Earnings Call: Q1 2020

Apr 24, 2020

Hello, everyone, and welcome to the Q1 presentation. I would like to start directly on Page 2 and just give a quick overview of the quarter that we just reported this morning. And overall, we can say that the Q1 this year was a stable, solid quarter with some COVID-nineteen effects during the last couple of weeks in the quarter. So overall, we were rather unaffected. Most of our business is done in the Europe and U. S. End use markets. So we were not really affected by the early problems in China with demand. However, we had slight effect on the dental side where we have a production unit in China that has some difficulties keeping up the production in the early part of the quarter, but it turned out to work out fine on that side. I also like to highlight that we also this quarter grow our profits more than sales, which is one of our ambitions in Lidco, not maybe every quarter, but over time, we always strive for driving our profit more than sales to reach high and solid margins. So we did that in this quarter, partly or mainly thanks to acquisitions, our organic growth on the top line was actually negative of 2%, but acquisitions contributed with 9% sales growth in the quarter. And this translated in total into an EBITDA growth of 11% and actually a higher growth in profit before tax and net profit of about 25% in the profit before tax, which has to do with the effect we had in the quarter 1 last year of onetime cost of SEK 56,000,000 that we didn't have this year, obviously. And then we also like to comment quickly on the cash flow. It was also a stable, solid quarter in terms of cash flow. I think the comparative figure here last year, we had some difficulties generating the cash in the last quarter in 2019 on the Q1 in 2019, which had to do mainly with a very high level of growth and business activity in that quarter that led to working capital issues as well as also some effects on the prepayments last year. But this year's quarter was more normal and quite good actually in terms of cash flow. So we're very happy about that. All in all, also just commenting on our return on capital employed, excluding goodwill. If you compare the quarterly numbers, we have to keep in mind that the IFRS 16 has major effects on that number. So we are fairly similar overall underlying, if that's our performance. So with that, I would like to turn to Page number 3, where we look into the different business areas. If we take dental, we did see some effects of COVID-nineteen and the lockdown in certain markets in the last, I would say, couple of weeks, especially last week of the quarter. But other than that, it was a stable and solid quarter for us. And yes, as I said before, some issues we had with increased costs in relating to the China production entity in our prosthetics business, but that's very, very marginal as you can see in these numbers. If we turn to the demolition tool piece area, I'd like to summarize the quarter that I think the underlying market was very similar to the Q4 of 2019, where we reported actually lower profits in that quarter compared to the year before. This quarter, we report improved profits, and that has partly to do with the effect of actually having some deliveries of project business or slightly larger orders with good margins. And as I mentioned, in previous quarters, these type of orders tend to fluctuate between different quarters. But overall, my comment on demolition tools and the online market is that if you take the last maybe last week of the quarter and exclude that part and then look at what was the market before, it was very similar to what we saw in Q4. So basically, slightly weaker market conditions than we had in the beginning of 2019, where everything was very strong in this segment, but still on a very good level, I have to say. So we have to compare compared to the long term trend and still good in that sense. And then if we come to the last business area, the CEC Solutions, the growth there of sales in 15% and profit in 25% is mainly driven to acquisitions. As you all know, a lot of our acquisitions tend to end up in this division. This is area where we have a very broad definition on what type of companies that can be included in the area. So that contributed to that growth there. I just want to make one more comment on CECL solution. We still have rather weak development in our forest product business and also saw that in this quarter. We have that now for quite some time, but we're working hard on trying to address those issues. So with that, I'd like to go to Page number 4 and just make a summary of the effects. I mean, most of the comments I've had up until now has been related to how the situation was before the last 2 weeks of March. But since then, we have seen quite some changes. What we did in the very early part of March, obviously, like most companies, we did actions to reduce our risk for employees when it comes to health and safety and also to make sure we could continue operating our businesses in the Europe and U. S. Despite the demand on basically making it more difficult for people to go to work. And we did quite well in keeping our operations running. We did obviously see some effects, but very limited effects in the Q1 due to the demand over the last two quarters, and that's quite general. It was more specific and more immediate in the dental area where we saw quite a few markets, both in Europe and the U. S, where both due to legislation or clear regulations that dentists or