Earnings Call: Q3 2021

Oct 22, 2021

Thank you, and good morning, everyone, and welcome to our Q3 presentation. And we can start directly by going into Page number 2 in our investor presentation. And on a very high level, we can I conclude that this was another strong quarter for Lifeco, with strong underlying market demand in Demolition Tools and Systems Solutions specifically? And just briefly on Dental, we had marginally weaker market situation compared to the comeback quarter in Q3 2020. I'll come back a little bit more to that later. On the overall level, we have a sales growth of 26%, of which 8% is organic growth. Acquisitions contributed with 16%. And in this quarter, we actually had a positive effect from exchange rates of 2%. On the EBITA level, we are growing 23% in the quarter. And on the margin level, we have slightly lower margin compared to the Q3 2020, which was A quarter with very high margins due to solid sales volumes combined with, at that time, very low cost levels due to the early phase of the pandemic where all companies were in a sort of low level mood following the extreme situation in Q2 2020. If we talk about cash flow, it's on a solid level, same level as last year, partly thanks to the increased profits, which is then a little bit offset by increasing receivables due to the market conditions that are very strong and also inventory buildup that is taking place in many areas now due to the strong market conditions and companies getting ready for fulfilling the map. Our return on capital employed is on a very high level at 23% and actually at 161 present where we exclude goodwill, which is a very good level. And this is, of course, an explanation for the strong cash development that we can have despite the growth period that most companies are in right now. And then we can go into the more specifics on Page number 3 and talk firstly about Dental Area, which had a very strong quarter actually in last year in Q3 2020 And especially the cost levels in this area was at a very low level, which we indicated already a year ago, which was leading to extraordinary high margins last year. And this quarter, Q3 twenty twenty is more a normal quarter, I would say, more in line with quarter 3 in 2019, and of course, complemented them with some acquisitions, adding to our sales growth. And we are now seeing activity levels in sales and marketing coming back to more normal levels as the markets are coming back closer to a more forward looking mindset in terms of future looking. Last year was a bit different in that respect. In Double Agent Tools, we see very continued strong market conditions, and we are growing sales with 55%, Thanks to both very strong organic development and complemented by acquisitions in this year. And the higher margins in this year is mainly thanks to the operational leverage in this area. But also, of course, in this area, we have We're also getting more forward looking and mindset in terms of sales and marketing and other costs that will coming back to more normal levels. But I think the sales growth itself is taking that effect away. So the operational leverage is more important in Demolition Tools. And when it comes to Safety Solutions, we are growing sales, both thanks to strong demand and market situation and complemented with acquisitions. And the margins In Q3 2020 are slightly lower than previous year, also here due to the cost levels were extraordinary low last year, and they're starting to come back more to normal levels. And also in this area, we have a few entities, which we are pointing out in our report. Now those entities are having longer order books, which means that they have not fully compensated the raw material price increases yet into the market. This is an ongoing process of trying to compensate. It varies between companies how quickly that can come in due to the order books mainly. And with that, we can go to Page number 4 and just have a little bit of a short reminder on For everyone, how Lifeco, over many years, have been growing the business, both organically and through acquisitions without any capital infusion or increasing debt ratios. In addition to that, we also paid a small dividend every year. And obviously, the data for 2021 is So JetBrady, as we only present full year numbers here, and it will be presented in next quarter. But after 9 months, we have I conclude that we have continued the journey with both strong organic development and acquisitions, and we are keeping our net debt to EBITA ratio fairly constant, and which we can see then in the next page, if you go to Page 5. We are on a very solid level when it comes to net activity. And Thanks to our strong cash flow characteristics of the business and the profit improvements, we still have a net debt of net debt to EBITDA of 1.8 times, if include everything. And the interest bearing activity is 1.2, which is actually lower than 1 year ago. And this is despite the fact we have been very active in acquiring companies in this year. And once again, this is a proof of the strong cash flow generation of our portfolio, also in times of organic growth. And with that, we can go into Page number 6. And on this page, I'd like to just talk On the margin side, as you can see, we have very strong development in terms of profit over the years. But specifically looking at the margins, I'd like to remind you here that we have a long term trend where Lifeco has increased our margins dramatically since our IPO in 2014. And this is, of course, a combination of operational improvements and our strategy to make our niche companies even more niche a more differentiated over time and also acquisition has helped. And I think my final remark is that the pandemic led to a Faster than normal growth in margins. As you can see now, we are a little bit coming down in this quarter compared to last 12 months in last quarter. But it was an extraordinary