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

Good morning, everyone. It's 10:00 a.m. and welcome to the Lagercrantz presentation of our Q3 report. Me speaking is Jörgen Wigh, CEO; and together with me here, Peter Thysell as well, our CFO. Welcome, everyone. We, as we normally do, have this as a phone conference. The presentation we would like to go over and the slides we would like to go over, you can download them from our homepage. So lagercrantz.com is the homepage address and you can download the presentation there. And we would like for everyone to be able to follow, I would like to -- I try to highlight along the way which page we're on. But you can find the presentation there and also the report of course that we released here this morning. A very strong Q3 in our fiscal year ending then last of December. We had a very strong growth still and also some good cash flows and also some acquisitions came in very nicely for us. So it's a record high EBT for the group here in Q3. We will as always go over the presentation and it's basically 3 parts. So I make a small introduction for those that are new to the group and after that, we will go over the numbers and after that, we will highlight a few things that we feel are very important when we move forward and then finally, we also open up for Q&A. [Operator Instructions] So we will jump right into the presentation and just to give you the first overview of the group then. We have on Page #2, you can see the overview of the whole group. We are a tech group trying really to build a company consisting of our subsidiaries and build a group around sort of B2B tech. All of our companies achieving some type of leading position in expansive niches. So we're really looking for growth niches in different parts of the market. We have a high dependency on electrification and infrastructure, but also a number of other niches, product and tech niches that we are present in especially our Niche Products and International divisions. The TecSec division is the last one where we have more of sort of technology security companies with sales in security type products, which is also a growth area for us. All our companies are offering value-creating technologies in different expansive niches either through own products or through sort of leading suppliers doing more value-adding distribution for those type of companies and some system integration. But some 73% of what we're doing currently is proprietary product companies and products that we sort of provide for our customers. Our revenues are approaching SEK 7 billion, SEK 6.8 billion here in the moving 12 months and we have some 2,400 employees. We really focus on having strong subsidiaries so we have some 15 to 18 people working centrally. All the rest of the people are working out in the different subsidiaries. We are strong believers of decentralization so each of the profit centers are working independently based on some goals and some strategies that they have in each of the subsidiaries and they're all sort of then gathered in these 5 divisions that you can see here on Page 2. Over to the right, you can see also where we are present geographically. You can see that the Nordics are a strong foothold for us especially Sweden and Denmark, Norway and Finland slightly smaller. But we are then also moving out in the world establishing ourselves in sort of Northern Europe and we have now some existing business in the U.K., in Germany, in the Benelux and a number of other places as well. You can also see that we are moving more towards more and more exports along the way. And you can see that we have footholds also in other parts of the world outside the Nordics and Northern Europe and you can see that goes over to the right there with China and the U.S. as some examples and India as well. We are a very acquisition driven company. M&A is a very central part of our business model and we are concluding some 6 to 8 M&A transactions per year and it's been slightly more here lately, which is also affecting the numbers. So we have been quite acquisitive here in our fiscal year this year. And we were part of the Bergman & Beving Group up until 2001, but we've separately listed as an own company on our own name here since 2001. So we've been around for some 23 years or whatever, 22, 23 years along the way. So that's an introduction to the group. We move on to Page #3 looking at the Q3 report. We posted yet another good very strong quarter, record high really and you can see how that evolved over time here on Page #3. You could see that we started out with some low margins way back in '06, '07, '08 and since then we've been moving up and you can also see that we now posted yet another strong quarter and the moving 12 months EBT is now about SEK 900 million. And as those of you who know is that we're aiming for the SEK 1 billion here and we are on the way to reaching that goal. We said we would do it in 5 years and now we're basically close to doing it in 2 or 2.5 years or something like that really along the way here. So that's I think very encouraging and also we feel enthusiastic about that goal and achievements we've had so far. Moving over to Page #4. We posted our numbers here this morning and you can see we try to also give you some idea of how we feel the business climate has been. And we feel that during the quarter here the market situation remained very favorable for most of our businesses in our main markets. It's a lot of talk of downturn and we are prepared. We have made our contingency plans and stuff like that in all our subsidiaries, but we haven't sort of put those in effect in more than maybe 5 to 10 companies or so. So I think we still feel that the order intake is strong and good in most businesses and we feel that we are still sort of perceiving the market to be very good for us. In Q3 we had a strong revenue growth of some 38%, of which 10% was organic then and 23% through acquisitions and then we also had a positive currency effect of some 5%. We believe that our strong and very broad focus with sort of many different end customer segments is very strong for us at the moment. The group also has quite a lot of dependency up on the electrification, the