Lagercrantz Group AB (publ) (LAGRB) Earnings Call Transcript & Summary

Welcome -- warm welcome to you all. Me speaking is Jörgen Wigh, CEO of Lagercrantz. And together with me here on the line is Kristina as well, our CFO. Kristina MacKintosh. And we will try and run you through the interim report, our Q3 report, that we released this morning. And the report is available on our website, lagercrantz.com, and you can find it there to download it, and that's how we normally do it. And we will run you through that and comment along the way, and we will open up for questions in the end of the presentation. It usually takes around 40, 45 minutes before we open up for questions. [Operator Instructions] Okay. Good. I hope everyone is muted and can listen in. Again, a warm welcome, and I will start, and I will point out along the way which slide I'm on. So let's -- and normally -- the way we normally do this is that we start with a short introduction. A couple of slides is too long to introduce all the newcomers to the group, what we are all about. And then we will jump into the numbers. And then we will also discuss a little bit, especially around the M&A situation, I think, at the end here. So that's I think -- yes, that's how we normally would run it and do it that way as well today. So we start at -- on Slide #2. Lagercrantz then in introduction, is that we are a tech group with a very strong focus in building sort of strong positions in niches. And currently, we are all around 60 -- somewhat short of 60 profit centers. And they're split into the 4 divisions that we have: The Electronics, the Mechatronics, the Communications and the Niche Products divisions that you can see there on the slide. And as you can see, we have a density up in the Nordics, but we have a sort of a Northern Europe group, with also some companies in the U.K., some companies in Germany, in Poland and also in the Dutch region or in the Netherlands. We have some 1,500 employees, all in all, in the group. And we have a turnover of some SEK 4 billion around -- roughly around that. And as you all know, or most of you know, is that we have M&A as a very strong sort of DNA of how we run things. We are building the group with focus on organic growth and especially on organic profit growth, and so the improvement in the companies that we have, but also in terms of doing M&A with a clear ambition of acquiring 4 to 6 companies per year, around 10% of the group should come from -- or growth -- or sort of -- the group should grow by around 10% coming from M&A every year is our aim. We have been on the Stockholm Stock Exchange since 2001, as a separate entity, and we are currently on the mid-cap on the Stockholm Stock Exchange. Moving over to Page #3. We give you a little bit of the sense for what we have in our different divisions. Here, we have them again, the 4 divisions. And you can see from the left that Electronics is the heritage. That's where we came from. We used to do quite a lot of electronics distribution. But nowadays, we have changed the content of electronics quite dramatically, with both moving to more of modular and semi-finished goods, so much more complex products, much more solution-based -- type sales. And we've also moved in some proprietary products areas with LED, with other types of areas, which we're in, the RFID and also some marine applications that we also have within the Electronics division. And we also have a couple of other companies doing more special materials or more infrastructural type businesses that we have in the Electronics. And through all of that, we have lifted the margin within Electronics from 10 years ago, some around 3% to 5%, up now to more than 10%, which I think is the good performance from the Electronics division. Alongside with having the Electronics, we also have the Mechatronics, and that is currently our biggest division. Here we have also the biggest company within the group, the Elpress company, providing cable logs and electrical connection systems for a lot of interesting sectors, growing quite a lot for the wind turbine industry as well with components going in there. But also, in the electrification of the whole society. We have a number of companies working in that area with Elpress as one of them. But also, the cable harnesses companies, El Capsuling and Norwest or a couple of other companies going in that direction. Here, we have quite a density of our companies, but also quite a density of our earnings and volumes, and you can see this 33% of EBITA last year. The third division is around Communications, and that is also -- it is built around really 2 verticals or 2 areas, like technical security area. We have -- where we also have our biggest company within that division, that is the Argon business, providing different types of infrastructure for sprinkler systems with pumps and other type of infrastructure around building sprinklers for houses and factories and that type of thing, those type of environments. We have a couple of other companies within that area doing more of traditional technical security with the law and protecting and -- yes, for instance, in prisons and that type of thing. We also have a couple of companies around that. Within Communications, we also have the control and access area, where we have a number of companies. And one example is the Radonova, you can see there. They are one of the market leaders in