Earnings Call: Q4 2019

Jan 31, 2020

Hello, and welcome to Lifeco Q4 Report 2019. 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 CEO, Karl Waldo Manson. Please go ahead with your meeting. Thank you, and welcome, everyone, to this Q4 conference call. I would like to start to go already to Page number 2 in our presentation and just quickly go through the summary of the quarter. If we take the quarterly numbers first, we had a sales growth of about 8% in total. However, we had actually an organic decline of 2% on the sales side in the quarter and also a 3% decline in the EBITDA numbers. In the quarter, however, we had a very strong cash flow, growth of 44.5%. I would like to only slightly point out that the work that we initiated during the year to get inventory levels into a better position paid off in the last quarter. And also, thanks to the lower receivables, we showed a very strong operating cash flow. And while staying on this page, I can also comment slightly on the full year number. We had a overall 16% growth and 4% organic sales growth for the whole year and EBITA growth of 16% for the full year. And also, the full year numbers, very solid cash flow development of 30% growth in operating cash flow. Also, just to comment, we have a proposed dividend of SEK 5 point 25, which is an increase of 14% compared to previous year. And then we can turn to Page number 3, where we go through the different business areas. And if we start with dental, we had in this quarter a somewhat weak development in the especially in the distribution business. And this is relating to many small things. It's not one specific company or geography that is sort of the problem area or in general was a slightly weaker quarter than normal. Also want to emphasize that this is a quarter we have no acquisition goal in this business area. And if you look at the whole year for Dental, it's been actually quite good year. We grow the EBITDA of 9% in the year, which we are quite happy with. And then if we go over to the Demolition Tools segment, we had a quarter that although we grow the sales numbers with 12%, that's impacted by acquisitions. So organically, it was clearly a weaker market condition on the business area, especially if you compare back from the period starting in already in Q4 or even Q3 2018 up until the summer of 2019. We have now felt a little bit weaker market conditions but also a more unclear market condition. It's basically a little bit month to month. It's been the last few months. And we don't give any forward looking statements, but I want to emphasize already here that we have not we normally don't have very long order books in this business area, so the visibility is not so long for us on what will come in this area. On the quarter, if you look at the profit development in demolition tools, where we have a decline of 21% in profit, that is related to the overall weaker organic development in sales, but mainly due to the negative impact from product mix. In this quarter, we didn't have any major special projects that can be very profitable. And also, in general, the growth characteristics of the business has led to a negative product mix in the quarter. And this has also historically been fluctuating up and down in Mexico. And when it comes to the last business area of Sysysolutions, we had overall a pretty good development, a growth of 13% and EBITA growth overall sales numbers and EBITA growth of 14%. So in general, it was pretty good, this is Solutions, but the weakness in the forest project business still continued in the Q4, and we also had quite we're not so happy with the organic development in service and distribution for the quarter specifically. And overall for the year, if you comment on service and system solution, we had a very strong development of 20% EBITDA growth. Also coming back to the demolition tools, I want to emphasize that we grow the year with 15% EBITA growth for the Emulation tool as a whole. If we then turn to Page number 4, we update once per year, we update the acquired versus organic EBITDA growth. So I just would like to make a short comment on this slide where you can see the 2019 numbers. We had a growth of 10% from acquisitions. And actually, most of that growth came from acquisitions made in 2019. We only carried over SEK 43,000,000 from 2018 due to quite low acquisition activity in 2018. And then we could also, in this summary, see that at the second to last row that we have a total acquired estimated annualized EBITDA of SEK 287,000,000 in the year 2019, which is actually all time high for let go. And also on this slide, on the last row, we have the net debt to EBITDA numbers. And this is now the comparison between 2018 2019 is not fully comparable as we into 2019 has now the IFRS 16 effect in our net debt to EBITA ratio. But as you can see, we still run as no matter how you define this net debt to EBITA, we're still below the 2x EBITA target range. And then we can flip to Page number 5, and I just would like to look at the long term development of net debt to EBITDA. It's the black line in the graph to the left. And as you can see, we end also 2019 with a very solid balance sheet, and there is obviously more capacity for acquisitions going forward in Mexico. And then I would like to flip to Page 7, 50 front slide. And just to comment on our return on capital employed, where we if you take the right hand graph, you see a quite short decline in our return on capital employed. Now this has to do mainly has to do with