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

Hello, and welcome to the Lifco Q3 Report for 2020. [Operator Instructions] Just to remind you this conference call is being recorded. Today, I'm pleased to present Per Waldemarson, CEO. Please go ahead with your meeting. .

Thank you, and welcome, everyone, to this Q3 update call. I'd like to start by going into Page #2, where we present a high-level overview of the group's performance in the third quarter of this year. And I think to summarize the quarter, we had a very solid and strong quarter. And I think it's very nice to see this, especially with the perspective on how things felt and were back in April, May. We had a very strong, I think, come back quarter in that respect. So we're very happy about that. If we go into a little bit more around the details, we are growing net sales with about 3%. And we have virtually flat organic development on the entire group. There are, of course, a lot of differences in the various entities. I will come back to that shortly. When it comes to the quarter, we had growth from acquisition of about 7% and a negative impact from currencies of about 3%. And if you look at the year-to-date figures, we have an organic development of negative 7%, which obviously has to do with a severe problems that we had in demand in -- especially in April and May in dental, specifically the Dental part, but also in some of the other areas. And if you look at the whole year, the acquisitions have contributed about 7%, and we have then on the whole year numbers, a negative exchange rate of about minus 1%. With that, we can turn more into the Page #3, we will look at the different business areas. And coming back then to the Dental area. In this quarter, we do see some growth of 6%. But more importantly, we have very strong profit development. And here in the Dental area, we see, obviously, some effects of the fact that the COVID situation makes it -- make sales and marketing activities quite different during normal quarter. So that impacts us positively. And then I think also the situation that we had in the spring has also created a lot of saving activities in the various companies. It's kind of rolling over from the previous quarter there. I think if you look at the whole Dental area this year, it's very pleasing to see there that we have a very negative market situation in April and May. But other than that, things have normalized and stabilized. Giving a little bit more flavor around the Dental area, we see that we are mainly exposed to the European markets, which have been quite strong since June, which we reported in the last -- in the last report as well that things came back in June, and we see that continuing now in the third quarter. And then I can move on to the Demolition & Tools area, where we have a weaker market than last year. It's quite obvious now that things in this area started to weaken already I would say, May, June of last year, and this has now continued throughout the last 12, 15 months. And of course, was even more negatively impacted by the COVID situation in the spring. And we see still a weak development. And I want to highlight here in Demolition & Tools that we see and even more uncertainty and a weaker situation than for the more capital intensive products. Those products that are viewed as more of an investment product for our customers. They are, of course, having a more difficult market situation. I would also like to highlight there that we have very tough comparison numbers here in this quarter. So last year, we had very strong, both sales and margin in Demolition & Tools. So I think it's -- you can look at this area from different perspectives and also conclude that things are still okay, but they're not as strong as you would like them to be. That's how to summarize that. Going further then into Systems Solutions area, it's a very mixed situation. As you know here, we have a lot of different companies in various industries. On the high level for this area, we see very good development in the quarter, both from sales and from -- especially from a margin perspective. Most companies have had being exposed to quite stable situation, so they have stable demand situation. But some companies that sell what I call more indirect products, things that are not being used to produce things here and now. Those have been suffering weaker market conditions throughout the period since March, April, and that continued also in this quarter. And then obviously, we also have some companies, especially in the contract manufacturing side where we also see a positive effect from the COVID-19 situation where demand has increased, and that has to do with exposure to health care and medical sectors, et cetera. So with that, I would like to move over to Page #4. I think I've been through most of the COVID effects already, but just to summarize, the dental impact was very negative in April and May, especially the recovery started already quite strong in June. And the European Dental markets have been on a quite good level. And we use the word returning to more normal levels for this quarter. And once again, Systems Solutions has been, as a whole, relatively unaffected, although there are quite big differences between smaller operations in this area. And once again, the demand and the markets in Demolition & Tools remains uncertain, and it was weaker than previous year, which was once again, a very strong quarter in Q3 2019. Yes. And with that, I would like to move over to Page #6. Sorry, before we do that, once again, remind everyone that the sales and marketing activities, not only in Dental but also in -- especially Systems Solutions, has been on a lower level and that has to do with COVID-19. And it's very difficult to know will these things come back to normal level and when. I think there will be certain things that will take a long time before those costs will increase and certain things will come back quicker. So we just have to follow that as we go along. And then we can move over to Page #6. And let me talk about our balance sheet and cash flow. And we have had a very strong cash flow the entire year also in this quarter. And the cash flow now from the operating activities is close to SEK 2 billion for the first 9 months compared to SEK 1.2 billion last year. Now that has to do with, obviously, that we have been increasing the efficiency on the working capital and reducing inventories, among other things. On top of that, also good profit development in this year. And that gives us a net debt-to-EBITDA situation, including all the debt to our option agreements and the IFRS 16 effects of leasing to 1.9. But maybe more relevant measurement of the interest-bearing net debt-to-EBITDA is now down to 1.3, which is a very low level. And here, we have to keep in mind also that we have made quite a few acquisitions also this year. Maybe not as many as we would have liked to do a normal year, but -- and on top of that we also pay the dividend in this quarter. And then we can go on to Page #7, and this is more of a reminder of our most important target to Lifco, which is to increase profits every year. And we have had some challenges historically. In 2009, we had difficulties where we dropped quite a lot in results [indiscernible] collapse and all the things related to that. We had a problem in 2013, and we have had quite big problems early on in this year. But as you can see in our rolling 12-month numbers are now above last year's figures, which is very pleasing. And we will then see how the year ends in the next few months. And with that, I go to Page #8. And once again, just to remind everyone about our very strong focus on the return on capital employed. And I don't -- would like to highlight the right-hand side of this graph, where we have the operating return on capital employed will exclude the goodwill. And this is pretty much where we look at our each individual company summed them up on the fixed assets, inventories, receivables, minus the trade payables. And here, you can see that we had a big drop in '19, which was basically related to the change of reporting method, where we have to include IFRS 16 and all the leasing effects. But now this year, we are now turning this ratio up again to this level. And you can also see that we have this dotted line of 50%, which is our sort of what we call the rock bottom, where we can feel okay to have a company on a 50% level. The reason why we are so extremely focused on this is that Lifco has an ambition to continue to grow every year from acquisition. Also in years where we have strong organic development. With a high-return -- return on capital employed, we can maintain the cash flows also in here, so we had strong organic growth. This has been fundamental to our historic success and also will be very crucial in the future going forward that we can keep on acquiring continuously without having increasing net debt ratios. And then we can move all the way down to Page 23. And this is once again, a little bit of a more long-term perspective. I quite often get questions about our Systems Solutions business area. And here you can see on the right-hand side that we have developed this area quite a lot since we went public in 2014. And we have now a much stronger group of companies here with higher -- much higher margins and also much better return on the capital employed. So we can see here that we continue that development also in this year, with increasing margins and also growing the top line. And obviously, quite a lot, it obviously has been coming from acquisitions over the years. And speaking about acquisition, we can then turn to Page 29. And just to summarize, how this year has been. We carried out quite a few -- quite a lot of acquisitions early on in the year, basically, in January and February, and then there's been obviously, quite difficult to carry out acquisitions in the second quarter. Now in the third quarter, we have, of course, increased the activity. We did 1 acquisition in July. And we're working very hard now to get the acquisition pace up again. But as always, it's very difficult to talk about a pipeline, acquisitions is, by default, very difficult to forecast. And some acquisitions come from long-term discussion, but quite often also, we get the acquisition into Lifco that are coming in quickly, and we act very quickly from the first time we meet the company. But activity is going up here, and hopefully, things will material, but it's very difficult to say when that happens. So with that, I would like to open up for questions. Thank you.