certain dental treatments were not allowed also due to general attitude of patients not wanting to go to the dental office. And this type of trend continued in the beginning of April, and it has also been affecting many of our other subsidiaries outside dental in terms of demand during the last couple of weeks. So with that, we actually believe that the COVID-nineteen will have effect on sales and profitability levels in Q2 2020. Very difficult to say exactly how because obviously, it depends on many, many different factors. First of all, how will the markets in Europe and the U. S. Open up and how will it impact our very different type of business that we're operating. And once again, the short term impact has been clear on the dental side and also on the Sysore Solutions side in certain areas where we have very little order book to work with. We also see the demand going down in demolition tools, but there we have slightly longer lead times and some order book to work on. But the effect is quite broad in spread during the last few weeks. And all I'm saying now is referring to how things have been in early April. Obviously, we don't know how May June will be. That's still an unknown trust, and we are just curious to everyone else to understand how the markets will develop in the next weeks months. And in summary, it's basically possible for us to predict exactly how the impact will be and for how long it will last. And that's how we leave that comment. And with that, I'd like to go to Page number 6 and just very shortly then make one more comment in addition to the data on this slide, and that's that we still exit this Q1 with an interest bearing net debt to EBITDA of 1.6x. So our leverage ratio is still on a quite low level despite high activity in acquisitions in the last 6 to 9 months. And then we can move directly over to Page 28 and just all the way back to Page 28 and just comment briefly on their most recent acquisitions. As you can see that we made them in early 2020, we finalized 4 acquisitions, 3 in Dental and 1 in System Solutions. And as just a comment on the acquisition level, acquisition activity right now. We are obviously a little bit in a situation where we are still keeping a lot of discussions going on. It's difficult to enter new discussions due to difficult to travel around in Europe to meet the entrepreneurs and the business owners. But we do as much as we can to keep things going, and we hope that once we get more visibility in our portfolio and also in the companies that we are targeting, we can go back to more normal situation. But also there is, of course, difficult to predict when and how that will develop exactly. So with that comment, I'd like to open up for questions. Thank you very much. Thank And our first question comes from the line of Max Lees of SEB. Please go ahead. Your line is open. Yes. Hello, everyone. Max Neistroomm here, SEB Credit Research. I have a question on the balance sheet and the liquidity, which obviously is a topic on everyone's mind this day. At the year end, I believe you had SEK 1,200,000,000 in the overdraft facility. So in addition to the cash at the balance sheet, could you tell us what is the situation at the end of Q1? Is it the same financing package? Or have you extended the liquidity? That is my question. Thank you. We have extended the liquidity at the end of the Q1. So we have both in RCF dilution and also through our normal overdraft check credit. Is that something you could share with us the details or are there any public? I mean, we haven't normally communicated those details. We have what we have communicated in the end of the quarter was that we did not we had a bond that was terminated on April 3 that we instead of making a new bond, we have to go out and make a bridge financing on that. So we are currently working on our long term financing solutions. In addition to that, we also took certain steps to make sure that we have more liquidity sort of backup, which will occur to this overdraft that this comes from. So finally, is it fair to conclude that the cash on balance sheet and the undrawn credit lines are greater than they were at the end of last year. Sure. Thank you very much. Thank you. Our next question comes from the line of Jurgen of INT Asset Management. Please go ahead. Your line is open. Yes. Thank you for taking my question. Per, I have a question regarding the Systems Solutions business. It's doing very well, thanks to acquisitions. If we go back when you really started after the IPO And you saw in 2017, 2018, 2019, you acquired a lot of businesses in the system solution area. I know it's a very fragmented area. But if you take a look at these companies, are they doing better than the old companies in the portfolio? If you take a look what has happened in April, so they are protecting the margin better. They're protecting their businesses better than the old business. Is that a fair assumption that they are doing very okay actually? Is your question related to how they're doing after the lockdown of the European and U. S. Market? Yes. Yes. I think that's a very difficult question to answer because you really have to go into every company. They all have specific situations. And then also the timing of how quickly you fall into effects of COVID-nineteen lockdown is also quite to predict. It's been almost on a daily basis the discussion with different companies. Certain companies that felt everything was perfect last week of March suddenly starts hitting positive in the second April. So it's