the new IFRS 16 calculation. So from this year on, we will have more comparable numbers in this graph. Lifeco still has a huge emphasis on the return on capital employed, and we have a very good overall portfolio, which leads to this good cash flow and cash conversion in general. And then we can move all the way over to Page 14 in the presentation, where we also once a year update or actually once every second year update our organic development. And I just want to give everyone the background. This is when we have measured purely organic our original dental companies on the left. These are now based on public information in the Nordic region. You can find this data publicly available. And we have now tracked exactly same companies over a long time period. And as you can see, the historical development has been very good in the dental on the left side side. However, in the last 2 years, we had a decline of or an annual average decline of 3% in our profit level in this subset of companies. And that has to do basically of 1 distribution company that has suffered some problems in the Nordic region during this time period. And I think we're still running on overall healthy margins, but I just want to comment on that as well. On the right hand side, you can follow the Swedish entity of the Brok Group, basically the Brok AB factory. And as you can see, it continues to develop very strongly also in 2019. And then we turn all the way to Page 27, where I just want to emphasize on the acquisition side that we have since the last conference call signed 5 acquisitions, 2 in Sysore Solutions and 3 in Dental. And just to clear on that as well. And I think with that, I will open up for questions. Thank you. Our first question is from Oskar Bjergstrom from ABG. Please go ahead. Your line is open. Hello. Thank you. So just one first question here is a bit on the margin in Demolition and Tools. You mentioned that the lack of these highly profitable special orders. Could you develop a bit more on what they are usually? And is this a trend that you think will last? Or is it just will this come back in the next quarter? How do you view that? Yes. And just before I answer that question, just to be very clear, I think the lower margin in the quarter has to do with a general product mix effect. And on top of that, we did not have any of the special product that can be highly profitable that sometimes come and go. And the predictability of the special orders is very difficult to foresee in the future because, first of all, the lead time can be long and also the timing of the now very difficult to proceed. So it's but it's not something we had historically as well in this division. But I think on top of that, we also had a weaker development in the high margin part of the aviation tools business in the 'fourteen. And so that development, why is that, do you think? Is that is it increasing competition? Is there pricing pressure? Are people choosing other options? Or how do you view that development? No, we view it as we had a somewhat weaker market condition in this quarter compared to previous years. I also would like to emphasize, in general, I didn't mention that, but in Q4 2018, we had an overall organic growth in lift growth 10%. So we're meeting a somewhat strong Q4 2018 as well in this regard. But I think the market itself has been more unpredictable also the last 4, 6 months when it comes to market conditions for the demolition tools segment, which has a cyclical component or a very strong cyclical. Yes. And this is so it's really just market. There's no company specific in this segment really. It's more the overall market. Yes. And in terms of I was also wondering a bit on dental. You mentioning that distribution was the distribution companies were doing a bit worse or a bit softer. But I also noticed that the recent acquisitions, there are a few that seem to be more falling into the category of distribution. Could you just develop your thoughts there? Is that do you think the market is solid? Why do you choose to acquire these type of companies if you're seeing a slower development? Well, I think you're referring to we have done one distribution acquisition recently. It's a Croatian company where we think we have quite a strong market leader in a market where we think distribution can be attractive long term. But in general, it's also for an attractive price and attractive valuation. But in general, we have been quite open within the last few years that our main focus in dental has been in the other segments, in the manufacturing side and in the prosthetics side, let's say. And the distribution business is a very good cash flow business for us, but we are running on a high margin level and the growth characteristics of that business has been quite low for some years. And I think this quarter in Dental is a mix of many small factors, the results. Okay. So the margin in Dental, could you just develop a bit more because so if the distribution business is doing worse, Could you just develop on why the margin is down? I thought that was the lower margin business. Or is that wrong? So the margin is so the EBITA margin is down 1% basically year over year? Sure. Sure. Can I give you a little of why that is? Yes. But I think the margin, exact margin by quarter can fluctuate a bit as well. So if you look at the overall 2019 numbers, which is also a relevant factor, we have been growing the margin in the overall dental and also in quite a lot of the companies. But in this quarter, we