infrastructure and some specialized products in different niches that we feel is favorable for us at the moment. We feel that we are really working with some strong megatrends in society and those are beneficial for us at the moment and that's also holding up the numbers really good here in the quarter. We believe that the order intake is still good and especially so we've seen here during the quarter within the TecSec and International divisions. We saw a slightly lower growth rate but on very high levels, but not really significant and still holding up very well for us. We also said here that the order intake during the quarter was at the same level as the net revenues. So the order book was basically intact during the quarter. It didn't decline and they didn't build, but it was intact during the quarter and that's for comparable units then and that I think is also a strong point given the market -- how sort of the discussion is around the general market conditions. Also here down below, you can see also that I mean we have the -- I'll come back to that later, but that's around our aim to have 75% proprietary product and we see that improved a little bit further here to 73%. And you can see also to the right there that our revenues, exports are becoming more and more important to us and you can see that's also sort of -- that development is continuing in the right direction like the way we'd like to have it. We move over to the figures that we have on Page #5 and looking at the Q3. And as said, the net revenues increased by 38% and the organic growth part of that was 10%. The EBITA increased by 43%, which we feel is a very strong number and, as I said, I think ahead of most of the consensus which was a strong point. And then we had an EBITA margin improve slightly with the 16.6%, a very strong good level we feel and we are of course working intensely to keep that level. And I think with the acquisitions we made and also the sort of setup we have with the different businesses, we have very strong portfolio of companies in that range and above that range. So it's a strong one for us as well. The organic growth in the EBITA was 20% where we felt that many of the companies, especially in Electrify and TecSec, contributed the most to that figure. A very strong one was also the cash flows from operations, which was the SEK 439 million during the quarter. We had a tendency to build some safety stock earlier on and I think we are about to sort of deal with that. We see some [ lead] times coming down in some instances and we see that we also are freeing up some cash flows along the way here and that's affecting that number, but also of course from profits is also a huge part of the cash flows. In the report, you can see the full cash flow analysis. Profit after financial items then increased by 31%. We had a currency conversion effect on some foreign currency loans that was somewhat higher here during the quarter, which affected the growth rate of the profit after financial items. The weak Swedish krona has affected some foreign currency loans that we had and that's also part of that number. The profit after tax then increased by 34% and the return on equity was very strong at 30% as opposed to 29% last year and the equity ratio improved here during the quarter from some 30% last quarter to 35% and compared to 36% last year. So the strong cash flows and a few other things also affected the equity ratio here along the way. We move over to Page #6 and you see the 9 months and you can see that the Q3 was slightly stronger than the 9 months. If you compare the slides between [indiscernible], the net revenues increased by 33% and the organic growth was 10% also for the full 9-month period and the EBITA then increased by 37% and EBITA margin of 16.6% for the full 9 months report. And the EBITA then, the organic growth in the EBITA was 19%. Cash flow strong also for the 9 months, but it really picked up here in the last quarter. So that has really turned for the better for us. And then you can see the rest here. It's important to also highlight that we closed some 7 acquisitions during the 9 months period that add about SEK 1 billion in sales. And we made a few slightly larger acquisitions especially the PcP, but also few high margin ones that add to the whole group. And here lately we also just at Christmas we acquired Tykoflex, which is also an important acquisition for the Electrify division. So that's really a good thing from us we feel as well. I'll come back to those along the way. So the earnings per share is currently at SEK 3.5 per share as opposed to SEK 2.80 for the full fiscal year last year. So that's also moving definitely in the right direction. And the equity ratios then yes, that I covered already. Looking a little bit at the outcome by division on Page #7. You could see that we had some 5 really strong divisions. It's very strong in Electrify, TecSec, Niche Products and International. It's the Control division that is lagging behind a little bit. They are struggling with a couple of companies that are more related to the building sector and some parts there, but also experience some shortages from supplies of different type of components still some parts of that in that business. But otherwise, many of the companies did very well in the Control division and you can see a very good healthy EBITA margin in the quarter there for the Control division as well. We see couple of strong companies there and especially the Radonova business is strong here during the wintertime and you can see that affecting the strong EBITA in the last quarter of Control. You can see also down there that we have 5 divisions with really strong and healthy margins, all of them. And I think that's also a very good thing about Lagercrantz that we have a strong portfolio of many different companies and a very broad-based sort of setup in the group. Looking at Page 8, we have some more comment by division. I mean looking at Electrify, their revenues -- they posted a very strong quarter. Their revenues were up 26%, the EBITA was up 31% and the EBITA margin of 16.4% and the improvement there as well. We can see that the stronger and the bigger part of the companies are doing it