that type of situation right now where it's very difficult to predict. So I think, yes, some of the companies, for sure, are maybe less affected, but I will also say some companies are affected quite a lot. So it's very difficult to draw to make a statement like you tried to make me here in this because it's really company specific. It's also day by day or week by week specifically. So I would say there a lot over the last 5 years. Yes. But if we look back, it's fair to assume that the companies that you have bought for system solutions, they are of a much better quality than you actually had before. So all things being equal, they should be doing better. If you take a bigger perspective on this and look at it in a more normal marketization, and we totally agree to that statement that the companies, on average, that we have brought into Lifeco has had an even stronger niche position and even stronger market position and margin opportunity and also margins coming into litho as well as, I would say, quite a few of them also have opportunities to do something to develop their business going forward. So yes, we are quite happy with the portfolio we have acquired, but we are also very humble in this period of time to say that many companies that you normally would not think will be very volatile could have severe impact in this period of time where demand suddenly can from one day to the other almost be wiped out as it's very short term. So that is also very difficult to predict how things develop in the next few weeks or months. Yes. Okay. Well, it's a fair assumption. If just my last question regarding dental, and it's very obvious that the dental clinics, for example, here in Denmark, where I am, they have been closed for a month or so, and they are coming back to business now. Do you see any and it's probably also fairly difficult to analyze, but is it fair to assume that there's some sort of pent up demand? There will probably be some lost revenue that will never come back, but there will also be a pent up demand. So how do you see that for the dental business in general? Yes. I mean, I thought about that topic, and I got that question actually before we got into the silent period from some people as well. But I think it's very difficult to predict that because some of the treatments, they will never come back. Some are related to annual checkups and more stuff like this. And then we have some treatments like bigger prosthetics treatments and implants and all that. Will that come back with a it's all difficult. Even if it would be so that there is a pent up demand, what how quickly will the delta market have capacity to increase that? And there's always there's only so many dentists available and depending on how the market happens and when it opens up. So yes, in theory, there should be some, but how it will develop is very difficult to say because of the capacity. Yes. Fair enough. Just lastly here on the M and A. If we assume that you are discussing with potential sellers like you always have done, Is there anything on the financing side that you see an obstacle? Or are the banks ready to because your balance sheet is actually quite sound and you're very can't be agree on the price with the potential seller? Yes. Are there any issues with banks that you see it? Or is it mainly you can't be agree on the price with the potential seller? I think to maybe comment a bit more on M and A. I mean, the last 4 to 6 weeks due to obvious reasons has not been focusing on maybe finalizing deals. We have not been in that spike over the last weeks. And we have some smaller add ons that we are still might or might not do in the near future. But these are the more normal stand alone Lifeco type of acquisitions that we've done in the last 5 years, been a little bit on hold in terms of because we've been very busy trying to understand where the world is going and to make sure our companies are going in the right direction as well as making sure we focus on our cash flow and operations. As we turn now the next few weeks months, hopefully, the situation will slightly improve and we can go into a discussion. And you're right, we have a strong balance sheet, so we have the capacity to take on more acquisitions, but we also have to be making sure that we know a little bit more about the future before we make major steps forward. Because we, the whole portfolio is our financing source for the future acquisition as well. So we have to make sure that it would be nice to see at least a little bit more opening up of dental markets in the next few days weeks. Yes. But you don't see any problem on the financing side like when you from banks and so on when you do the acquisitions? No. As I told you, we have not been in a deal striking mode the last couple of years. Okay. We've been more focusing on building up our cash positions and our liquidity situation more in-depth. But of course, we plan on continuing our acquisition activity at some point in the next weeks, months or at least quarters When it will come back to more, I don't know today. Okay, fair enough. Great. Thank you. You. And our next question comes from the line of Johan Hilson of Enterthunder. Please go ahead. Your line is now open. Hi, thank you for taking my questions. Some more questions on the dental side. How has the Swedish market developed during this period? Sweden has been locked down, but I guess it's still heavily affected? Yes. It's been heavily affected. Some of the public big public dentists in Stockholm and Southern