have especially in the distribution of weaker development. And our next question is from Julius Ropelli from SEB. Please go ahead. Your line is open. Yes. Thank you and good afternoon. One question first relating to the Systems Solutions division. And could you perhaps just elaborate a bit on the different segments in there and give a short update on the forest side? You mentioned that it was still weak in the quarter. And how do you see the outlook for Q1? The problem with the forest division is that it contains this sawmill project business. And I think in previous calls, I've been explaining that it's a very difficult business to predict because even if you have good orders, it's very difficult to understand the profitability until you reach a certain point in the project and actually until you reach the clearance of the project. So it's a very you have this very unpredictable business area. So I think it's a yes, it's something that we can't really predict to those. I think we'll be very open with that. It's a bit fair that it contributes to our cash flow over time, and it's been good if you take the average over the years. But quarter to quarter, it can be very difficult to forecast for us. Okay. Overall, the Systems Solutions saw quite nice development during the quarter. Is there some divisions or segments that are standing out? I mean, for instance, the environmental technology had quite good growth year over year. Something you can comment on there? And are you referring to the quarter now as a questioner? Yes, yes, exactly Q4. Yes. Yes, I think the environmental technology has been doing well in quarter, and I think also the other areas have been doing quite well. It's only the forest and the service and distribution where we're not fully happy with the quarter. All right. And then the last one from my side. This ongoing coronavirus thing, do you see any it having any impact in your manufacturing facilities in Asia? Or how do you see this? First of all, it's a very difficult topic to predict the outcome of this. But I only mentioned that we have in our dental prosthetics business, we have a German business with a production facility in China. Exactly. Yes. And that is if this corona situation would be becoming worse or continue for a very long time, that can be a problematic area for us. Because as of now, we still are able to operate right now, but this is a day by day development that we have to follow on track. All right. Thank you very much. That's all from my Our next question is from Robert Jardim from Carnegie. Please go ahead. Your line is open. Yes. Hi. So on demolition and tools again, would it be possible to sort of say how much of the decline in the quarter is related to sort of the slower or worse project or product mix? And how much is due to, say, a cyclical slowdown? It's difficult to break it down into to these levels. I can say it relates to both. But and I want to be clear that the market conditions in Q4 2018 was better than in the Q4 2019, in general, for the whole business area. So I want to make that clear. We had better market position the year before. And on top of that, we didn't have any special products in the quarter, which we normally have something of, not every quarter, but in Q4, we had a little bit of that effect in 2018. So it's a combination, right? Right. I guess that mix can vary, but if you have the other maybe more of a non blind process. Could you say something about the development through the quarter? Was sort of October, November better or worse than November, December or what? But I can say it's fantastic. I can say that in general, it's been very, very fluctuating month to month since the summer period, I would say. It's been in certain months, we've been feeling really bad, and the next month, it looks okay again. And that's how it's been throughout the last 4 or 5 months for us. So it's been very difficult, Morte, to understand for us also month by month. And as I said before, the visibility for us giving our order books is not very long. So it's very we're very curious how 2020 will be for this business. Okay, right. And another question on acquisitions. So you had a period with sort of not so many acquisitions during Osadol for summer, some time in the autumn and now you've had a flurry of acquisitions. So how do you view the pipeline that's better work than normal? Yes. I can only say that comment on that the way I normally do it. Some of these companies we bought, we've been in discussion for a very long period of time and suddenly a deal comes through. And some of the others, we learn about 6 or 7 weeks before we sign a deal. So that's why it's always possible to discuss the pipeline of those. Because of course, we have ongoing contacts with many companies that can happen in March or April or in 10 years. And then we will sometimes we find a company in November and we make an acquisition before end of December. So it's very difficult to comment on this. And now we had some activity in the last 2 months, and we work as hard all the time. We try to buy good companies for a reasonable price. That's what we do all the time, and we increase our work. We have a little bit more people involved in that work, and we try to do as best we possibly can. But to expect timing of acquisition is not it's impossible to predict. Okay, perfect. Those are my questions. Thanks. Our next question is from Christian Hellman from Nordea. Please go ahead. Your line is open. Hi, thanks. Just a question on the Demolition