very well with Elpress and Elkapsling posting very strong quarters and also Cue Dee had a very strong quarter. We had a couple of others moving in the other direction with Swedwire for instance that we also are working with. But all in all, a very strong quarter from Electrify. The Tykoflex acquisition came in and affecting only the December numbers so that will also be something that we look forward to working with that company within the group moving forward. We saw a slightly decline in the growth rate here in the last part of the quarter for Electrify, but so far it's been good here during this quarter. It's not a big thing, but still somewhat slower here in some aspects in the Electrify division. The Control division, as already said, is the one that didn't increase their profits in the quarter compared to last year. Some units are still doing it very well with Direktronik and Precimeter especially while Radonova is performing at the same level as last year. We have expected some growth there, but the somewhat slower growth I think that's also people are -- customers are sort of being more careful with sort of doing that type of thing and measuring [ light ] at the moment and therefore holding back a little bit, but still on a very good level at the same pace as last year really. And the recent acquisitions came in very nicely. We have a couple of other companies within Control that are more struggling especially the lighting business we have in Norway for instance and in Denmark struggling a little bit and we also see in other parts of the business that we are struggling little bit. But still on a very good level I think in the Control division as well. The TecSec division on the next page, Page 9, is on the other hand doing it very well for us. They're basically doubling both the revenues and the EBITA during the quarter as opposed to last year. Here we have made some significant acquisitions. But also underneath the underlying organic sales, both sales and EBITA growth has been very strong here during the quarter for the TecSec division. The larger units; the CW Lundberg, the R-Con, the ISG Nordic and Frictape; they all had very strong organic sales growth and also some of the others did very well with the COBS and Idesco. And also the recent acquisitions came in very nicely for us with PcP, Aras and Door & Joinery. Within the Niche Products division, we posted some revenue growth of 33% and an EBITA of 22%, slightly lower organic growth rate during the quarter. I don't think there is some things that has been working better or worse for some of the companies there. So it's not really business cycle related I would say, but somewhat slower there. But good hope of things to catch up going forward here. Especially strong development we have within Wapro and Truxor and Profsafe and PST. And Niche Products is a very strong division for us so it's good to see that they have an EBITA margin of 19% and a good revenue growth as well. And last but not least is then the International division, which had a very strong quarter and is doing much better along the way. Posted revenue growth of 28% and an EBITA growth of 38% and that's really some strong numbers coming there. We see some good margin improvements across many businesses really and especially the marine businesses with Libra in Norway and ISIC in Denmark and also the Tebul that we acquired here during the fall in Finland posted very strong quarters. Also the German Schmitztechnik and the ACTE companies, which we have in a number of markets, did very well for us. And also the E-tech business in the U.K. is really growing at the moment, which is good to see. So a very strong quarter for many of our divisions and some highlights there. That was what I had to say about the quarter really. We move into looking a little bit further ahead. I think it's important these key themes are the highlight. And of course Lagercrantz, the goal that we have here on Page #10, the Lagercrantz towards the SEK 1 billion is a key thing for us. We are really keen on delivering on that and we are well underway to doing it before the timeline really. Here this is something we launched now 21 months ago really where we would like to sort of -- we made a reorganization of the group. We set targets a little bit higher ambitions along the way and we also declared that we are really moving into more sustainability and finding different type of product segments, different types of customer segments where we see some underlying structural growth also to create a more sustainable society really. And we will also like to increase the capacity within the M&A, which also I think we've been delivering quite nicely on. Looking to highlight what we have done really within -- looking at Page 11, you could see that we have really been looking at growing faster, doing more acquisitions along the way; but also creating a better organic growth than we've had looking a few years back. So in the last couple of years we had a stronger organic growth with this new focus of ours and of course also benefiting from what we believe is a very strong market or has been a very strong market along the way. But setting ambitions a little bit higher with the 5 to 8 acquisitions per year and really delivering on the return on equity of more than 25% along the way. On Page 12, you could see the new 5 divisions that we've had since now almost 2 years then. With electrification and Electrify really focusing on that area with a number of interesting companies very well positioned within that sort of megatrend. And especially Elpress are among the bigger ones, Elkapsling is among the bigger ones and now we've also then added Tykoflex here as well as an important company within the Electrify division. We see the Control division, which is focusing on measuring and controlling different type of technologies with sensors, communication solutions and lighting control that we have within the Control division. That is the smallest division we have, but we definitely have the ambition and see good opportunities for growing there both organically, but also we are also looking for more acquisitions within the Control division. The TecSec division has been growing quite