radar measurement, doing quite well for us. And Precimeters and another company doing very well for us in an area for measuring and working in the aluminum industry, whether -- you can all find separate home pages for these companies, if you like, to understand better on what they're doing. Since 2012, we are also building Niche Products division, which is becoming increasingly important to us, and it's here at 25% of EBITA. Currently, it's growing faster than the group all in all, and that is very promising. Here, we really find some -- and that's been very important to us. And the strategy that we have for all the group is to find the niche proprietary products companies that we can add to the group. Here, we have a number of different companies. We have, for instance, the SIB, you can see up to the left there, with the brusher systems using to clear runways that airports from snow. We don't provide the vehicles, but we provide the brush systems that we have there. You can see there. We also have a number of other companies, and the company doing best in this division is the Tormek. You can see the sharpening machine there to the right, not entirely to the top, but the second picture from the top there to the right. You can see the sharpening tool and sharpening machine being used there. And you can also see -- and that company is doing very well for us on exports, especially in the U.S. and in mid Europe. So that's also a very strong company within the whole group, but especially for the Niche Products division, and a number of other companies that we have within the Niche Products division. So that was sort of an introduction to the Lagercrantz Group. We move on with going into numbers. Here, we have our shark that we have used over the years, showing where we are with the leading 12-month figures in terms of sales and profits. And you could see that we concluded yet another good quarter. We had a little bit of a strong over time. We had a very strong upward trend within our numbers. And as you can see, the scales on to the left and to the right here are proportionate, meaning that we also can see the margins lifting along the way here, exceeding 10% as of, you can see, 2016, somewhere there, we started to exceed 10%, and we have been above 10% since then basically as an EBIT margin then. And that has been very good. We -- you could also see that we had a very strong performance in 2018, '19. And then we reached very high there about a year ago, and a little bit more than a year ago. And since then, we have also been, as most companies been dealing with the COVID-19 situation, and therefore, we had a couple of slow quarters. But after that, we have now had 2 stronger quarters than the same quarter previous year. And that means that we are still on a very good trend when it comes to our profits. Along the way here, we have also then been doing -- have different type of things. You can see that in the bubbles here. We started out with some restructuring of the group. We put a new sort of corporate governance model in place in the years 2005 and onwards, and that proved very good for us. And we have the downturn in the financial crisis, where we took some actions around -- during the recession. But since then, we have had some recovery and started out doing more and more acquisitions and improving with operational improvements along the way. And then we had created some organic growth and more acquisitions along the way with especially proprietary products that has been lifting our margins and our profits along the way, which brings us to the full picture here. Moving on to Page #5, a little bit more in the Q3 report or much more really. I think what we saw in the quarter is that we had a recovery during the quarter with some good improvement in many of our companies. And we saw some limited effect to the COVID-19 pandemic in total. We saw some companies doing really well. And especially the bigger companies have been doing very well for us. With the Elpress , it's doing very well on exports within the Mechatronics division. We saw in the Communications, the R-Con with the sprinkler pumps that I mentioned earlier, they're also doing very well for us within the Communications division. And the fastest-growing company in the group this year has been the Tormek company with the sharpening machines there, that I also pointed out earlier, within the Niche Products division. A couple of other companies within Niche Products division has also been doing very well for us, also that, for instance. The NIKODAN in Denmark has been doing very well for us within the Niche Products division. And as you will see from the numbers, the Niche Products division is the one growing their profits the most here in the quarter. On the other side, Niche Products have also had a couple of companies that have been affected by the COVID-19, especially ASEPT that was doing very well for us last year with their products -- their dispenser products for the fast food industry and the fast food restaurants in the U.S., especially. I think we can all understand that those type of sectors have been very severely hit by the COVID-19, and that has to some extent also sort of affected our ASEPT business. We have a couple of other companies that have also been affected by the pandemic, and that is especially within the Mechatronics division with Frictape and also some [indiscernible] has also