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

Hello, and welcome to Lifco Q4 Report for 2020. [Operator Instructions] I am now pleased to present Per Waldemarson, CEO. Please go ahead with your meeting.

Hello, everyone, and welcome to the Lifco Q4 presentation. I would like to start directly by going into Page #2 where we can see the high-level group financial performance in the last quarter of 2019 -- 2020 as well as the full year performance. And on the high level, we can conclude that we, in the fourth quarter, had a net sales development, which was fairly flat. It was consisting of organic decline of about 2%. I will come back with more details around that. We had a positive effect from acquisition of around 6% and the negative effect of exchange rates of about 3.5%. And we will go into further details in the following slides. I also want to just highlight that the Board in Lifco has proposed to the Annual General Meeting that the dividend per share will be SEK 6, and also that we have today announced that we will propose to the Annual General meeting a split of the share, 5:1. And with that, we can go to Page #3 and look into the more details around the business area. If we start with the Dental business area, it has been -- this year, 2020, was a very turbulent year for the area. As you all know, we had a dramatic impact on our business in the second quarter, which then rebounded gradually during the summer, and that has been on a fairly normal level during the fall and throughout Q4. So overall, it's been a solid, stable quarter for us in the last quarter of 2020. The only thing I'd like to highlight is that the market for the prosthetics business was still on a slightly lower level, is our laboratory business where we are offering products like crowns and bridges to dentists predominantly in Germany. And there, we saw still a slightly weaker market. Also, I'd like to highlight in Dental that we have continued to be on an extraordinary low-cost level due to the pandemic. There's been basically fewer and lower activities in the sales and marketing, just like we saw it in Q3. If we continue down with Demolition & Tools, we are then happy to see that we have a sequential improvement. The business was weaker in Q2 and Q3, and we saw a gradual improvement during Q4. We still are on the lower level in Q4 2019, but on an improving track in this business area. When it comes to the margins here, I'd like to highlight that the margins here can fluctuate between the quarters, and we had a fairly low margin in the last quarter of 2019 where we basically had very few special orders. And typically, we have some special orders in most quarters. And last year, in 2019, we had a lack of that. So that's also explaining the margin improvement in this area. When it comes to the third area, our Systems Solutions, it's -- as you all know, it's combined of many different areas. We see here a decline in sales in the quarter, but an improving margin. And the sales decline is mainly related to a lower sales levels in the project-related business. We have been -- in this area, we have both in the Forest division and in the Environmental Technology division, we have some companies that have more project-based deliveries, and they can fluctuate. In this quarter, we had lower sales, but they can also then fluctuate in terms of profitability, and the profitability was quite okay for this area in the quarter. If we continue then with other parts of this division, we still saw a slightly weaker area for the more CapEx related products or the more indirect products that we have been referring to earlier in 2020. However, I would like to highlight that -- so we still have that in our -- in some parts of the business. Some companies there also see a sales decline, but with still strong margins because they have a strong aftermarket business. So when they lose the CapEx sales, they still have a pretty good aftermarket business. But overall, it's been a fairly stable development also in this area, and we've been, as a whole, not too much affected on the pandemic in the Systems Solutions area. And then I'd like to continue to go to Page 4 and to summarize what I already said here that Dental is basically coming back after the very sharp decline in April, May. We, of course, continuously worry about the lockdowns that are taking place in Europe, and it's still something that we have to keep an eye on. We haven't seen in the recent second, third wave lockdowns the same effect as we had in Q2. But it's always, of course, something that is a concern, how dental treatments will develop until the pandemic is sort of fading out. When it comes to the Systems Solutions area, as a whole, as I said, it's been relatively unaffected. We have some companies that have been positively affected and some that have been negatively. But as a whole, it's not been too much. And then in Demolition & Tools, we had a tougher market conditions in Q2 and Q3, and still not perfect market in Q4, especially for the more CapEx related products, but it's going in the right direction is what we feel in the fourth quarter. And then as a whole, we have still an impact on lower sales and marketing activities in many of our companies where basically trade shows, different customer events are not being performed as normal in this field. And then we'll come back to acquisitions at the end of this presentation. But obviously, we had a an impact in 2020 that Q2 and Q3 was more difficult than normal to carry out acquisitions. And as we will come back to here, we have now started that activity and announced quite a few acquisitions. If