nicely here since we launched this. So it's becoming one of the bigger divisions we have with safety and security products or solutions addressing that in society with some really important and interesting companies that we are gathering in that division. And then we have the Niche Products division also doing very well for us, have been around since 2012 doing it. Been a very strategic important move for the group to do that and that we're also now translating into what the International division is doing. The Niche Products division is doing it in some buildings sort of different type of clusters and different areas within the Niche Products areas -- some Niche Products companies really, proprietary products all along. And we're planning to do the same thing in the International division in some new markets especially addressing the U.K. at the moment, but also looking into Germany and other markets as well. Strong positions in Denmark and Norway as well. So those are the 5 divisions we launched. We're looking at Page #13. I think it's also important to see that we have a very strong portfolio of companies. I usually try to highlight how many units, how many profit centers or units that we have within each bracket here. This is the benchmark that we're doing from the best to the worst really in terms of return on sales so net margin, EBT margins that we see and you can see how that's evolved this year compared to the same period last year. So you could see that we are moving up with more, having more; 18 as opposed to 13 units above 20%, 12 as opposed 11 units last year between 15% to 20%. So I think we are building a stronger portfolio along the way and moving up more companies to blue here and that's really great. And of course that also has to do with the acquisitions, the companies we're looking to acquire that we preferably would like to have them up well above 10% or above the 15% that we have as an ambition for the full group really. One thing looking at Page #14, you can see the aim of having 75% proprietary products and you can see how that evolved over time and you can see that we are currently at the 73% as opposed to 70% here some 9 months ago. And we are basically approaching the 75% and we are currently discussing what we do in the next phase and probably we will aim even a little bit higher here going forward with proprietary products, which is a very strategic ambition for us. We see that margins are higher and growth opportunity in exports for instance are bedded with proprietary products and therefore, we would -- that's a key strategic ambition for us to grow the prevalent proprietary products within the group. Last, but not least, is the acquisitions. We have built our organization slightly. We are moving more in a decentralized way working with this in the divisions along the way and that's been very important for us. And here in 2022 the calendar year, we have acquired some 9 companies you can see there, adding some SEK 1.2 billion in revenues. Previously I said SEK 1 billion, that is in the 9 month sort of period so that's during the fiscal year. But for the last 12 months, it's been SEK 1.2 million then as you can see there from Page #15. I did normally put together some data sheet for each of the companies we acquire and looking a little bit on those. You can see on Page #16 the Tykoflex. The Tykoflex is our most recent acquisition. It's a leading supplier of high quality solutions for optical fiber joints and enclosures, which is important acquisition for our Electrify division with some annual revenues of SEK 140 million and you can see they made SEK 24 million in 2022. Not fully closed the year yet, but that's the way -- that is the calendar year then that we also announced in our report here. So a very strong company coming in and doing it very well and will be an important part of the Electrify division. I'd also like to repeat on Page 17, you can see the PcP Corporation, the fact sheet for that. That is the company that we acquired here this summer and it is the biggest acquisition we've made within Lagercrantz in recent years and very important to us along the way. They're still doing it very well. They have a slightly slower winter period, but otherwise they're according to plan. And the ambition we have here is to move them to the 15% EBITA, which you can see they have not entirely reached historically, but we are really having a strong plan for delivering that. And they started out during the high season, they are already at that level while in the low season, are slightly below that level. But still doing it very well for us. On Page 18, I also like to repeat the Door & Joinery solutions company we acquired in the U.K. This is the first real acquisition we made in the U.K. As we have said already, we had to put some feet on the ground in the U.K. looking quite a lot into the U.K. market and seeing lots of opportunities there and we would like to move ahead there as well. And the Door & Joinery we acquired here this summer has come in beautifully in the group with some strong numbers along the way, doing it very well. I also would like to repeat on Page 19 that Waterproof Diving International, which is the company we acquired here this summer, also doing it very well as highlighted here in the comments earlier and came in very nicely for us. And on Page 20 we have Tebul, which came in here in September. A strong Finnish company, high margin and doing it very well for us, very good start within the group. Just a reminder of the acquisitions we made. So to conclude, I think we posted a very strong quarter. We had some good organic growth, we had some pickup in our EBITA margins doing very well for us both organically and through acquisitions and we also had a very strong cash flow and we also then posted some 7 acquisitions here during the fiscal year adding very nicely to our performance really and coming in very nicely, most of them. So looking at the last 12 months figures, you can see how that's evolved and you can see how we have -- on Page 21 as a wrap up here. You can see our current status and how we're working with these things. So with all that, I think we'll try to open up for questions and do the Q&A.

