Earnings Call: Q2 2021

Jul 16, 2021

Hello, and welcome to the Lifco Q2 Report 2021. Throughout the call, all participants will be in 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, and Therése Hoffman, CFO. Please begin your meeting. Thank you. Good morning, everyone, and welcome to the Lifco Q2 presentation. I'd like to directly turn to page 2 in our investor presentation, and just on a very high level conclude that this was a very strong quarter for Lifco with strong underlying market demand in, I would say, almost all our segments. That resulted in very strong sales development, organic growth of 34% in the quarter. Acquisitions contributed with 15% on the top line, then we had a slight negative effect on exchange rates of about 3%. I also like to continue, we have then obviously even stronger development on the EBITDA numbers, growing 79% in the quarter. Obviously, the comparison numbers here from Q2 last year are obviously fairly weak. We were quite affected in the early phase of the pandemic, especially in the dental area and also in the Demolition & Tools area. This year we obviously see a strong market condition across the board. Despite that, we are very satisfied with the results in this quarter. The strong EBITDA number is obviously due to greater sales and operational leverage combined with our acquisition work that tends to help the margins. We are also in this quarter, as we've now been saying for quite some time, seeing an effect of lower sales and marketing costs due to the pandemic. Already here I can mention that it's still not known to us exactly how that will develop in the future now when the societies are opened up. We're still having a close look at that, but also open for all possibilities when it comes to this. Going further down in the numbers here, we have a solid cash flow in the quarter. We're growing cash flow despite that last year in the early quarter of the year and in the pandemic phase, we had a strong cash release in working capital. This year we have a little bit of the other effect, when the strong sales growth also leads to especially high receivables as normal. Still very solid cash flow. Then we can turn to page number 3 and go a little bit more into the different areas in Lifco. If we start with the dental business area, this was the area where we had the most dramatic COVID effect last year, where basically all the markets were very low level in April and early May, and then it came back to more normal level in last year's June. This year, the market conditions were more, I would say, normal. Even you can argue in some areas of dental, there could be some effects of some stock buildup coming back in the customer end of the business because what happened last year was that all customers were keeping stock at lower level when the uncertainty and the lower market level was apparent. In this area, we have a very strong EBITDA development due to acquisitions and also due to the fact that we have lower sales and marketing costs also here. If we move over to Demolition & Tools, it's a very strong quarter coming in. Last year, we had more uncertain market conditions in the early phase of the pandemic. This year, it's a very strong market condition across the board. I'd like to highlight already here that it is an area where profit and sales can fluctuate quite a bit between quarters and also obviously between years, depending on the underlying market conditions. If we go further and look at the profit level in Demolition & Tools, it's also done mainly due to operational leverage. Also here we have acquisitions helping us in this year. On top of that, we also have in this very good quarter also a positive effect for some extra profitable special projects that, as most of you are aware of, can fluctuate and will fluctuate between quarters and even between years. Demolition & Tools, it's a super good quarter, basically. In Systems Solutions, this was the area where we had relatively the least negative effect last year due to the pandemic. This is the area where we grew the least this year. Still very solid development. This is obviously an area with many different type of market exposure. For the most part, it's good market conditions all over the board. Almost all of our companies are performing very well this year. Last year, in the 2nd quarter, we had some companies that had some positive effects from COVID and some that had some negative effects, and this year it's more flattening out the effects of this. I also want to highlight here that it's still very good market conditions for the most part. The only area where we had some weaker development in the first half of the year is in the forest area, where it's not so much correlated with the market conditions. It's more correlated with what type of projects we are taking in and how they are developing. I'd like to remind everyone about the forest division here, that it's not really a market-driven situation. It's by itself a volatile area that I've mentioned in previous calls. We can move from page number 3 to page number 5 and look a little bit at our balance sheet and mainly focusing on the net debt to EBITA level. We are now, despite the fact that we've done a record high acquisition pace the last 6 to 9 months, we are still at lower interest period net debt compared to the same period last year. Our total net debt to EBITA is lower than last year. Still a very solid financial position, which gives us room for further acquisition opportunities if we find great companies to buy in the future. I also like to just highlight that last year we did pay the dividend in Q3 due to the pandemic. This year we paid in Q2. That's also something that shows that we are in a strong position here. We can move over to page 6 and just look at the high level