time here in the pandemic where basically cost levels were at a very low level. But still, the long term trend is looking very good. So then we can go to Page number 7. And here you can see also the capital employed ratios to return to capital employed on Very good levels. And this is, of course, part of our focus to always acquire and develop companies with very high return on capital employed, which once again is very fundamental part of our culture. The fact that this, we can combine strong organic growth with acquisitions without stretching our balance sheet. And we can do that over many years. And then we can move all the way down to Page number 12. And once again, just a small reminder, we have a very strong Lifeco philosophy of running our portfolio companies. It's based on the decentralized fundamentals, where we let Strong management in each individual company take the responsibility and get the mandate to deliver in each individual business. And we do that thanks to a philosophy of only acquiring and having companies that can be very successful on a stand alone basis. And then we work with making these companies more profitable over time by having a clear strategy of focusing on the more profitable part of the business and sometimes then actively sort of sacrificing lower module business for the long term benefit of our group. And we do this in a very lean and simplified way, where we try to keep every company very entrepreneurial and having the focus on the value adding functions. And then we try to outsource things that are not Absolutely crucial, which leads to a strong focus for the management of each company on the most value creating parts, which we then, of course, combined with a strong cash flow focus and a very long term perspective. We have all our companies, we have the ambition to keep them forever. And therefore, we are making sure that we also make the investment for the long term growth of our business. And this was my last remark, and then I will open up for questions. Thank you. Our first question comes from the line of Karl Anderson from Nordea. Please go ahead. Good morning. It's Karl here from Nordea. A couple of questions from my side. Firstly, on the ramp up of costs In the quarter, which you talked a bit about, is it fair to assume a further sequential uptick In Q4, in the market setting and marketing activities and also do you plan to return to pre pandemic cost levels? Or how should we look at it? Well, I think if you take the first question, this quarter, and I think it has been in the planning For a while, we are now getting back to a more forward looking mindset, not only in sales and marketing, but also in all other areas of the company. 1 year ago, the companies were just coming out of a shock period after Q2 when everything was uncertain. They were keeping everything at the minimum, especially sales and marketing. But there was no hiring taking place 1 year ago. Now companies are more forward looking in their mindset, which means that they are Hiring people, they are getting out to more actively to do sales and marketing, whether it's physical or digital, It's more active across the board. Will it ramp up? It's very difficult to forecast. And you have to look into how are things in the previous quarters. But We are coming back to more normal levels. And for Lifeco, where most of the cost levels are outside or customer related, it's There's not so much internal cost that we can save on. Maybe the corporate with more internal conference organization can also have internal savings. We don't have much of that. So we expect to see it coming back in more to normal. Will it be fully back pre pandemic? It's not clear yet to exactly how that would play out. Okay. Perfect. And on the Dental side, I mean, as you said, you're back on or just above 2019 levels. But could you help us understand the driver in the quarter? If it's purely Selling and marketing expenses burdening the margin year over year or if you had any, yes, mix effects or anything like that impacting as well? If you only talk about the quarter here now comparing very short time periods, there is effect I mean, last year was a little bit of a comeback situation. They were so depressed in Q2. Q3 was a comeback. On top of that, the sales of The material and those things were on a little bit higher level last year. And now, of course, the markets have normalized, if not to the same level. That's where I can give you directional input. But other than that, I think now it's more of a normal situation. The market can still be a little bit In some areas, a little bit still pandemic affected, but I think we're more now in a normal level. And I think it's also the forward looking mindset is back in the companies. Last year, it was still in a freeze period, if you like, coming out of the pandemic shock of our companies. And on the raw material side, I think you mentioned somewhere in the report that you saw some headwinds. Is it primarily in Systems Solutions you see a slight raw material headwinds? And do you think they will accelerate during Q4? Or how do you handle it? So I would say this is very different between our companies. And it's not so much correlated where the companies are located in our portfolio. But it relates to companies where we have a little bit of headwind this quarter, there's a few companies where you have long order books. And basically the prices that we're giving out on the old raw material prices. And then we're taking the long term approach of not going in and changing order book, mainly because we have distribution companies in between and we have to act responsibly here in those few companies that are affected by this. For the most part, we've been doing very well. We've been able to quickly handle the situation. But it's a very, very mixed situation. You have to go into each and every company to get the full answer on how this is