[Operator Instructions] So anyone would like to start?

Can you hear me?

Yes, we can.

Yes. This is [indiscernible] from SEB. So as usual, congratulations on another very strong report here. So a few questions from me. First, regarding the cash flow, as you said and as we could see, it was very strong and you -- nice release from working capital. Should we expect a similar pattern going ahead the following quarters where you basically get the boost from working capital?

Yes. Well, we are struggling and working with that. We would like to tie up as little as possible and some quarters then, it depends on how we're sort of invoicing the last month of the quarter and stuff like that. So it's not entirely predictable from a group level what is happening. I think we've had some strong cash flows along the way. I think we see a clear tendency that the safety stock is coming down, that we don't need to sort of have the large safety stocks due to the long lead times from our suppliers as the sort of delivery times come down a bit. So I think we could expect some better cash flows. Then I think it's also good to highlight that, I mean, if we see a -- more of a not a strong growth and things -- and even if the market even went down a little bit, usually what happens in these companies, ourselves and our peers as well, I think, is that cash flows is then usually very strong. So that -- if that would happen, I think that cash flows are usually very strong. We saw that in the 2008, 2009 and we saw that in the pandemic, and we saw that in a couple of instances looking back. But I think our intention of course to keep the growth up and that's what we really see, but the safety stock thing will help our cash flows going forward.

Okay. Perfect. And the next question, you touched upon this during the presentation, but what have you seen so far here in January and the first quarter -- or in the first month during your Q4? Any change to Q3 or is it the same in terms of the norm and so on?

We think that things are moving along quite nicely, and that -- the pace is keeping up.

Okay. Perfect. And the next one. I know this is quite tricky for you, but inorganic growth of 10%, what is your best guess, the split between price and volume?

I think that we've earlier said that the price component is probably around the 10%. I think that is coming down, as we see the comparables versus last year is coming up a little bit. So I don't think the price component no longer is as high as 10%, but I think most of it -- the majority or maybe 7% or so is -- my guess, is price.

Okay. Perfect. And then one -- 2 final questions. As you said, Niche Products segment, I mean, it had the lowest growth, organic growth of the segments. Did I understand you correctly that you might expect a pickup here in the coming quarters?

