Lifco AB (publ) (LIFCOB) Earnings Call Transcript & Summary

Hello, and welcome to the Lifco Q2 Report 2020. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present Per Waldemarson, CEO. Please go ahead with your meeting.

Thank you very much, and welcome, everyone. I would like to go directly into Page #2 and just give a high level overview of the second quarter of 2020. And to summarize this quarter, it's been a very challenging quarter for us. It started out with April, where many of our companies were affected by the lockdowns in the EU -- around Europe, and especially in the dental area, and also that led to an organic decline in the group in the quarter of 18% in sales. And this obviously relates mainly to our dental area, where a lot of dentists and a lot of patients were canceling appointments during April and May. But also, we had a weak organic development in our Demolition & Tools area, and I will come back to that a bit later here. I also would like to highlight on this very first page that Dental came back quite well in June, which was very encouraging for us. And while staying on this page, we can also highlight that we had a positive effect on growth from acquisition with about 6%. And as you also can see here when we look at the operating cash flow, it was a very strong quarter cash flow wise, mainly due to release of working capital in the inventory and receivable section. And I think this was extraordinary good due to the low activity -- or the lower activity in the quarter. But all in all, we are summing up this quarter on a positive note. We're quite happy with how all our portfolio companies are managing the profit and margin in this very difficult time. And this is, of course, due to some cost savings that are very short term in terms of cutting down our marketing, travel cost and less developing projects in this quarter. And also we took, in various countries, some state plan programs in terms of supporting the business. But that, all in all, led to what I think a quite good margin despite these challenging times. And with that, I would like to go to Page #3, where we go into the specific areas. And if we sort them, by Dental, as I mentioned before, it was very weak in April and May, and June improved a lot in Europe. We still have a weaker situation in the U.S., but that's partly due to market conditions and partly due to the fact that we are operating mainly in the manufacturing side there. And the manufacturing of dental products, it takes a bit longer before the demand comes all the way back to the manufacturing companies. We see that distribution companies get quicker uptake of demand once the dentists start to operate again. And I also want to highlight that U.S. is a relatively smaller market for us. So Europe is, by far, the most important. While staying on Dental, I also would like to highlight that it's a slightly slower comeback for our prosthetics business, basically our lab business, where we see that it takes a little bit longer to get demand back to normal due to the lead time of planning more advanced work. So it takes some time before dentists and patients are getting back. So we have to wait and see how that develops going forward. But overall, in Dental, we also had very good cost management in the quarter. So we're quite happy about that. When it comes to the Demolition & Tools area, we have now, for a few quarters, communicated that the uncertainty in the market conditions have been larger recently. And I would like to say that in this quarter, it became even more uncertain, and it was quite difficult in April and May to get especially the more expensive and more bigger equipment out there in the market. And this is difficult also to say because part of this could be market-related at the end users, the construction site and so forth. But part of it is also related to the uncertainty itself, that our customers have to make decisions about quite large investments, and that was obviously more difficult market conditions for us in this quarter. And we normally don't give any forecast, but I can just conclude that in Demolition & Tools, we still see a lot of uncertainty. We basically are very curious to see how things will develop now in the coming months and quarters. And that's a statement that I normally have. So it's always an unclear situation. And once again, our order books and visibility is always quite limited, so we will be -- depending on the market condition in the next few months how things develop. When we come to the last area, Systems Solutions, we were actually positively surprised by how good the develop -- development was in many companies. We had a few companies in this area that suffered quite severely. But the vast majority of our companies were not so much affected by COVID-19. And especially in contract manufacturing, we had a very strong quarter. Construction material also holds up very well in the quarter as well as service and distribution. Where we had a weaker performance in Q2 is in environmental technology, and there's 2 reasons for that; one is we have a project-related business that had a little bit weaker development and then also a few companies that are selling more products that are, I would say, less critical short term for the customers. They are very important long term, but where postponement of investment decision can be done, and we saw that happening in the second quarter. And the last area here in Systems Solutions is the Forest division, where the weak performance, I would say, mainly related to our Forest project business, and that's not so much related to COVID-19. It's a similar situation that profitability fluctuates between quarters due to different projects. And then we can turn to Page #6 -- sorry, I was -- sorry, I'd stay on Page #4, and just summarize what already said about the COVID-19 effect. We had, all in all, a significant impact on demand and profitability in April, May. We handled this in a very good way through our very decentralized business model, and the effect was obviously very, very different in different parts of the group. And therefore, of course, a decentralized management style is the right approach to handle this type of situation. And then also to summarize, again, that June was a positive signal for us in the Dental area as well as in some of the Systems Solutions area where we had some effect earlier in the quarter, we see some positive signs. It doesn't mean that everything is back to the normal, but it's going in the right direction. And Demolition & Tools, once again, uncertainty is still very high for us, and we have difficulty to forecast what will happen here in the future. And with that, I can go to Page #6, just to discuss a little bit about the net debt situation. And we released a lot of cash in the quarter, and our net debt reduced by more than SEK 800 million due to the release of working capital mainly and obviously not making any major acquisitions in the quarter. And our interest-bearing net debt-to-EBITDA is now down to 1.4x, which is a very solid ratio. And the total net debt, including leasing and option agreement, is at 1.9x, which is also very solid situation for us. I also would like to make a note here on this page that the dividend that we carried out took place on July 1. So that is not in these numbers, that will come in Q3, just I want to have that -- take that into consideration. And then we can go actually all the way down to Page #28. And just to comment a little bit on the M&A activity. And as you can see there, we had a quite strong start of the year with quite a few acquisitions in January and February. And obviously, as we communicated in the last conference call for Q1, the M&A activity was challenging during the second quarter. As I have stated before, we are mainly buying companies from families and entrepreneurs, and personal relationship and meeting each other is crucial, and that was very difficult to carry out that activity during, at least, April and May. In June, we started that activity again. And actually, now, just a few minutes ago, we signed and communicated a transaction in Italy, where we have acquired a company called Tastitalia, which is a niche producer of touchscreens down in Italy with roughly EUR 12 million in sales. And so we are -- right now and for the fall, we are ramping up the activity again. And I would like to highlight, it's always difficult to know the timing of acquisitions. But we can conclude that our balance sheet is very strong, and there is opportunity for us to carry out transactions once we find attractive targets at a reasonable price. And with that, I would like to open up for any questions. Thank you.

