Earnings Call: Q4 2020

Feb 2, 2021

Hello, everyone, and welcome to the Lifeco Q4 Presentation. I would like to start directly by going into Page number 2, where we can see the high level group financial performance in the last quarter of 2019 2020 as well as the full year performance. And on the high level, we can conclude that we, in the Q4, had a net sales development, which which was fairly flat. It was consisting of organic decline of about 2%. I will come back with more details around that. We had a positive effect from acquisition of around 6% and then negative effect of exchange rates of about 3.5%. And we will go into further details in the following slides. I also want to just highlight that the board in Lifeco has proposed to the Annual General Meeting that the dividend per share would be SEK 6. And also that we have today announced that We will propose to the Annual General Meeting split of the share of 5 to 1. And with that, we can go to Page 3 and look into the more details around the business area. If we start with the Dental business area, it has been this year 2020 was a very turbulent year for the area. As you all know, we had a dramatic impact on our business in the second quarter, which then rebounded gradually during the summer and then has been on a fairly normal level during the fall and throughout Q4. So overall, it's been a solid stable quarter for us in the last quarter of 2020. The only thing I'd like to highlight is that the market for the prosthetics business was still on a slightly lower level. It's our laboratory business where We're offering products like crowns and bridges to dentists predominantly in Germany, and there we saw still a slightly weaker market. Also, I'd like to highlight in Dental that we have continued to be on an extraordinary low cost level. Due to the pandemic, there's been basically fewer and lower activities in the sales and marketing just like we saw it in the Q3. If we continue then with Demolition Tools, we are then happy to see that we have a sequential improvement. The business spin was weaker in Q2 and Q3, and we saw a gradual improvement during Q4. We still are on the lower level than Q4 2019, but on an improving track in this business area. When it comes to the margins here, I'd like to highlight that the margins here can fluctuate between the quarters, and we had a fairly low margin in the last quarter of 2019, where we basically had very few special orders. And typically, we had some special orders in most quarters. And last year, in 2019, we had a lack of that. So that's also explained the margin improvement in this area. When it comes to the 3rd area, our Sys and Solutions, it's as you all know, it's combined of many different areas. We see here a decline in sales in the quarter, but an improving margin. And the sales decline is mainly related to lower sales levels in the project related business. We have in this area, we have both in the Forest division and in the Environmental and the Oil division. We have Some companies that have more project based deliveries, and they can fluctuate. In this quarter, we had lower sales, but they can also then fluctuate in terms of profitability, and the profitability was quite okay for this area in the quarter. If we continue then with other parts of this division, we still so a slightly weaker area for the more CapEx related products or the more indirect products that we have been referring to earlier in 2020. However, I would like to highlight that so we still have that in our in some parts of the business. Some companies there also see a sales decline, but with still strong margins because they have a strong aftermarket business. So when they lose the CapEx sales, they We still have a pretty good automotive business. But overall, it's been a fairly stable development also in this area. And we've been, as a whole, not too much affected on the pandemic Industry Solutions area. And then I'd like to continue to go to Page 4 and just summarize what I already said here that Dental It's basically coming back after the very sharp decline in April, May. We are, of course, Continuously worry about the lockdowns that are taking place in Europe, and it's still something that we have to keep an eye on. We haven't seen in the recent 2nd, 3rd wave lockdowns, the same effect as we had in Q2. That is always, of course, something that is a concern how dental treatments will develop until the pandemic is sort of fading out. When it comes to the CECL solution area as a whole, as I said, it's been relatively unaffected. We have some companies that have been positively affected and some that have been negatively, but as a whole, it's not been too much. And then in Evolution and Tools, we had a tougher market conditions in q2 and q3, and still not perfect market in Q4, especially for the more CapEx related products. But it's going in the right direction is what we feel in the Q4. And then as a whole, we have still an impact on lower sales and marketing is in many of our companies, where basically trade shows, different customer events are not being performed as normal in this year. And then we come back to acquisitions at the end of this presentation. But obviously, we had an impact in 2020 that Q2 and Q3 was more difficult than normal to carry out the acquisitions. And as we will come back to here, we have now started that activity and announced quite a few acquisitions, please. If we can then go over to Page 5, this is a slide that we update once a year. So now we have the figures for 2020 available. And as you can see, we have done and this is now describing mainly how our growth from acquisitions over the years. And as you can see, we see acquisition as our continuous growth driver. And over the last 6 years, it's been a growth from 9% to 14% coming from acquisition in any given year. Unfortunately, 2020 was on the lower level. We only generated 9% from that, and that has, of course, to do with lower acquisition activity in the second and third quarter. I can also just comment on our EBITA organic development, which was then at 0% in last year, which obviously is an effect of the pandemic and the weaker market in Dental and also in some of the other areas for 2020. And the last point from Slide 5 is that I wanted to highlight that we in our Lifeco Model is based on the ambition to continuously grow from acquisition, obviously, focusing on doing organic growth over the years and then keeping