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

Welcome to Lagercrantz Group Q3 Report 2024/'25. [Operator Instructions] Now I will hand the conference over to CEO, Jorgen Wigh; and CFO, Peter Thysell. Please go ahead.

Good morning, everyone. I hope you're all hearing this now. Welcome to Lagercrantz interim report, our 9 months report. As you know, we're starting our fiscal year 1st of April. So we just concluded our 9 months report ending then in December here. Together with me here this morning is Peter Thysell as well, our CFO, and we will try to run you over some numbers and have some Q&A at the end. We usually spend around 45 minutes or so doing these sessions every quarter. So welcome, everyone. We will have a sort of a setup where we will have a short introduction to the group for those that are new to us, and then we will go over and discuss the numbers and then have a little bit of discussions on where we are more strategically and in a long-term perspective at the end. So just to give you a short introduction, Lagercrantz is a tech group with -- really working through M&A and building with all these autonomous companies that we have within the group. Currently, we have some around 80 companies within the group, all aiming at getting a leading position in an expansive niche where we see some growth and good opportunities to be a very strong player in these niches in the companies. Every company work under their own name in their own market, and we try to be a very good owner of these companies, encourage them and challenging them and supporting them in their growth and improving their growth and profitability in each of the companies. You can see here that we have organized ourselves into these 5 divisions, the Electrify, Control, TecSec, Niche Products and International. And you can see how many sort of profit centers or companies that we have within each of the divisions. This setup is new as of some 3 years ago, and we see some good things coming out of it now and then we have a more of a focused approach in each of the divisions, trying to get them into growth areas and building where we see there is some underlying structural growth. We have reached revenues of around SEK 9 billion, and we are some -- currently some 3,000 employees in the group. You can see all over to the right where we have our companies with the needles there. We have been focusing on Northern Europe for quite some years. And since many of our companies are also working with exports, you could see also all the way over to the right that we also have some footholds in other parts of the world, in Asia and also in North America. M&A is a very central part of our business model. So we're acquiring some companies along the way, some 8 to 12 companies per year, adding approximately 10% of the group is our ambition every year. We were part of the Bergman & Beving Group up until 2001. But since then, we've been on our own since 2001, listed on the NASDAQ Stockholm. And we started out as a small cap company, went to mid-cap and are currently since some 3 years on the large cap segment. So that's an introduction to us as a group. We released our numbers here this morning, and it was good to see that we had a very strong quarter, we think, with some improvement in terms of growth rates in -- compared to where we have been in earlier quarters. We came back to positive organic growth already last quarter, but now it was improved a little bit. So we posted some 3% organic growth. But on top of that, we've been also then very acquisitive here for some time and acquiring more than the 10% I talked about ourselves along the way. And some -- and here in the quarter, it was around 16% that came in from organically in terms of sales growth -- sorry, not organic -- nonorganic through M&A. So we have been having a good trajectory for quite some years now, and that continued here or even strengthened a little bit here in this last quarter, which was very good to see. We have -- since we were at some SEK 500 million or so, we set the bar that we should double since we're growing with some 15% per year, meaning that we're doubling every 5 years or so, we set the bar there that we should go towards the SEK 1 billion, which was a goal for ourselves along the way. And we actually went -- achieved that as of last year. And now we put the bar at SEK 2 billion. And we have now some quarters there where we see that trajectory is really continuing over the year -- over the -- yes, along the way here. So yes, thank you. Next. In our report this morning, we communicated that we feel that the sort of overall market conditions stable, continue to be stable for most of our businesses. We see some variations between the segments. We see some segments that are actually showing some good and better growth along the way. We see the electrification taking a growth path along the way, and we also see some of the parts within the Niche Products also doing it very well. We also see that in other parts of the businesses along the way. But we also see that the construction sector, which has been sluggish for some time now, continue to be sluggish. I think most of us expected that, that will pick up here during last year, but that has been delayed. And therefore, we see that this construction sector is still sluggish for -- affecting some of the companies that we especially have within the Control division and also some in the TecSec division. Looking from a geographical perspective, we feel that most of our main markets, Sweden, Denmark, Norway and the U.K. are showing some good recovery, while we still see that -- and especially Germany. We don't have that much in Germany, as you can see already 6% or so. So it's not that much in Germany. But that is, of course, also affecting some of the Nordic companies as Germany is a very important export market for all of the Nordics really, not only us, but many other companies as well, and yes. And we also see that Finland is also a bit sluggish. So we see a pattern there. But our largest markets, the ones that are put up there have developed and showed some recovery also along the way and allowing us to have a stronger sort of earnings trend here in the last quarter. We also stated here in the report that our order intake were in line with or actually slightly a little bit above invoiced sales in the quarter. That varies over time, and it's hard to really make a huge conclusion out of that, but still it was a little bit better and a book-to-bill that was a little bit above 1 here in the quarter, which was good to see and is also sort of supporting the thinking that actually it is a little bit of improvement along the way here. What was also good to see is that we continue. You know that we have the great ambition of our proprietary products, and that went to the 78% here now. I have a slide later on covering that as well. So that was our sort of general comment on the business trends or the business conditions. And Peter, maybe you should go over the actual numbers then as we presented them.