been affected. But all in all, the most important ones and the strong ones have been performing very well. And all in all, I think it was a quarter that we saw some strong recovery and some strong order intake in many other companies, and that proves promising for the future as well. What we also saw in the quarter was that we saw -- we did, and I have commented on that earlier, that we did some really restructuring of the Electronics division about a year ago, and that has taken some time. But we had here -- now again, a strong quarter from the Electronics division, where we saw some good effects from the restructuring, we did last year. We closed 1 company in Germany -- sorry, we restructured 1 company in Germany. We put a couple of new management teams in place in a couple of companies, and we closed 1 unit in Norway, and that has come to have had a good effect on the Electronics division here. And we can see -- they come back very well here. And during the quarter here, we also made 4 more acquisitions. We took a little bit of a pause here during the summer, and especially during the spring and summer, but have then picked up the M&A activities here again and concluded now 4 acquisitions during the quarter, which I think is very promising. They are strong companies as such, but they also have clear connections and some synergies with all the companies that we already have. I'll come back to that later on here. We also try to comment on the charts down here below, on Page 5, and you can see that our share of International business is slowly, but steadily increasing over to the right. And you can also see that the proprietary product is up to 63% here now. So that's also been a key metric for us, driving the growth and the profitability of the group. I'll come back to that as well. Looking a little bit more on the numbers in Q3. We had sort of net revenues at SEK 1.078 billion. And an EBITA then increased by 8% to SEK 168 million versus SEK 156 million last year, and a very strong EBITA margin, as you can see there from 15% to 16.6%, which is a very good number, I think. And the profit after financial items also increased by 8%. So a stronger quarter than we had in the previous quarters and -- due to the recovery, and we're coming back and having a better sort of grip on where the COVID-19 will -- are affecting us and where it's not, and driving the group in a better way along -- further down the road here, means that we had a good recovery here in this quarter. What I'd also like to point out is the very strong cash flows we had, the SEK 226 million, you can see here, as opposed to SEK 178 million last year. Last year was also a strong quarter, was SEK 226 million, is even stronger. And again, for acquisitions, I'll come back to them later on here in the presentation. That means that in -- on Page 7, you can see the full 9 months figures. And you can see that the EBITA then increased in the quarter by 8%. And here, during 9 months, it was 3%. So we have a stronger tendency there along the way, even though Q3 last year was a very strong quarter. And then EBITA margin for the full 9 months of 14.3%. And yes -- and earnings per share as well at SEK 1.78, as most of you have recognized that we did split our share here during the period. [indiscernible] and manage it -- also expecting earnings per share and those type of numbers. And that's all been sort of adjusted for a year, of course. The return on equity was at 22%. And we have a very strong balance sheet going forward as well with equity ratio of 40% as opposed to 38%. That leaves quite a lot of room for more acquisitions. And again, a very strong cash flows from operations here with SEK 552 million as opposed to SEK 369 million last year. So cash flows is very strong point as well, I think. Looking at the outcome per division on Page 8, you could see how it looks by division. And I think it's important to highlight here the strong performance in Niche Products. Niche Products have had some quite strong quarters and is becoming sort of the very strong team within the group, with the -- and the main thing really to build Niche Products division and those type of companies. We have those in the other divisions as well with the Proprietary Products. And that proves, you can see how Niche Products is evolving over time here. And another strong point is the recovery in the asset restructuring in Electronics, now back at the EBITA margin of 12.5% which is the strongest they have in the timeline here. I think they have been close to that earlier on, but still a very strong quarter. And with more of acquisitions and building Electronics further, the aim is, of course, to improve that further. But I think the important thing here now is that the restructuring from last year had a good effect here in the quarter. That was -- you could also look a little bit on Page 9, where we have the comments by division. If you look at the Electronics division, again, the restructuring, I went over that already, I think, and that was in Poland, Norway and Germany, that was the reason behind improvements. Within the Mechatronics, we see the main unit doing very well for us. The vision is larger units with the Elpress, Elkapsling and Norway score are doing very well for us. But we also saw some negative effects from the pandemic, specifically related to the QD and the Frictape businesses. Nothing that we really worry about