Well, I think the companies that we have within the Niche Products division are very strong. So I don't expect them to sort of -- to do worse or I think it's a matter of how things turn out the specific quarter or so. I don't want to sort of predict anything going forward, but I'm not worried about the companies or the market positions or how things are run at that division.

Okay. Perfect. And the final one. I couldn't find it in the report. What was the organic growth in the Control segment?

I think it was slightly minus.

Minus 6% in the quarter.

Can you hear you me?

Yes. We can hear you.

Yes. Great. Victor Hansen, Nordea here. First question here. You mentioned that your Q3 order intake was similar to sales. Are there any specific segments that stick out here in terms of the order intake? And then maybe a follow-up. I'm also wondering what visibility you have, how long is your backlog?

I think it's the ones we've commented really. The electrification are doing it well in terms of order intake. We also see the TecSec division doing it quite nicely, and we also see the international, especially also with some good order intake here along the way. So I think we've highlighted a little bit. The visibility we normally have is 2 to 3 months. It varies -- I mean, it's 70 different businesses, right? So it varies quite a lot. I think we have a number of businesses that have order backlogs maybe 6 to 9 months ahead. So they have good visibility while others have basically 2, 3 weeks, but on average, I think the average would be 2 to 3 months.

Okay. Understood. And then here on cost inflation, I'm wondering, what's happening to input prices here? Are they still rising maybe at a slower pace? And then are you able to raise the prices fully or is it getting harder? So basically is there an input-output mismatch here in the quarter margin wise?

Not really. We are really keen on -- we love working with pricing and revenue management in our different businesses, and that we do every day. I think it's about timing. Sometimes it's about when you can raise prices and when price raises take effect in the businesses that we're running. I think we have compensated largely. I think we have a few more things to fix in a couple of companies, but we also see some prices coming, I mean, stabilizing. And so I think the general sort of -- and as you are sort of indicating, I think that it will be increasingly difficult as consumers and others, sort of customers and eventually B2B are struggling to compensate and raise prices along the way. It was easier a year ago. That is also true.

Yes. Yes. And on the same theme here, so given the price hikes year-on-year on a flat order intake, that should mean slightly lower volumes sequentially. So I'm wondering here, this should impact your operating leverage negatively or how should we think about this?

Yes. To some extent, that's true. I think the amount of really fixed cost that you can't adjust along the way is very low in Lagercrantz as a group. So it's not like, I don't -- it's not like I see that as a big problem. We will compensate and work with adjusting along the way. And I think we have -- I think it's been quite -- a lot of things to adjust here in the last few years and you could see from the numbers that we've been quite good at doing that, those type of adjustments along the way. So if we need to reduce fixed cost, then normally you could do that even if it might take a little bit longer time to do this. And the share of really fixed cost is not very high.

Can you give a number?

No, no, not really. It varies quite a lot. So it depends on how you define things, but generally speaking, I think we have been very good at adjusting and compensating in -- and keeping gross margins and keeping costs as a -- fixed costs at a reasonable level.

Yes. So my final question is, if we stay on this topic, so you reduced the headcount quite a lot to cope with the financial crisis a lot of years back. And I'm wondering, will you use more of the same if we would see a scenario where volumes would start to decline here? Or what other levers will you pull? Yes. So how are you preparing for a recession? What actions will you take?

Yes. I think that is our most -- it was and is still our most important lever. Yes. That's what is necessary. I think we are already cautious about recruiting new people. We are very cautious about building costs or -- that we do just from listening to what the market or really what the general climate is talking about. But if we were to come into -- run into problems or that we see volumes deteriorating, that is definitely an important lever. I think other levers is of course to negotiate better with suppliers or it might be sort of reducing office space or, yes, a lot of things that goes on in our companies when we see the necessity for that. But so far we don't really have that as a big theme for us. Do we have someone else?

Can you hear me?

Yes.

Jörgen, Niklas Savas here, Redeye. So I want to ask you about the really strong cash flow you have, both operating cash flow, but also the financing cash flow with the opportunistic move you did selling your own shares over the market. I just want to ask, how did you reason doing that move?

So how did we reach...

How did you reason when you decided to do that?