our net debt to EBITA level constant. And as you can see, we have now the same net debt EBITDA in the end of 2020 that we had in the end of 2015, and we generated quite a lot of acquisitions in the same time period. If we then go to Page 6 and just continue to talk a little bit about our interest bearing debt, which is now down to SEK 3,200,000,000 compared to SEK 4,000,000,000 1 year ago. And now we have actually an interest bearing debt of 1.1x EBITDA, which is record low for Lifeco since we went public in 2014. I can also already here mention that we have a small slight effect that 2 of the acquisitions announced In October November 2020, they were not closed until early January 2021. So that also impacts that the actual payments went out after the 31st December. And then we can go over to Page number 7 and just take a little bit step back and look at our ambition. Our main overall target is to increase our profits every year, and we are very happy to conclude that we exceeding with that target also in 2020. And as you can see also, it's a little bit difficult to read out from the callers, But also Dental division ended up with a higher profit in this year. The only area where we had a lower development was in the Malaysian Tools, which has to do with the market condition being bit tougher for us compared to previous years. But we're quite happy that this was able to be generated also in the year like 2020. And then we can go to Page 8 and just briefly talk about one of our most important measurements. It's on the right hand side of Page number 8. We present our return on capital employed, excluding goodwill. And this is basically an indication of how our businesses are in terms of asset intensity. And we are now improving that return on capital quite a lot in this year. It has to do with the improved profitability, but also that we have been releasing some of our working capital in 2020. And I also would like to highlight that the comparison with 2018 is not really possible because we don't change the calculation method with the implementation of IFRS 16. So the actual outcome in 2020 is very strong also compared to historical figures. And then we can turn all the way to Page number 24 and just look a little bit more into details in cash flow. And as we've been seeing throughout the year, we had very strong cash flow this year. And we have now generated around SEK 2,800,000,000 in our operating cash flow, which is very strong for the year. We can also send on the right hand graph on Page 24, see that we did not allocate as much capital to acquisitions in 2020 as we did in 2019. But we have, as you've seen, increased our activity in the recent months. And then we can just go to Page number 29 and just a little bit look at the acquisitions that we've been carrying out. And actually now, when we summarize things, we have then been able to communicate 10 deals since the pandemic started in March 2020. So the activity is now back more to normal levels. However, it's important to highlight and often get the questions about the pipeline. It's very difficult to say how the future in acquisitions will be. We work very hard with it, And we continue to try to do a lot of acquisitions, but the outcome is very difficult to forecast because there has to be Many things that goes right in every deal to happen, but the activity level and ambition is very high. And as you also can see from our balance sheet, The financials are there to have capacity to carry out more acquisitions also in 2021. So with that, I would like to open up for questions. Thank you. We have a question from the line of Carl Rangnestam from Nordea. Please go ahead. Your line is open. Good morning. It's Karl here from Nordea. I have a few questions. First of all, in terms of your Dental business, what have you seen in terms of Demand recovery for your prosthetics business. And also what could you say about the backlog? I guess you have A bit to work through when entering 2021, I guess, if the society will normalize or how should we view that? So specifically for the prosthetics business, we've been on a it dropped like everything else in Q2. And then it didn't come back the same way as the more consumable products. So we've seen a slight improvement, but it's still not back to normal level. That's the way I can best summarize it. And the reason for this is, of course, that In the pandemic, there is a certain amount of people that don't make bigger treatments. I think that's what we're missing out on. But it's not a catastrophe, but it's not it's just not back to really normal level. And when it comes to backlog, I It's very difficult for us to say because it's not like we have a backlog of dentists putting dentists putting an order transfer when they get the patient in the dental chair. So I guess what you're referring to more is, is there a pent up demand? And of course, you could argue that it's likely that there will be a slightly bigger need for more treatments when this pandemic is over. But exactly when and how that will play out, it also has to do with the capacity of the dental dentists in Germany specifically, if they can how quickly they can cope with that. But It's likely to that there should be some kind of effect at some point in time when the pandemic is over. Okay, perfect. And also in terms of SG and A, you managed to take out roughly, I guess, EUR 60,000,000 year over year. I mean just in terms so in general, I know that you don't give guidance, but what could you say is more Defined as long term savings and how much could be sort of will come back when the situation normalizes? So we haven't communicated that specifically. But I think in previous calls, I've been mentioning that certain companies, especially more in the cyclical area. They took the chance and the opportunity to do a little bit of a slight restructuring in this year, and they have been going through all their cost levels. Whereas in other areas, maybe as an example, Dental, it's more of a sort of short term effect where where activities is at lower level because the dental market is a particularly stable business. So they have the right capacity going into this and the capacity It's likely to come back. But exactly in what form this will come back and how quickly it will come back, it's impossible to answer because it has to do not only with us, it also have to do with competition, how they act and how the general market develop in terms of