in the long term. But because we can see clear reasons for why it's happening now, it's very difficult for Frictape, for instance, to visit customers and do installations out at customer sites when we have a lot of close -- lockdowns in different parts of the world. And also have some international projects. And we had 1 last year during this time -- this time of during last year, but that was not repeated this year. But we also have some discussions and some good projects coming downstream. But to some extent, they are a bit delayed here, and that's why we made this comment around the telecom -- the delay in some telecom-related projects here in the Mechatronics division. Within the Communications, we also had a good EBITA, we think very good margin of 19.4%. We have some type of seasonality within the Communications, as I pointed out earlier. But we -- and we also see that some of the bigger units, [indiscernible] and ISG, Nordic and we have Precimeter are doing very well during the quarter, while we also saw some negative effect in the radar measurement business, the Radonova, that was negatively affected by the pandemic. So -- and that was also very important for us. And within the Niche Products division, that was the one increasing the EBITA most, up 46% as opposed to last year. I think we see some really good performances from especially the Tormek business, but also from the, Dorotea Mekaniska also made it very well, and. On the other hand, ASEPT made a very strong quarter last year, but also affected, and as I pointed out earlier, by the COVID-19 pandemic. So it's -- and I also think that's very easy to explain. And we are confident that, that will come back as soon as we are through the pandemic and our approaching summer here, and things will turn for the better in many of these companies, has some effect. So moving on, that was what I would like to present around the numbers of the quarter. Looking a little bit ahead, I think I tried to highlight a few things. I think we will continue, as we always do, to adjust strategies and measures and actions to the situation in each company. When we have a portfolio of 60 companies, it's always some companies that we are more in the restructuring phase, while others are sort of really driving growth and doing very well. And I think we have a very strong management team that is -- that are adjusting these -- adjusting measures to what is needed in each company. So we run the companies through the boards, and the sort of recipes and the strategies vary quite a lot between the different companies to what we do. All in all, of course, we have still some actions due to COVID-19 pandemic. I think we're dealing with that on a company-by-company basis as well. And -- but I think we have a good grip on where it's affecting us still. But -- and we don't see any sort of really dramatic measures at the new lockdowns that we've seen in the last -- recent weeks or months here. I think the sort of -- it's still working on a very good level for us in most instances. As we get through the COVID-19 pandemic, I think we also will put much more focus on growth again. And we will continue our focus on value add. And we will also then, as we already picked up now, doing more of acquisitions, and I will comment on that a little bit further on. So look, I think we will move to Page #12, where you can see the focus on value add. This is something that is very important to us. And you see that it has been a focus for us for many years. You can also see that we have been good in delivering and improvement in value add. I think this comes a lot from what we see in Page 13, which is the boarding operations and the increase of proprietary products. You can see that it's the top clear target for us. And as pointed out earlier, we are aiming for the 75%. And with the recent acquisitions, this will also be pushed in the right direction. But we are definitely on the path to reach the 75% in the next, yes, 3 to 4 years or something like that. We will be there 2 to 4 years, maybe, depending on how acquisitive we are along the way. Looking at acquisitions, we are on Page 14. We can look a little bit. And as pointed out, we have made 6 acquisitions in the last year or so, while we made 4 here in the last quarter. The Sajas Group came in, that is affecting the numbers in the quarter, while the other 3 will affect the numbers starting from 1st of January. So we have -- we only have Sajas within -- with the numbers in the Q3, while the other ones will affect us from Q4. And the acquisition is a key thing for us. We have seen some very interesting projects, and we still see some interesting projects along the way. It's been very exciting to be in this market. And it is very exciting to be in this market. We have more acquisitions that we're looking into. And that, I think, is very promising for the coming quarters as well. Looking at what we have acquired here during the quarter, the Sajas Group is the first one. So over them a little bit. Sajas Group is a leading supplier of brushes for road sweeping, airfield and railway cleaning and that type of thing. You can see a little bit of the products over to the right on Page 15. And here is an annual revenue of some EUR 10 million. And this is a Finnish-based company in Tampere in Finland. But they also have operations and production in Palin and also some states organization primarily in