Sweden, they basically decided to close down dentistry with the argument that the materials that go into dentistry should instead be used in hospitals. There only have been a few clinics also for emergency ventricity. So and on top of that, you have the when a lot of people don't get the recommendation to stay at home, I think a lot of people also cancel their dental and annual checkups. So if you don't have severe pain in your teeth, you maybe don't go to dentists right now. Obviously, that's not completely true because there still are a lot of dental offices patients there. But to summarize, we saw also substantial decrease on our markets in Sweden in the last 4, 5 weeks. And how is the timing of your sales to the dentist? How far ahead do they typically order your products? It's a very direct link. So there's no long lead time. Majority of our sales and profits in our dental business comes from either distribution of dental consumables or the prosthetics, which is, of course, order by order type of business. So there's not a lot of lead time. Maybe normally, that is that's what orders on a weekly or biweekly basis. Okay. So the impact will be very direct given the activity the dumpsters have in their business. So maybe what did happen in March was that there was maybe a little bit of increased demand at the beginning of the March. When everyone was stocking up on food in their kitchen, they also bought some more material because they didn't know what's going to happen. Then that was maybe the only effect, but that was also kind of marginal. But you're right, it kind of directs the link to the end user demand and our sales. Okay. And when you look at your overall markets in dental, have you seen any time line for how government recommend the dentist to act now? Are they supposed to open in May? Or are they supposed to be limited? Yes. The only market where we that I'm aware of, I know in Denmark, you had some discussion about making it now allowed to be certain that the treatment comes, I think, this week or early next week. So that was the only sort of that I've heard of positive regulatory or sort of governmental decision making. Most of the other decisions are more like in Sweden, there's no real rules, it's more how people act and how patients act and also how dentists act. So that is more important here maybe than what's actually regulated. But we do hope, and this is more a hope than a that discussion now in Germany, which is a very auto market felt that they will see a little bit more opening up of the society in the next few weeks, and we hope that, that will have some effect. We don't know how much, and we don't believe it's going to be back to normal, but we hope to see that it's going to go in the right direction for us. Actually, that's more hope than a sort of prediction, I'm also hoping. Okay. And then finally, on your cash flow, it looks pretty strong, more or less all net income turns into cash. Have you done anything extraordinary, encourage your subsidiaries maybe to increase factoring or anything? Or is this just a normally strong cash flow that wouldn't take anything away from coming quarters? I think we like most companies, when we saw this coming in March, we had a very strong internal focus on cash flow, but we still had a very strong internal focus on cash flow. So it is difficult for me to say exactly how all 100 and 64 subsidiaries have acted exactly on the last week of March. But I would say, in general, it's maybe more important if you compare the cash flow this quarter compared to last year, that last year, we had a pretty sloppy cash flow because of the huge organic growth we had. If you remember back then, I commented that we were not so happy with our inventories and things like this. But now we are more stabilized that and then we're comfortable with that. And maybe we have a little bit effect in this quarter on the supplier side that in certain situations, for example, in the dental market, we have been asking some of the distributors sorry, some of the manufacturers to share a little bit of the burden of the dental lockdown, so that our dentists can, we can help them together. So that's the marginal effect overall, I think, Philippe. Okay. And if you just look back at what happened during the financial crisis for many single companies to Lifeco, As everyone released working capital, cash flow was the strongest ever. Is there anything in this situation that would make one believe that cash flow wouldn't be strong? Could it be that, well, if sales completely gets wiped out, you don't get the cash flows? But I guess you're such a widespread group that you should have some sales and then cash flow would be strong. Yes. But I have the same thought that if we get a total stop, you don't get, the inventory will just sit there. But I don't think we're there. And I think we definitely will not be there. Even if we were there for a few days in the beginning of this month, we will not be there for the whole quarter is not what I'm seeing right now. And once again, we have to be very humble to predict anything in these very turbulent times. So we hope that the most reasonable scenario is that cash flow will be very strong if volumes are weak in general. We focused on that. We don't predict cash flow, and we don't communicate any forecast. We do our best. All righty. Thank you very much. And there are no further questions on the line at this time. Please go ahead, speakers. Okay. Thank you, everyone, for listening in. And yes, have a good day. Thank you.