[Operator Instructions] First question, we have Per Jørgensen from I&T Asset management.

Congratulations, Per, for the very good results, given the circumstances. A few questions from my side. If we take a look at the quite impressive margin in Systems Solutions, will you still be able to acquire companies that would not dilute this quite good margin? That's my first question. My second question is actually, are these margins sustainable as you see them in Systems Solutions, overall? My last question is regarding the net working capital. And I know that it's quite impressive what you have released. Is it due to the incentive systems that you have with your MDs in the different companies that they were -- actually, they were incentivized to keep the net working capital as low as possible and, therefore, if markets are going down, as we have seen, they are very quick to react. Is that a fair assumption?

Okay. Thank you, Per. The first question regarding if we can continue to acquire high-margin companies in the Systems Solutions, well, that's our ambition. We have now learned over quite some years that for Lifco with a decentralized business model, we have seen that these high-margin companies with a very high return on capital employed, they are very good because if they grow organically, they contribute with enormous amount of cash flow. So we have that ambition. And we -- but we don't restrict ourselves to set a strict number on where the limit would be. But as you can see, the margin lift that we had now for quite some years is related to acquiring much more high-margin companies, and we continue doing that this year as well. Whether we will do it in the future is, of course, impossible to say, but we have a very high ambition when it comes to the margin of the companies we do -- we acquire. So we will try that also going forward. Exactly, if it will be at every given year, we will beat the average margin is difficult to say because, obviously, when we reach a certain number, we can also feel comfortable buying maybe a company that is only as good as our average margin. As you said that, we're getting to that situation soon. But we will not look for companies that have 5% to 10% EBIT margin. That's not where we're going to do most of our target search. On the question about the sustainability of margin, I would say that if the markets remain like -- if the markets remain good, I would definitely say that the sustainability hopefully will be there. We don't give forecast, but we try to acquire stable business that -- where margins should be sustainable in that sense. But we have to always be careful because market conditions can change very quickly, and that could also lead to impact, especially when you have very high gross margin. If the sales go down, it's very difficult to compensate the full growth. And when it comes to the last question about working capital, yes, but we have the same incentive systems for many years. I think this crisis and this situation made everyone, including myself, very much focused on cash flow. The situation in March was so uncertain that basically, the whole focus of us was cash flow for quite a number of weeks, and we continued that through the quarter. So I would say maybe this -- we haven't -- in my period at least, we have not had a period where we focused as much on cash flow as now. So maybe the cash flow was better than you normally would expect because we have such a big focus on it. And as we now -- certain companies come back to a more normal situation, we have to also be a little bit more forward looking and maybe you have to need some more inventory. And obviously, if sales go up, receivables go up and so forth. So that maybe was a little bit extraordinary good in the quarter.