Germany. So a strong player. And here, this can be connected now to the AFID business that we already have within Niche Products division. So it's -- there, we're making brushes and brush systems for cleaning runways and airfield, while we here have a broader spectrum. And therefore, we see some clear synergies between the companies. And Sajas also had significant sales to Swedish customers, and that means that we can also sort of collaborate going to market here, will be the 2 different companies. So that's very promising. You can see the numbers down to the right there. And normally, we would like the EBITA to be above 15%. They have not been fully there. But our previous businesses is there and has been there. And therefore, of course, we have some profitability measures to be taken here in order to improve this further. But a very promising acquisition within that area. And that will affect -- that came into the numbers as of November here, last year, again in Q3. The second acquisition we made is the Hovicon International. That is a Dutch company based in the Netherlands. And that is connected -- it has a clear connection to the ASEPT business that we also have within the Niche Products division. Here, we're making different type of dispenser solutions. As you may know, the ASEPT came basically from a lot of catch-up dispensing and those type of equipments that you see in restaurants and McDonald's and that type of thing. And -- but we also see clear -- other areas where there is more dispensing with other type of solutions. And we made an acquisition of 1 player in the Dutch region, the very late acquisition a few years back. And now we have also made the second acquisition here with the Hovicon business coming in here as of January. Here you can see some really good numbers down to the right, some really strong profit margins. And that is, of course, adding to the overall strength of ASEPT and Niche Products and also to the group as a whole. So very interesting, and we feel that acquisition is -- the third one on Page 17 is a Finnish company. We have a similar business, making more of enclosures, smaller types of enclosures in Sweden, that our Elkapsling business. And here, we have another company in a similar -- with similar customers and similar sort of applications in Finland. And here, of course, we will see some synergies also with [indiscernible] are being brought to Sweden and Elkapsling been brought to Finland. And through that, find some synergies on market wise. This company is located in Carlston, and you can also see some good numbers down to the right there. Elkapsling is providing even better numbers. So we also see some synergies that can be explored here in order to maybe reach the 20% level here, I think, is fully reasonable. The last acquisition, but not the least, is the VP Metall on Page 18. That is a company that we acquired here in Norway, and they're making inclusive connectors where you build for high-voltage applications. You can see the applications over to the right there. And as you may know, we -- the Elkapsling is making cable logs as well using a quaint technology. This is more -- this is another technology using explosive and making these inclusive connectors that is used -- the application of these are easier to be applied, especially when we're talking about high-voltage application and the transmission network in -- and it's really a very strong player in the electrification of the society. And therefore, fits very well into the ambitions we have within the Mechatronics division. This is a Norwegian company. And as pointed out, it's located in [indiscernible] Norway. And you can see down to the right there, also very strong performance in terms of margins and performance. And the growth here has not been very high, as you can see there. I think we -- that is a clear ambition for us to put some growth into this company. They have been very sort of Norwegian and been very sort of local in many things, what they've been doing. But they have a set up now, some sales organizations in -- both in Sweden and in Finland, but also in Canada, for instance. And we will, together with them, and -- put Elpress and -- with stronger exports on their agenda and try to build the company further on with exports as a primary source of growth here in this company. That's also a very interesting company being brought into the Mechatronics division. So round off, I think we produced a very solid quarter here with some profit improvements of 8% in Q3. And now accumulated, we are above last year, despite the pandemic, and I think that's a very strong sign from us. And I think, in addition, we had very strong cash flows and a good cost control in what we were really doing. And as pointed out, especially the division, Niche Products, delivered a very strong quarter, and Electronics came back after some restructuring for a couple of quarters. We still see some negative effects from the pandemic. But once we are through this, I think we also will see some stronger growth from our companies. And as pointed out, we have also then picked up our M&A activities with closing additional 4 acquisitions along the way here. And with the strong balance sheet, we have, I feel confident that we have -- looking forward to 2021 really in the coming quarters. That was my presentation. I think we will try and open up for questions then. [Operator Instructions]