and the long-term history performance of Lifco. Looking at the EBIT margin development since 2014, we have a continuous and gradual improvement of margins. This is not a coincidence. We always strive to make our great niche companies even more niche and more differentiated and focus on the high margin part of every segment where we can. We have learned through many years that this builds greater barriers for our companies and better competitive situations. This is a long-term development. What other drivers that helps our margin is obviously acquisitions. We have been, the last seven years, acquiring on average better quality companies with higher margins coming into Lifco. In the recent period, the very last year or so, we have also been increasing our margins more than the normal due to the lower cost for sales and marketing due to the pandemic. I think I'd like to remind everyone that it's not only that, it's also the long-term strategy of Lifco going in that direction. We can turn to the next page, number 7, and also more on the high level, remind everyone that we have a very high return on the capital employed, especially on the right-hand side where we measure it excluding the goodwill. This is basically looking at each individual company and summing them up. Here you can see that we are now on record high levels also on return on capital employed. It's an indication that we buy and own high quality companies with great cash conversion, which is fundamental for our long-term strategy of growing Lifco gradually from acquisitions. We can actually move all the way back to page 29, which is listing our acquisitions that have been carried out in the last 6 months. It's quite a long list this time. We have carried out 14 acquisitions that have been consolidated from January 1st or announced now in June. One of them has not been consolidated yet, will be done in the next couple of weeks. This activity of buying companies, of course, very fundamental for us. It's a key focus area for Lifco. We involve today much more people in the work of doing this. I'm not talking only about acquisition-dedicated people. We also involve a lot of our group managers sitting in the subsidiary levels in taking care of new companies and developing in these roles. Our target is to acquire very good companies with typically market leaders in small niches with very solid financial history. Then we, as always, stay very disciplined and strict to quality standards, but also valuations. This means that if you want to do this in a very long-term perspective, which Lifco is trying to do, we have a very long-term perspective in this. It leads to a situation where sometimes we get great results, like we had in this year. Some other times it could be lower activity because we are not forcing this. We try to avoid mistakes. We try to develop Lifco with high quality. I often get the question, what is our pipeline? That's always difficult to predict because there's so many factors, and it's so unclear when the deal will happen or not happen. We also are backing off quite often things that we don't feel fully comfortable about because we're going to own the company forever. That's our mindset. With that, I would like to open up for any questions about the development in the second quarter. Thank you. If you would like to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02. There will be a brief pause while questions are being registered. The first question comes on the line of Erik Cassel from ABG Sundal Collier. Please go ahead. Your line is open. Hi, good morning, Brad. First off, in Demolition & Tools, obviously an exceptionally strong margin at 28%. I would like to understand a bit better. Could you please help us bridge this margin uplift in terms of special orders, margin accretion from M&A and OpEx savings to sort of understand how sustainable this is going forward? Yes. Well, I think this is the area where the operational leverage is maybe most apparent. It's also because it's a quite volatile area, as you've seen historically. Operational leverage is clear that when we get these sales increase, we don't increase the fixed costs as much. That's a key driver, obviously. It has always been a key driver when we have these periods of high growth. In this quarter, we have on top of that, the icing on the cake that we have this special project, it's not a huge amount in this quarter, but it's still a very high profitable order, basically, that triggers the margin up even further. As you're pointing out, we also have acquired some very high-quality companies recently that then helps on the margin a little bit. This area consists of different types of business. We have the Brokk and Darda robots, which everyone knows it's a very high margin area. When they have higher sales, it typically falls down a lot of it to the profit level. We have the attachment area, which is a little bit more scattered. We have some areas of attachment with very high margins and some with more, I would say, good margins. It's a little bit depending also where the strongest growth takes place in that segment. I think I like to repeat myself here, this was an exceptionally good market condition in this quarter and exceptionally good basic outcome. On top of that, we have these lower sales and marketing activities. There's no trade shows taking place. A lot of these, I would say, normal marketing costs and sales costs that we typically would see are not happening this year. There's so many things happening here in this. Operational leverage is a quite apparent thing here as well that we would see in any year with this type of sales level. Thank you. That's very helpful. As you say, this is a volatile segment, and the markets as well. Do you have any indication that it could become worse in