Yes. So overall, as Jorgen mentioned, we're quite happy with our Q3 report. The net revenues increased by some 20%, where acquisitions contributed with 16% and the organic growth was 3%. And as you may remember, this time last year, we had a couple of quarters with negative organic growth. So this is a gradual improvement. Last quarter, the organic growth was 1%. So we see a small improvement there. On the EBITA increased by 21%, and the margin was quite stable and slightly improving from 17.2% to 17.4% in the third quarter. Our most important earnings is the -- after financial items, and this increased by 18% in Q3 and profit after tax increased by 19%. The cash flow was quite strong in the quarter. This is partly driven by some of our entities like the Nordic Road Safety, which has a quite strong cash flow during the late fall, but improved by some 32% in the quarter. And then in addition to the -- well, in November, we made the acquisition of Mastsystem that only was included in December in the numbers, but that added some SEK 175 million in annual revenues, and that totals to some SEK 1.320 billion acquired since October in 2023. So this is roughly the 15%, 16% acquired growth that you could see above. And in December, we also signed agreements for the acquisition of Van Leeuwen Test Group in the Netherlands and TASL in the U.K. And they are both subject to regulatory approval and will most likely be added to the group in the beginning of 2025. If we sum up the financial year so far, we noticed that the acquired growth was 15% and the organic growth was slightly positive, but 0 and the currency didn't affect the net sales. And EBITA increased by 15% and the EBITA margin was very stable at 17.4%. And the profit after -- or before tax increased by 14%. So as you may know, this is slightly below our target of 15%. But we're quite positive to achieve that in the full year. And cash flow improved to SEK 980 million. Return on equity was same as last year, 28% and the equity ratio was at 35%. Profit over working capital was at 82%, so an improvement from last year's 77%. And the earnings per share improved to SEK 4.61. So if we then turn to the outcome per division, we noticed that all divisions improved their EBITA in the third quarter, except TecSec. So we are quite happy with that. And you notice that the EBITA margin for the group improved from 17.2% to 17.4%, but there are some variations across the divisions. And the most strong performance is from the Niche Products division, which has had a couple of quarters now with above 22% EBITA margin. So that's very, very strong. And comment on the Electrify division is that this is affected by Nordic Road Safety, for example, which has a rather weak season in the Q3. And yes, those are probably the most important comments. So then maybe, Jorgen, you can comment.