Do we have any questions from you? Anyone would like to start? [Operator Instructions]

Hello, can you hear me?

Yes, I can hear you, yes.

This is Victor Hansen from Nordea Equities.

Who are you again? Victor, let's start. You can start.

Yes. Jörgen, if you could please give us a split or at least elaborate on how much of the margin improvement in Electronics that is due to general market performance? And how much is due to restructuring and cost efforts, please?

I don't have a clear number for that. I would say that, from sort of my draft, I would say that 60% of the margin improvement is due to restructuring and 40% to margin -- to market improvement. We saw some really sort of lower growth in some of our Danish businesses last year. That has picked up again. So that's sort of a market improvement. We also saw some improvements in Germany. But we see some clear sort of -- and some stronger improvements from the restructuring that is coming from the restructuring in Norway and Germany, as pointed out. So 60-40, I would say.

This is Johan from Danske. Just two quick questions. Firstly, can you just address, if you look into the coming 12 months, if you see a normalization of your SG&A, i.e., sort of internal education, traveling, et cetera? If you just look on the cost headwind from those issues as society normalize, hopefully, and if you compare that against that, so you saw a slight decline in number of employees in the group. How do you expect that net to sort of pan out in the coming 12 months in your perspective?

I wouldn't put really so much emphasis on that. I believe that we have been good at cost control, and we have decided to out some employees given the pandemic and some companies affected by that. And it's not like we will hire them all back as soon as we sort of see some improvements. That won't happen, I think. So I think that we -- I think what I expect in the next year is also that we see some improvements in top line and business volume that will address that. So of course, yes, we will get some SG&A back, but I don't think that effect will be significant, really. I think we see some -- and I don't see that we sort of -- will -- that will affect our margins to a large extent. That I have a difficult really -- I think you, in theory, to argue that, that would be the case. But I feel that -- I think that improvement in volume and the gross margins and -- or gross contributions will sort of be strong as well in the next year.

All right. Just another question on -- can you just quantify in very sort of broad terms, your exposure to electric infrastructure sort of transmission business? And also, what are you hearing from those companies in terms of long-term planning, sort of long-term dialogues with their clients? Is there any sense of a shift -- long-term shift in demand? Lots going on, obviously, on a very high level in that area.

Yes. And I think we are very well positioned in that sort of -- when that is happening. I think that -- we have, I think, around 60%, 70% of the business we have within Mechatronics is related to that type of happening in society. But we also have other businesses that are also affected by that. So that, I think, is a very strong platform for us to build. And especially now when we've also made the additional acquisition into that area, I think we will -- that -- I think that's a good place to be. And given the discussions we have with -- so what we see is that, of course, there is a lot of discussions on both the need for more electricity to be produced, but also the imbalances in the systems and in the networks. That also means to the networks to be further developed. And that, I think, is very promising. When you look into what customers and different type of -- sort of expansion plans, you find different things. But all in all, I think, the growth will be pretty good in those areas.

But you're not talking about...

rather stronger than weaken and it has been really.

Okay. But no sort of step change, which you can identify as yet. Is that correct? I understood that.

Yes, there has been some articles around that lately. And there, you could see basically a step change. But we have not really, yes, been able to verify that in sort of the discussions we've had with customers. So I think that's the politician sort of starting out in that area, and then it will happen along the way, but it -- maybe takes a year or 2 more before we there. Okay. No more questions? Anyone else? Okay. As always then, me and Kristina, are available here during today. So please, if you would like, give us a call, and we will try to give you a brief sort of interview or a short one-on-one, if you'd like, if you have some additional questions. So don't hesitate if you'd like. So -- and thank you for listening in, and have a good day.