how will trade shows be carried out in the future and activity levels with customers and so forth. So it's very difficult. I can't give you a more precise But at least a certain degree of the cost savings Should you consider to be long term sustainable? Of course, in certain parts of the business, there's been a little bit of that. And if you look at number of employees in Lifko. There's been certain companies that have reduced that because of the lower demand throughout the year. And yes, of course, a little bit like that. And you know, the Lifeco is, as always, a story of many different companies. So you see both. But quite a lot of this, of course, has to do with general savings That is potentially could come back to normal levels at some point. Perfect. And in terms of Bock Can you give some more flavor on the current market condition? I guess it is CapEx driven demand. Would you say that it is still a high degree of uncertainty impacting the order intake currently? Or what do you see there? So the way to look at this demolition tool segment is that the more the underlying market has been improving sequentially over the year now and up to Q4. And that also has been impacting all our business. But it's been a slower slower development on the more CapEx, the more expensive type of product. It's not we see it more quicker in the more, if you like, more simpler and less expensive products that's more one to 1 correlated with immediate construction market development. So we don't give any guidance, and we don't know it's always an uncertainty about the future. But As I've been mentioned here and also we published our report, it was a better quarter for the underlying markets in Q4 compared to Q3 and Q2. Okay. Perfect. And the final one from my side. During 2020, we saw Almost mainly dental acquisitions. I mean, is it a coincidence that you or is it more that you put a lot of focus into this business area? Or is it probably because it's easier to do acquisitions within the segment given that the pandemic had a I mean, Quite little impact on the dental side, at least during H2. Yes, I mean, it's partly a coincidence. We have been working on many other sectors as well. And sometimes, A deal happens, but sometimes it doesn't happen. And now it happened in Dental in a few instances. The only thing I could mention is that the organization Dental has In set in a more stable level that we had in 2019, there was a little bit of changes in management with the which affects also further down the organization that we have to reorganize and lift up people in different positions. So we have now, in the dental area, people that are driving acquisitions more frequently. So that is one factor. But Just by doing that, it's not sure you get the deal. So and then also to just mention, we have now in the recent yesterday and then a couple of weeks ago, we have announced also deals outside So we are working in all sectors like normal. Okay, perfect. Thank We have a question from the line of Per Jonsson from R&T Asset Management. Please go ahead. Thank you and congratulations, Per, with the fine results. A few questions from my side regarding the Dental business we just Talked about you made a lot of more production related acquisition in that, and you mentioned that there were Low cost in Q4. But should one see that the margins in the Dental business is heading Above 20 or even more going forward, that's my first question. So when it comes to the Dental area and the margins, it's not it's quite clear that We communicated this previously that obviously, our margin is higher in the manufacturing software and prosthetics and obviously slightly lower in distribution. So it has but I also have said that we like to buy manufacturing companies. We like to buy software companies. But we're also open to buy distribution companies when they make sense. So to answer that question, it's a little bit depending on what we will do going forward in terms of acquisition. And we're open to all sectors. If we can find good opportunities to reopen to all. So it's not a given that it will happen. But on average, and it's not perfect, but on average, of course, The margins are slightly higher in Manufacturing and Software. Yes. Okay. Coming to a page that you didn't talk about, that's on the Page 30, about the number of acquisitions In the last 15 years, as I see, quite a number. Is that an indication that you have still Amblof you have Amblof Capital, but you also have Amblof Management to actually to really drive Lifeco as a Much bigger company than we have today. How should we see this indication? Well, I don't know if Page 30 is the indication or but I think what you're What you're asking is, can we continue to grow with a lot of acquisitions in the future? And the answer is that we are continuously developing our organization also. So we are If you look at the acquisitions we've been doing in the last 10 months, there are people being involved that were not involved in the past. So we are lifting up new people in that process continuously. And this is not something you do in one decision. It's a gradual process where you have new people in the system. And we're talking about our Good companies, subsidiary sales that from time to time then get the opportunity to engage in this. And as they engage more and more, they we build up capacity also in our organization to handle the both the acquisition work, but maybe even more importantly, the channel, the board work in the companies we buy. And then we have to have more people involved with that going forward to continue to increase our acquisition. Okay. So what you're saying is actually will you in due course change the structure in the conglomerate? Because I know from earlier days that you always look at Can't be another time. And the way you and Frederic look at it was not like the way we look at it from outside. Are there any thoughts on that? Or is it still too early? No, but this doesn't change. We still the people that are being lifted up, some people are only working one area, but also after time, they could also be stepping out and being a shareholder. So we still have that philosophy that We should build good general managers that can be future leaders of a portfolio company. Yes. Great, great. Thanks. There are no further questions registered. So I hand back to the speaker. Okay. Thank you, everyone, for listening in, and I wish everyone a good day. Thank you.