Yes. A few highlights and how we commented on each of the divisions. So let's start with Electrify, came in revenues up 34% and 28% of that was through acquisitions and organically some 6%. We feel that Electrify delivered a very good third quarter through -- yes, also then now consolidating and getting an effect from both Nordic Road Safety that we acquired here this last spring, but also the Mastsystem in December, which both contributed very well. We also have some -- but underlying several units, especially within electrification, but also within the infrastructure had a very good development. For example, Elpress that has been a very strong company for us for many years now, had a very -- having a good trend of the electrification. It's actually the growth rate there is actually picking up along the way a little bit, which is affecting Elpress and VP Metall as well to some extent. Tykoflex and Swedwire also had posted good quarters. The Control division, there we had -- the revenues were up some 26%, which was 24% through acquisitions and organically 2%. So EBITA was up 27%, which is better than we've seen from Control in a while, and that's a good development along the way, especially the Nikodan and also the newly acquired CP Cases in the U.K. posted some -- posted a good start and a good quarter here along the way. We also -- but here, we also see some still sluggish development in a challenging -- and a challenging market situation, particularly in the more construction-related companies in the Vanpee in Denmark and Norway and also the Stegborgs here in Sweden is also suffering a bit from a weak construction sector, which obviously is going to be delayed here along the way. We had hoped that it would have picked up already, but -- and we see some -- yes, along the way, we will probably do that, but it's been delayed to some extent along the way. Good to see was that Radonova continue to do very well for us. They have been very strong for the Control division for some years now and are having a strong sort of year this year as well, living up to last -- strong last year really. And in December, Radonova also then made the add-on acquisition of TASL or the Track Analysis System in the U.K. Not very big, but still very important in the development of Radonova, building a market -- stronger market position in the U.K. as well and all of Great Britain along the way. So that was the Control. Let's move on. The TecSec division posted -- that was maybe the weak point in the report. Revenues grow by 6% there and 9% came from acquisitions. So organically, this was the division that was slightly down with 5% -- 4% organically down. So here, we are struggling a little bit more along the way. We see some of the companies still doing it very well with the security companies. And ARAS, Fireco and Frictape are still doing it very well and growing and posting a very good quarter, while some of the more construction-related businesses, the R-CON, the Door & Joinery and ISG Nordic continued to be affected by the weak market conditions. PcP, which is the division's biggest unit, also slightly had a weaker development in the third quarter, also affected with the construction-related -- from the construction-related sort of sluggish market there. The Niche Products division was really the strong one with -- posting 28% together with Electrify was the strong one. Revenues were up 28%, which -- of which acquisitions was 21%, organically up 7%. So a good organic growth there. EBITA was up 41%, very strong, and the EBITA margin was also up to 22.9% as opposed to 20.8% last year. Had posted a strong quarter and very broadly, especially for a number of companies, the Asept, the Wapro, the SIB, Sajas in Finland, Thermod and Westmatic posted all very good quarters. And that was also then boosted by Prido coming in, which is the company we acquired here this spring has been very good for the group, contributed with a strong result in this quarter as well. And here, we also continue our Building division with also the VLT or the Van Leeuwen Test Group acquisition in the Netherlands, which has not yet affected the numbers. But it's a somewhat bigger company as well that will add to the numbers here starting from, yes, early 2025. As soon as we get the approval there, we will communicate that and close that business -- close that deal. We move on to the last one, which is the International and posted some 9% in revenues, of which acquisitions were 3% and organically a good 5%. The EBITA was up 6% and EBITA margin at 17%. A good -- another good quarter from International. As for those of you who have been with us for many years, you know that International was the division that was lagging behind earlier on, but has picked up and is now sort of, yes, in the midst of the group and really have been building along the way and providing some better margins along the way. Here, we see that the improvements came both organically and through acquisitions. But we also noted that especially the marine sector or the marine segment has picked up for us over the last couple of years and especially the Libra in Norway did post yet another good quarter. A couple of other companies that stand out are the newly acquired Glova Rail and DP Seals. They've been with us slightly more than a year now or more than a year, but still they posted good earning improvements being part of Lagercrantz. While we're more struggling with especially the companies that we have in Germany and in -- within the international divisions, there are 2 of them. So that is -- the German market is still sluggish and lagging behind in the recovery. Yes, those were the comments by division. We move on to looking at where we will move forward. I mean we feel very happy with where we are. We feel happy with the strategy and how we're working with things. I think the reorganization of the group that we did some 3 years ago has been working very well for us. Now with the divisions really building their portfolio of companies through M&A and organically. And through this, we will build a very strong group of companies and a very strong group all in all. And our sort of long-term ambition is then to have an annual profit growth of more than 15% per year, i.e., doubling every 5 years and have now set the bar for the SEK 2 billion, as you see up in the, yes, above the headline there, we've been talking about that. We feel that it's reasonable to think that we should have at least 1/3 of that growth come organically, while the rest through some 8 to 12 acquisitions per year. So it should be basically 1/3 of our growth organically and 2/3 from acquisitions. From time to time, it may vary how many acquisitions we make. We will still sort of try to post at least 10% growth through acquisitions, whether they are smaller or bigger ones, but -- so the numbers might sort of change over time, but at least 10% is why we're aiming -- what we're aiming for, and we've been above that threshold here for some time now. We will try to do this very sort of in a very profitable way and therefore -- and the return on equity should then exceed 25% within the group, a financial goal we had for many years and that we lived up to most of the years, especially here more in the recent years. I'll have something showing that as well. In the buildup of the group, we think that one strategic thing has been very -- yes, okay, we'll start there. Okay. The building of the 5 divisions. So