H2, or do you expect it to continue at this level? We don't give any forward-looking statement. I can only conclude that the market conditions up until today are still very solid. Right now everything looks good. How things will be in 2 or 3 months, it's not where we put our focus. We adapt our business to any market conditions. So far, we don't see any change in the strong market development. We're only 2 weeks into the new quarter, so it's very early to say anything about that. I think the 1 thing we haven't talked about, which could be worth mentioning as well, is that with this type of high increase in demand, there's also, of course, a factor of making sure we get the delivery capacity up, and that's not only our own internal capacity. It's mainly also getting goods from the suppliers. Far, as you can see from our numbers, we've been able to deliver on the high demand that we see. That's, of course, also a question mark, if there will be problems later on in the fall due to the general business activity now that we see. It's not only our companies that are screaming for more components, it's a general thing in the whole world right now. That's also an uncertainty that we don't know right now how it will play out in this area. Okay. Thank you. I'm a bit curious on a per country basis. You have obviously acquired a lot of great companies over the past year, and the Italian companies have become a large part and stand out in terms of margins and growth rates. I'm wondering if you're seeing a more rapid recovery in, for example, Italy, which is supporting the margin expansion and/or if any other region stands out as well. First, to answer the specific Italian question, if you look at the companies we've been acquiring in Italy, they are not so much exposed to Italy. They just happen to be located in Italy. They're great companies that are located in, typically, northern Italy, and they have a high level of international sales. These are typically the companies we like to own, global niche leaders. I would say we will, in next year's figures, also list out Italian market exposure. You will see it's not increasing at the same pace as our Italian acquisition list is adding, because they all, for the most part, are very international leaders in their niches. I don't think that's it. When it comes to markets overall, we see pretty strong development across the board right now. I don't think this is a quarter where I want to lift any specific geographies. It's pretty strong across the board. Okay. Thank you, Per. Good answer. You're still able to keep SG&A at a relatively low level despite the high volumes. Some of it are, of course, short-term savings, as you said, that should perhaps start to ramp again in H2. I know, of course, that you don't give any guidance, but have you changed your perception in any way of the timing of these cost increases and the magnitude of costs that should come back going forward? I still think there's a big uncertainty around that. I think it's partly, we're not going to spend cost if it's not adding to our business short term and long term. It's a little bit unclear how we will act in this field, and it will be different by segment, different by companies. There are certain parts of the business where I think we want to increase the sales and marketing, especially in the distribution business, where a close connection to customer is fundamental. It may be different if you have a totally unique product selling to a relatively stable base of customers that know you very well, it's maybe not a big rush. If you're not launching any new product or very radical new products, maybe you don't need to push extreme amounts of exhibitions or other types of sales activities. It will be very different. I keep a conservative approach on this. Until we know more, we have to assume that maybe not all, but a part of this cost will come back. If it will come back in next quarter, I don't think fully, because it will take some time to ramp this up due to COVID and all that. It will gradually take some time. It's difficult to answer in a more specific way. It's so different by company level, and we are a very decentralized organization. Our success is based on rational local management making rational decisions. They will not spend money if it's not adding value to the business. How that will develop, it's still an unknown factor for us. Okay. Thank you very much. Very helpful, and congratulations on the very impressive quarter. I'll jump back in queue. Thank you. Thank you. The next question comes from the line of Carl Ragnerstam from Nordea. Please go ahead. Your line is open. Hi, it's Karl here from Nordea. A couple of questions from my side. First of all, maybe we touched upon it a bit, but on demolition tools. When at least looking at the construction indicators, it seems like demand accelerated towards the end of the quarter. Would you say that it is a fair assumption for your business as well? No, I think we've been seeing the strong market condition now for quite some time. For us, for our type of companies, it's not a couple of weeks indicators that leads it. It's a longer period of increased demand combined with a much better sentiment. People are willing to invest also in the more expensive capital goods right now, which we saw in this quarter, which was not the case maybe nine months ago when we started to see the increased activity in the underlying markets. I wouldn't say that it's a 2-week factor here. It's been strong throughout quite some time. There is, of course, a little bit of effect that if we get good orders in March, you don't see that fully in Q1, that comes into Q2 and so forth. It's not an enormously long order book, but there's still a little bit of that effect. The market levels have been quite