[Operator Instructions] And our first question comes from the line of Carl Ragnerstam of Nordea.

It's Carl here from Nordea. I have couple of questions. First of all, I mean, obviously, quite strong margins in the quarter. But could you help with elaborating a bit on these, which of the segments that are the most positively impacted by less marketing and travel expenses? Also, I mean, how should we look at SG&A for the quarter? I mean, should we expect slight cost ramp up already in Q4? Or how is -- or how do you view that? And the final 1 on that note is also how much of the SG&A in the quarter, you would say that is -- or could be defined as temporarily? And how much is more permanent?

Yes. I think all these questions are quite difficult to answer. I mean, the first question, which segments that have been more impacted by savings. I think Dental is obviously 1 area where all the dental exhibitions for this year has been canceled. A lot of other sales and marketing activities that we carry out is on a very low level. Traveling is going down, et cetera, et cetera. But we see that also I think more apparently also in parts of Systems Solutions that operate in similar ways, quite sales and marketing-driven operations. So there's actually bits and pieces of solution has the same effect. And I think -- so that's so difficult to answer. The more difficult question is how -- what's going to happen going forward. I think that's what you're trying to get a hold of it. And there, it's very, very difficult because we don't -- first of all, we don't know when exhibitions, normal safe activities will open up again. That's number one. Secondly, will all things be the same once it opens up, let's say, that's not really sure because not only we, but the whole industries are taking shifts into more digital way of working. And I'm not sure exhibitions will be the same way we've been in the past. That's who knows. We'll see how that goes. So very difficult to say. On top of that, we have also -- maybe what's more special in this quarter is that given that things were very, very crazy back in April, May. So all companies were saving as much as we could in all areas because back then we had no clue how things was going to go in this year. We're very, very I wouldn't say paradigm, but we were very, very cautious about this. And I think that mentality has been rolling into this year. So a lot of companies have got a minor reduction of staff and go through this. That's, of course, more sustainable, at least in the near term. So that also comes into this picture. But I think the major part are related to more what I would call more variable costs. There is difficult to say when they come back or not.

Okay, perfect. And also, I mean you reported a slight negative group organic growth in the quarter, but could you possibly give any flavor on the organic development month by month. What I'm trying to understand is whether the recovery came sort of -- came back early in the quarter or maybe later in the quarter and how it's looking sequentially, if you will, month on month as well?

Yes. But I think the -- I know what you're getting at, but I don't think we have much more to say than that it was relatively the same throughout the quarter. Obviously, it's week by week, it goes always up and down. But there's no -- and the problem is also that in July and August, in most parts of our business, there is a weaker market condition due to the holiday season as well. So it's a little bit difficult to take -- we normally don't look so much at July figures, even though it's 1 of 12 months. So I can say that there's no huge impact on that. Things were much as in July or much as in September from my perspective. We started coming back in June already.

Okay. Perfect. And on the recovery in the Dental business, is it fair to assume that the distribution subsegment is recovering faster than, for instance, prosthetics or how should we look at the subsegments there?

Yes. So the -- yes, we have -- I mean, that's 1 area where we have a little bit of differences. It's that the distribution and also the [ manufacturing ] of normal consumables that we also have this is coming back a little bit quicker. And the prosthetics, especially the more complicated work, seems to be a little bit being postponed to some extent. But it's -- so it's not terrible, but it's a little bit -- there's some differences there, I should say.

[Operator Instructions] And we currently have no further questions via the teleconference. I will hand back to Per for any further comments.

Yes, I'd like to thank everyone for listening. And yes, wish you a good day. Thank you.