we are -- we have organized ourselves into these 5 divisions. And we feel that they are very well positioned and that we find good opportunities both organically and through acquisitions in these areas where we have positioned ourselves. And you can see that if we look down here, you can see that we are aiming for segments where we see sustainable and underlying structural growth along the way. And yes, I won't go over that very much more now here, I think. So let's move on. One key ambition for us has been that we would like to drive the proprietary products. And you can see that we started out already in '06 and '07 with the acquisition of Elpress. And we since then have been very keen on driving this share of proprietary products along the way. And you can see that it continues to improve. For some time, we had the ambition of having 75%, but now as we put up the Lagercrantz towards the SEK 2 billion, we have raised the bar to 85%. And you can see that we here in recent years also are picking up with a percentage points per year or so. As we approach the goal, it will be increasingly sort of, yes, challenging to get there, but we will -- I feel confident that we will get there by a couple of 2, 3 years as we continue acquiring more proprietary product type companies rather than the other categories here. Yes, and coming then to acquisitions. I mean, acquisitions being a serial acquirer without an exit horizon, we would -- we are -- we would like to see ourselves as a perpetual owner that we have an ambition to own the companies that we acquire for eternity. And we will -- and that's what we're doing. And since 2006, we've acquired some plus 80 companies. And you can see the list there with the acquisitions we have done since 2021. And it's good to see that we're keeping up the pace or even increasing the pace a little bit along the way. And since now -- since Q3 of last year, we have posted some 8 acquisitions that added SEK 1.3 billion, and that is then slightly above the 10% we talked about, right? It's more 14%, 15% or something like that, depending on how you measure it. But it's a good pace that we've had. And we also see that we have now signed 2 more deals down to the right there, Van Leeuwen and Track -- TASL, and that adds around another SEK 245 million to our acquisition pace here. And that is -- and that's the way we would like to work with it. We have, over the years, also expanded with putting a little bit more of resources, especially in different markets. So we have been very acquisitive in the Nordics looking back. But along the way, we have been more present in the U.K. and also in Central Europe. So I think we will see that at least -- yes, my guess or a rough estimate would be that we probably will make 50% of our acquisitions outside the Nordics going forward. So we'll be balanced there. We're still very keen to continue in the Nordics, but we also feel that as we're becoming bigger and need to do more acquisitions, we also feel that we should expand our scope a little bit along the way. And then looking into the acquisition we just posted, we -- I try to -- we try to make a fact sheet on all the acquisitions. So if you look back, you could look at the type of companies we have acquired and also some numbers around them. And the more recent one -- the most recent one we closed here is the Mastsystem, which is a Finnish company, a leading provider of high-performance telescopic masts for defense purposes with defense systems. As you can see down there, an excellent performance with an EBITA margin of around 40%, which is really great to see and will, of course, add to the numbers. This company is located in Joensuu in Finland, and we are a happy owner of this company since now -- yes, we closed the deal in late November, but has included in the numbers from early December. So somewhat bigger in terms of profits, somewhat bigger company than the average and a very good performer we expect it to be here going forward. And they started out with a really good December here as well, the first month. And then on top of the ones we've closed, we've already highlighted that we have also signed a couple of more deals. And the first one I'd like to go over is the Van Leeuwen Test Group. Here, this is a company in the Netherlands that designs and manufactures and calibrates and service robust equipment for testing heavy vehicles, brake testers and integrated software together with that, a number -- a set of products and have a very strong market position in the Netherlands and also in the U.K. where they're present. A company with revenues of a little bit more than EUR 20 million per year and also a very good EBITA margin there, as you can see, adding to the -- coming in and adding to the Niche Products division along the way. We have since before only one company in the Netherlands, and this will be the second company we have in the Netherlands. And so we're also starting to build in those type of geographies, especially the Netherlands and probably Germany along the way as well. So that is also an interesting development for us as we grow and go forward here. The other one I'd like to highlight is the Track or the TASL. This is a smaller add-on acquisition. You can see the sales down there. It's not that big for us, but still very important that we support the companies that we already have with making add-on acquisitions. So this is important and we will continue the journey of building the Radonova Group with the radon measurement sort of equipment and the radon measurement services that we provide there, being the global leader within the radon measurement with some operations all over Europe and also in the North America with this very niche-oriented business that we have within the Control division. So this is fairly important. Even though it's small, it's important to Radonova to get this business on board, which will also then be done after we have the regulatory approvals sort of done in the U.K., which we don't anticipate any problems with, but still it needs to be done before we can close the deal. Yes. I have included a couple of more here, the CP Cases. This is a couple of other companies that we've included sort of in the last 6 months. So the CP Cases came in here during the summer, and it has had a good start within the group. I've gone over this before, but just for your reference, we put in the slides here as well. A good company that have had a good start within the group adding to the Control division as well. And another example of that is the next one, which is Principal Doorsets, is also a U.K. company. So we have been more active in the U.K. along the way here. This is coming in adding to the TecSec division and has had a good start also to the group along the way here. So I will round off there with some numbers with looking at sort of our financial overview that I usually conclude with here. And we can see that we are still at a running 12 months at a very good level here. We were at some EBT growth of 10%, I think it was in the last quarter. So it's actually been picking up a little bit here in the last quarter. And we are, of course, aiming to be at the return on equity of more than 25% along the way, but also have EBT growth of more than 15%. That will be over a business cycle. So we will see what happens here. But it looks like we are in the neighborhood also this year. So I think I'll round off there, and we will open up for questions.

