dimension. Also, the sellers have to value Lifco. These are the two things that really have to be there to get the match. That is why we are continually looking for as many opportunities as possible in this case. Once again, it is difficult to forecast.
I understand. Just to follow up a bit on the pipeline and recent acquisitions. You have done two acquisitions within Demolition & Tools and then three in Systems Solutions. Is that something you've been targeting? Or are you also looking into Dental, or where are you laying focus at this point to get the mix of the company that you want?
Once again, we are looking very broadly. Obviously in the areas where we are and have more companies, we have, of course, closer connection to it. We are also very open-minded and work through many different ways to get new niche companies into Lifco as well. We are continuously looking for Dental companies. We are continuously looking for Demolition & Tools companies. What we do see and what you can expect is that the number of opportunities will always be bigger in the Systems Solutions area, given the fact that we have a very broad definition of that business area.
Understood. All right. One last question for Demolition & Tools. I was just a bit curious. It's my understanding that this is quite a cyclical business and so forth, and I was just wondering what your visibility is there from when things are starting to slow down, for example, till you see it in your P&L, for example. Could you give a flavor of just the visibility you have in this segment?
First of all, we don't have any forecast, and we don't spend enormous amounts of time trying to forecast. In terms of order books and some things, it's rather short, so to say. We have some areas, especially in the Brokk business area, where you have some basically special machines that could take longer to deliver, but normally it's not an enormous amount of time that we take. It's rather short.
All right, cool. Thank you. That's all from me. Thank you very much.
Okay.
Our next question is from Per Jörgensson from INT Asset Management. Please go ahead. Your line is open.
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 actually increasing the margin, or how is the old distribution business doing margin-wise? That's my first question. My second question is, Systems Solutions that has performed lately or in the last couple of years very well, and margins have increased also above your expectations, as I gather, and quite fine organic growth. We can also see back in the accounts that it's very different aged from the different areas in the Systems 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 & Tools, still very low?
All right. If I start with the first question about Dental, it's true that we had in the last 12 months a positive effect on 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. It could be that in distribution, in certain companies or certain countries, we even have a slight decline in top line, but we are extremely focused on our EBIT numbers. This goes back and forth over time like this. 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 top line. We're focusing on the EBIT level.
It's not something where we see dramatic, fast improvement in this area. Then in the more manufacturing side and also in the prosthetics business, we have a slightly better performance in that area overall. This can vary a little bit between quarter and quarter. This is a more general comment around that.
Okay.
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. 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. It may be a good thing to remind everyone, if you look at the first six-month figures, that from time to time, there will be effects from the project business that can go up and down. Then, to expect that all these areas will develop positively all the time is not realistic. It's been a good first six months for this reason.
To forecast, Per, it's very difficult for us to have forecasts because the visibility is not that long.
No. I know you look at it differently internally. You don't look at it as a Systems Solutions business, but from an external view, it's maybe fair to assume that the whole business area is actually, as a portfolio, more stable than one should think due to all these moving parts in the different companies. 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 Systems Solutions.
That is we haven't sort of recession-tested that portfolio in the Lifco ownership structure yet. That's a little bit of an unknown, exactly how that will play out. What we have said and what we will continue to say is that on average, the portfolio we have today has a, 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 five years ago. That's also explaining why the margins are as presented today. We have acquired new niche companies into the group.
Yes. Yeah. It's fair to assume that unless one expects a fairly big recession, but one says, "Okay, it's muddling through what we are seeing now," it's actually a more stable business than one should think due to this portfolio of many different companies.
Sure. We still have 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.
Yeah.
You can see that now from Sorry, about my cash flow comment in this quarter. Now it's cash flow that we're commenting, but that has such a big impact that it's 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 this we have to expect also going forward that can vary between quarters.
It's still mainly in the forest part that's project business, and then also in the recycling.
In the recycling, yeah. I think in this first six months, we saw somewhat a slowdown in the forest part for us, and then the recycling is compensating that.
Yeah. Okay. Fair enough.
Great.
Okay. Thank you.
Just as a reminder, if you do wish to ask a question, that is zero one. There will now be a further pause while questions are being registered. There seem to be no more questions, so 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. Thank you very much.
This now concludes our conference call. Thank Thank you all for attending. You may now disconnect your line.