Tools, just so I understand it correctly. Is it true that the organic growth in demolition tools was negative in this quarter? We don't communicate on DaliPro. As we said, but I think it's clear that it has not it has been a weak organic performance in the quarter. You have to keep in mind that we have, in this business area, acquired 2 companies in 2019 that has done positively contributed to the quarter. So if you do the math there, you can understand that there's B2B development. Yes, yes. In my model, it's negative. I'm just sort of trying to get a confirmation on that because Yes. I mean, you're directly correct. Okay. And a question on the drop through in Dental. I mean, you compared to Q4 last year, you're losing 1% of revenues in dental in Q4 and about 6% on EBITDA. I'm just wondering if that's sort of a normal drop through for you guys and that's something that we can sort of model going forward in case you were going to continue to lose a bit of revenues in Dental or if there's anything unusual or extraordinary that we should sort of take into account? So first of all, that dental organ it's only organic in dental because there's no acquisition effect basically in that area. But we dropped 1% in the quarter. I think that has happened organically in the past. Then we dropped a little bit more in EBITDA. That's maybe not so usual. But on the other hand, it comes from many small events. It's not one big event. So we don't give any forecast. We cannot predict. But yes, we will see how the future will develop in this area. But there were some positive FX tailwinds, right, in dentals in Q4? Or is that not correct? Yes, it's more positive. Yes. Okay. So the organic crop was a bit more than 1% then? Yes. Okay. And then just a final question on your presentation on Slide 8, where you're comparing LIFCO, I guess, the total return share price versus some other companies. I'm just sort of trying to because when I compare you guys, I have a totally different peer group compared you to Henry Schein, for example, in the U. S. And Adtech and those. So can you please elaborate on why it's comparing both of those names? Yes. So Page number 8 is, Lifeco was listed back in 'ninety eight, and then Carl Bennett bought it out just shortly after it was lifted in 'ninety eight. So there was a market price for Lifko in 'ninety eight. And then we tracked all the dividends and made a total return analysis of Lifeco since 'ninety eight and compared it to the best performing shares in Stockholm Stock Exchange that were listed in 'ninety eight. So then Lifeco turns out to be number 2, and then we just added Berkshire Hathaway as a reference. It's the line, the bottom line in this graph when it comes to returns. So it's just showing the returns that the lift curve has had for shareholders since May 'nineteen 8. So the peer group is the best performing shares that were listed in Stockholm 98 and are listed today. All right. I understand. Thank you. And our next question is from Daniel Lindquist from Handelsbanken. So I had most of my questions answered and basically the one I'm going to ask you as well. But just looking at Dental, should we perceive it as its one distribution company specifically that's having more problems and the rest is temporary issues? And also just talking about the holiday effects of this workers friendly holiday, have you seen more effects from that than maybe perceived by us? Yes. So we don't want to blame bad performance on calendar effects. The only time we do it is when Easter is slowed around between quarters. So we haven't done a deep analysis on that. We can just conclude that this quarter was not so good for the rental company. It's a mixture of many things. We have some extra costs there that have some explanation, but none of them are big and important enough for us to bring up in this. So we Going into Q1. When I refer to Q4 results now, then I refer to the graph where I show the very long organic development in some of the other capitals. There we have one company that has suffered in the last 4 or 5 years. But that you've been seeing through our numbers for many, many years. But not specifically Q4? Not specifically Q4. Q4 is a mixture of different small things and then also lower sales, as you can see. Okay. So going into Q1, should we expect still some temporary issues from what you see there? We don't give any forecast. We can only conclude that the dental area in general organically has been very slow growth. It's been fairly stable, and this quarter was weaker than maybe normal, but we don't give it a forecast amount. Okay, perfect. So no further questions on my side. Thank you. And our next question is from Jon Huttner from Interfunder. Please go ahead. Your line is open. Thank you. Hi, Per. Just a quick one on net working capital. How did net working capital to sales develop for the full year compared to last year? You mean network capture I don't have that number in front of me right now. But I can only say in the beginning of the year, we had quite negative effect on building inventory, inventory, and we probably ended the year with a positive effect on accounts receivables for sure, if you look at the full year numbers. So I don't have that data right in front of me right now. Okay. I will get it later on then. Thanks. And as there are no further questions, I will hand the web back to the speaker for any final comments. Okay. If there are no further questions, I thank everyone for listening and wish you a good weekend. Thank you.