[Operator Instructions] The next question comes from Max Bacco from SEB.

Well done here in the quarter. So 3 questions from my side. The first one, you said it yourself, Jorgen, here during the presentation that the acquisition pace, both in absolute numbers, but also relative has been a bit higher as of lately and compared to your historical average. Should we expect the relative acquisition pace to normalize when organic growth returns? Or do you aim to stay at this slightly higher level also going forward?

I think it's hard to be general about that. I think we will always look at acquisitions and try to sort of, yes, make those that we think are relevant and that we feel that could add to the group. And it will vary over time how much we actually conclude or get done, right? But I think that what has been good for some time -- what is good with our dual engine of growth, both organically and through M&A, is that when the organic growth is slightly lower, we actually have better cash flows. And that means that we can be, to some extent, a little bit more acquisitive. I think the long term, I think the sort of what we have communicated, i.e., 1/3 organically and 2/3 through M&A, I think that's still relevant. And I think we will sort of normalize at that level looking at it from a long-term perspective. On the other hand, I also think in short term, I still think that there is a lot of M&A out there and that we have a good pipeline. So we will look at closing more deals here in the, yes, next 6 to 12 months.

Okay. Understood. And the next one, I mean, it seems like looking at your 5 different segments that Niche Products and International as well are performing very well, both in -- well, once again, absolute numbers, but also relative to the other segments. Going ahead, do you see any reason to become a bit more sector-agnostic and focusing more on those segments compared to the more vertical or cluster strategy that you have had historically, if you understand the question?