strong now for a period of months, I would say. Also on the cost ramp up, how much cost have you started or what selling activities or marketing activities have you started already during Q2? Well, it's been very difficult to do normal sales and marketing, traveling. In some companies, very localized, they've been doing a little bit of that, but not back to normal, where some others are still on a very low level. Once again, I'd like to remind you that we are in a business-to-business type of environment. Most of our companies have ongoing relationships, so short term, sales can be great without any activities. It's more the long-term development that we're talking about for the most part, obviously. We have some exceptions where you need to do very active sales and marketing to get sales here now. For the most part, that's not required. Still in Q2, it was on a very low level. It feels restriction has been in place for the most part. Also given the general market discussion on component issues or cost, would you say that your companies might have been fueled, at least to some extent, by a pre-buying effect in the quarter? Or how should we look at that? There is some of that in certain parts of our business, but I think for the most part, no, it's real underlying demand, for the most part, that's been strong in this quarter. What part of your business do you see it? Where you would see that it could be like. Yeah stock build-up? I think given that we don't have, for the most part, very long order books, I don't think that's right. What might be a factor also helping demand a little bit now is that there's a constant price increase effect in this year. It's not only for us. You can read any report that this is a factor now. It could be that some orders are being pushed in a bit earlier around that. I think this quarter would have been good no matter what, because underlying market conditions were good in this quarter. I don't think that effect is enormous. Whether the markets will be this strong going forward is, of course, a big question mark and uncertainty. On the raw material side, we have seen most raw materials rally during last year and also into this year. You're obviously good at raising prices, but have you seen any impact on margins? It doesn't seem like that, at least. Also, should we even consider an impact in the coming quarters from that part? In this quarter, we see very little effect, obviously, around that. That's mainly because I think the price increasing is shifting the deliveries out from our companies more right now than it did maybe 3 months ago. It's coming right now. Then as you say, we are, of course adapting our prices continuously in all our companies. There is a little bit of risk, I cannot quantify that fully. There's, of course, in some companies, a risk that you will have a lag of a few months due to existing order books, due to promises to distributors that you long term want to value the customers and the business partners, that there could be a time lag. As you pointed out, for the most part in our companies, we have so strong positions that we should be able to carry this forward. The timing effect in a very short perspective is, of course, difficult to judge. I think the effect is coming maybe more now in the third and fourth quarter around this. Okay. It sounds at least like no major drama in the raw material side. Is it? The fair answer. Prices are going up. We are adapting. The timing effect in a short period could hit us potentially. It's not going to be any long-term effect, the way I look at it right now. Which market or which segment did you see the biggest risk of a hit? Or where you see locked-in orders where you don't have clauses, for instance? I think for the most part, we are very quick and flexible around that. There are some areas, one example is a project business area, which is not the biggest part of Lifco, but that's one example of where you have longer order books, you have commitments and prepayments for customers, and agreements that makes it basically impossible to adapt due to the prepayment conditions and all that. That's an area, but that's a very small part of Lifco. In other areas, the problems are more related to distributors giving out orders, taking orders, having an order book. For us to squeeze our distributors short-term base may be not the right long-term solution. Maybe we have to take a little hit in those areas. For the most part, this should be manageable in Lifco. We have strong positions. We have not huge order books. I'm talking about more a couple of months effect that could be the problem. It is more speculation also from my side. I don't want to overemphasize. I'm just lifting a potential situation that might arise. We haven't seen that yet. To follow up on this, the same thing goes for the delivery problems that might arise. We still have been able to scramble around. I think our decentralized model is very good because our subsidiary CEOs have now changed their mindset into putting a lot of focus on getting components into their houses so they can ship the goods out to customers. I think our decentralized model is very good. That's also another question mark uncertainty in the near future around that area. So far, so good. Really good. Okay, perfect. All from my side. Thank you. Thank you. Just a reminder that if you would like to ask a question, please press 01 on your telephone keypad. There will now be a further pause while any further questions are being registered. We have no further questions. I will pass back for any closing comments. Yes. Thank you very much for calling in. I wish everyone a nice weekend and also a nice summer period. We talk later on in the year. Thank you very much. Thank you for attending. You may now disconnect your lines.