playing out. I can only conclude, as I've said in previous quarters, we are, of course, in every company making extraordinary pricing. This year, the only thing is that they have Different effect when they come into the P and L, so to say, depending on the order book mainly in this company. Okay. So it sounds like no major drama coming then? I mean, if there is drama, it's very short term drama in my book, because most of our companies have very strong B2B situation where we should be able and we have been able historically without any problems to handle. But of course, the timing effect is a bit unclear. And the final one from my side is just on the demand throughout the quarter. We have seen some companies talking about the fluctuations between the months. Have you seen any changes in demand throughout the quarter and So especially focusing on the end of the quarter, if you could give any flavor on that as well? Now we overall I mean, there's, of course, many different companies and title companies in Lifeco. But overall, we see the market conditions being strong across the board. And that's been so for quite some time now. So no specific things to mention there in this short period. Perfect. Thank you. We have another question from the line of Peer Janssen from INC Asset Management. Please go ahead. Yes. Thank you for taking my question. I have 2. If we go back to Per, your slide, Page 4, with Quiet on organic growth. If one should take your comments, then it's more realistic that in the coming years, the organic EBITA growth will actually grow quite substantially due to better markets. We can see that you in 2021 I have also included some from 2020. You made some quite substantial acquisitions. So in short, my question is More organic, less acquired growth in the coming years. That's my first question. And the second question is, Do you see any structural changes in the Dental area post pandemic? Or is it just The business as usual, given that 2020 was so special. Thank you, Per. On the first question, coming back to Page number 4, organic versus acquisitive growth. Well, first of all, as you know, we don't give any guidance on what we're going to do in the future. We can only conclude that historically, we've seen and we still see acquisition as a very fundamental part of our growth. Also, organic growth is very important. But as you know, And this is cycle at the market underlying demand has quite substantial impact on certain portal, if not for the whole part. We start to grow organically Talk to you every year. We didn't succeed last year, but most of the years previously, we've done organic growth. We hope to see I mean, this year, as I said, we have been a very Strong development the first time on. So hopefully, this year will be a year of stronger growth. But this year will also be a year of very strong acquisition growth. And I think because of our Return on capital employed and the business characteristics, we've been able to do both. And of course, the ambition and the hope is that we can continue to do both. There's no Need for us to actually differentiate between we can continue our liquidity growth, I would say, almost Without taking the organic situation into consideration in a normal situation, of course, it is a big crisis, like pandemic, start of a pandemic that You made us a bit different minded. But other than that, it's something that we continue to strive to do. And we have shown this already that we can do both. We can combine this in a small way. So we don't see it like that because of if there will be strong growth, then we can do less acquisitions. We hope to do both if that happens, so to say. But we cannot promise anything. We work hard. We never know. But it was just more after your comments that now it's more normalized that your companies are out again trying to So one could argue that the organic growth could be quite strong in the coming years. Yes, that's in the future. So we'll see how that goes. And then I had a question Just to repeat myself. We don't see any limitation, and we cannot grow acquisitions if we have strong organic growth. I think we've proven that over the years. And then the other question about the dental area, I'm not really sure what can you repeat that question, Paris, I don't know. Yes. You mentioned that 2020 was So quite unusual also in the dental area and then Q3 last year was very strong. That's a fair point. But Do you see any structural changes in the dental area, production versus distribution and so on? Or is it just back To normal business in the dental area like before pandemic. Yes. I don't think it's fully back to normal business. We still the pandemic is not fully over yet, but we're still keeping a close look at it. And it's been a very relative to our very normal Stable business in Dental. It was, of course, a very strange last 15, 18 months for us, where we haven't talked. And then it was a little bit difficult to follow the market because if you look at the last 12 months, the markets were maybe not back to full volume, but maybe we compensated selling more in our safety materials and all these things. And now in this quarter, I think it was a more normal quarter. So we'll see how it goes. It feels like it's getting back to more normal levels, but I think it's too early to conclude on that given that the pandemic is still not fully over for us. So it's really more like normal now. Yes. But you don't see any structural changes in distribution or production, anything. It's just Back to normal like before. Yes. But I think those structural changes, they are very slow moving in them to normal. It's not a big factor in that sense. Okay, fair enough. Great. Thanks. And as there are no further audio questions, I'll hand it back for any closing remarks. Okay. Thank Thank you, everyone, for listening in, and thank you for the questions. And I wish everyone a good day. Thank you.