I think we are -- I think we are very sector-agnostic today. I think the scope we've set out is really that we should do B2B tech or B2B industrials. And I think that we will stay with. I think most of what we do will still be hardware because that's where we're working at the moment. But given that broad sort of scope, I think we can do most things within that broad scope, and that's where we've been all along, right? So I think that International and Niche Products that allows us to be very sector sort of agnostic, but we also feel that the electrification and sort of the things that we're working within Electrify. So I think we actually have the scope that we need. I think that we -- I don't think we will do B2C or, yes, go sort of into services or more installation type businesses or we will stay where we are. And I think that scope has been significant and very good for us.

Okay. Understood. And then the final one, a bit more detail oriented. And perhaps you mentioned this during the presentation, but some margin pressure here in the Electrify segment despite quite good organic growth. Anything specific to explain that? Is it just mix or something else?

Yes, it's entirely mix, I would say. I don't -- we don't see that pressure that you talk about really on the existing businesses. We see that when we acquire companies, it might be that the new ones are sort of changing the mix in the division a little bit. So that is what you see in that number.

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

Yes. Just starting off on a follow-up to the question on Electrify. You also mentioned that there is a seasonality effect of NRS. Could you share kind of the bridge effect on the margin decline, which was due to NRS?

Well, I need to look into that a little bit. I think the seasonality of the NRS, NRS are building -- are providing safety solutions and road barriers for roads, right? And they're working in sort of Sweden and the Nordics. And that means that in the winter time, you don't do very much of those sort of installations. So they have a quite strong seasonality towards the summer. They put the projects together in the spring. They install that in the summer and early fall, but they're also getting paid. So they also have a seasonality towards the end of the year when it comes to cash flows coming in. So they actually have a strong sort of order intake during the spring. They have a good revenue during the summer, but they're getting a lot of the cash flows at the end of the year. That's sort of -- and that is more of a seasonal pattern that we see in other areas, in other companies. When it comes to...

I see. So...

Yes. And when we talk about margins, if you want sort of the bridge there, but it's the companies that are coming in actually that is lowering the margin a little bit, but adding to the top line. And profits, yes.

Okay. And when we're looking at Niche Products, of course, very strong and a strong increase in the margin from last year. Of course, there's some M&A effect into that. But how -- can you share how you're viewing the margin when we're looking at the organic basis? Do you think this is a fair level, so to say?

Yes.

Maybe I can contribute on that part. If you look at the Niche Products during the last 4 quarters, you notice that you've been on this level quite all the time. In Q4 last year, you had 24.7% and then it was slightly lower in Q1. I think that was a timing effect. And then you've been on this 22.9%. So I think the average has been on this level, and it's a rather broad-based increase that we see in the Niche Products. So I think it's fair to assume that it can be on this level going forward.

It varies between how the companies are doing on a specific quarter. So -- but the 20% to 23% range is where they probably will be. It's hard to say that they will be at -- yes, but we are not that sort of stable that we can talk about sort of tens of percentages, but rather in that level where they've been, I think. And if you look at it, as Peter is suggesting, look at it from quarter-by-quarter, you could see that they've been at this level some of the quarters.

Yes, very clear. And looking at the book-to-bill, you mentioned in the report that it's basically in line or slightly above 1. Of course, I understand that the construction-related companies struggle a bit, but how broad is it? Or is it a lot of pulling from Niche Products and Electrify?

Yes. I think it is -- besides the construction sector, it is quite broad-based. And we also have seen some of the -- a little bit more project related that is more of the customers or the willingness to invest, we feel is coming back in some sectors. And that is also a positive. Not huge projects, but still sort of more of a smaller sort of smaller type projects, but to a greater number than before and broad-based.

Very good. And my last question on your profit divided by working capital, which is at very impressive levels, and we've seen inventories also come down. Could you just share how you're viewing your working capital, I would say, what you're looking at the development when you're looking ahead? How much do you think there is to grab here?

Yes. Yes, I think that the profitable working capital that was at 81%?

82%.