Okay. Yes. Just one last question regarding the ramp-up on M&A in -- probably after the summer. Do you see that company owners, entrepreneurs and management, are more inclined to sell now that they have maybe seen the market in March and April maybe disappear under them. And now it's coming back, so they're more inclined now to sell than before. Is that what you see or is that what's going on?

I think it's too early to say if that's the case. I mean we -- yes, we don't -- if you take dental, as an example, it was not the time to discuss M&A -- to start M&A discussion in the middle of April, where things were quite depressing in the marketplace because these companies that we are targeting in that area, for example, they are normally very profitable and very stable. So it would almost be an insult to approach people in that period of time. Now the market, as they're stabilizing, we will get back. And you could argue that maybe some family-owned companies have realized that you never know what happens, but we haven't seen that yet, and it's difficult to say.

Next question, we have Oskar Vikström from ABG.

So I have a few complementary questions. The first thing I wanted to ask is, you mentioned there that you received some support from governments and so forth. Is it possible to get a sense of the magnitude there of how much of, for example, the margin was held up by governmental support? And also, is there a risk that this will continue into Q3?

So we haven't communicated that number. So it's not a public figure that we have. And it's been in so many different companies, very different solutions, we have a decentralized approach to this method as well. It's not something we centrally steer. But I would say that we are now reaching a point where those type of programs are going down quite rapidly as we are getting back to, I would say, better situation as we communicated with you being more strong. So the Q3, there might still be -- there will be still some companies that are doing that. But overall, it will be very limited. And I think also I would like to highlight that support program, sure, but we had such a situation that we had in April, where basically cost -- all other costs were down to almost nothing. If you have a company, we normally have travel cost and a lot of marketing spend. In April and May, that was virtually down to 0 because there was nowhere to spend that marketing as well. So I think that's -- and that's going to change as well now in Q3 when we are being more forward-looking in our businesses again.

And then you also mentioned so Dental in June started to recover, but then you're also mentioning a bit on this sort of lead times in the prosthetics business. Have you any sense if customers are sort of running through their own inventories before they're starting to place orders? And do you have any sense of the timing there? Or is it difficult?

That effect is more related to our manufacturing of consumable products. That's more of a timing effect. And we saw that, that type of business came back later in the quarter. And we still haven't seen the comeback in the U.S. business there because the U.S. market has been even -- and once again, I don't want to put too much emphasis on the U.S. because it's a smaller business for us. But that's more of a timing effect in the manufacturing of consumables, where you have a distributor that keeps inventory and the dentist keeps an inventory, so you have a 3-step approach to the final patient. When it comes to the prosthetics business, it's not really related to that because that's a tailor-made product. So that's -- once the dentist and patient decides for a treatment program, then we get involved. But there's a timing effect. When you have very little activity in April and May, even if you have a lot of dental visits in June, maybe it takes a bit longer before they initiate the more larger treatments, at least that's what we hope. The other effect that could be that why the prosthetics business is slow is that obviously, a lot of older people are involved or risk groups are involved in that type of treatment. So it could take slightly longer time because of that as well. We don't know exactly. I just want to -- my comment is more that distribution came back quick. Dental manufacturing of consumables also showed positive signs in June. And prosthetics, also very positive signs, but still not fully back to what it was before, so to say.

[Operator Instructions] Next question, we have from Jon Hyltner, Enter Fonder.