we can then go over to Page #5. This is a slide that we update once a year. So now we have the figures for 2020 available. And as you can see, we have done -- and this is now describing mainly our growth from acquisitions over the years. So as you can see, we see acquisition of our continuous growth driver. And over the last 6 years, it's been a growth from 9% to 14% coming from acquisition in any given year. Unfortunately, 2020 was on the lower level. We only generated 9% from that. And that has, of course, to do with lower acquisition activity in the second and third quarter. I can also just comment on our EBITA organic development, which was then at 3% in last year, which obviously is an effect of the pandemic and the weaker market in dental and also in some of the other areas for 2020. And the last point from Slide #5 is that I wanted to highlight that we -- Lifco model is based on the ambition to continuously grow from acquisition, obviously focusing on doing organic growth over the years and then keeping our net debt-to-EBITDA level constant. And as you can see, we have now the same net debt-to-EBITDA at the end of 2020 that we had in end of 2015, and we generated quite a lot of acquisitions in the same time period. If we then go to Page #6 and just continue to talk a little bit about our interest-bearing debt, which is now down to SEK 3.2 billion compared to SEK 4 billion 1 year ago. And now we have actually interest-bearing debt of 1.1x EBITDA, which is a record low for Lifco since we went public in 2014. I can also already here mention that we have a small slight effect that 2 of the acquisitions announced in October, November 2020. They were not closed until early January '21. So that also impacts the actual payments went out after the 31st of December. And then we can go over to Page #7 and just take a little bit step back and look at our ambition. Our main overall target is to increase our profits every year, and we are very happy to conclude that we could exceed it with that target also in 2020. And as you can see also, it will be difficult to read out from the colors, but also Dental division ended up with a higher profit this year. And the whole area where we had a lower development was in Demolition & Tools, which has to do with the market condition being a bit tougher for -- compared to previous years. But we're quite happy that this was able to be generated also in the early 2020. And then we can go to Page #8 and just briefly talk about one of our most important measurement. It's on the right-hand side of Page #8, we present our return on capital employed excluding goodwill. And this is basically an indication of how our businesses are in terms of asset intensity. And we are now improving that return on capital quite a lot this year. It has to do with the improved profitability, but also that we have been releasing some of our working capital in 2020. And I also would like to highlight that the comparison with 2018 is not really possible because we don't change the calculation method with the implementation of IFRS 16. So the actual outcome in 2020 is very strong also compared to historical figures. And then we can turn all the way to Page #24. And just look a little bit more into details in cash flow. And as we've been seeing throughout the year, we had very strong cash flow this year, and we have now generated around SEK 2.8 billion in our operating cash flow, which is very strong for the year. We can also send on the right-hand graph on Page 24, see that we did not allocate as much capital to acquisitions in 2020 as we did in 2019. But we have, as you've seen, increased our activity in the recent months. And then we can just go to Page #29. And just a little bit look at the acquisitions that we've been carrying out. And actually now, when we summarize things, we have then been able to communicate 10 deals since the pandemic started in March 2020. So the activities is now back more to normal levels. However, it's important to highlight, and I often get the questions about the pipeline, it's very difficult to say how the future in acquisitions will be. We work very hard with it, and we continue to try to do a lot of acquisitions, but the outcome is very difficult to forecast because there have to be many things that goes right in every deal to happen. But the activity level and the ambition is very high. And as you also can see from our balance sheet, the financials are there to have new capacity to carry out more acquisitions also in '21. So with that, I would like to open up for questions.

[Operator Instructions] We have a question from the line of Carl Ragnerstam from Nordea.

It's Carl from Nordea. I have a few questions. First of all, in terms of your Dental business, what have you seen in terms of demand recovery for your prosthetics business? And also, what could you say about the backlog? I guess you have a bit to work through when entering 2021, I guess, if the society will normalize or how should we view that?

So specifically for the prosthetics business, it's been on -- it dropped like everything else in the second quarter. And then it didn't come back the same way as the more consumable products. So we've seen a slight improvement, but it's still not back to normal level. That's the way I can best summarize it. And the reason for this is, of course, that in a pandemic, there is a certain amount of people that don't make bigger treatment. I think that's what we're missing out on. But it's not a catastrophe, but it's not -- it's just not back to really normal level. And when it comes to backlog, I mean, it's very difficult for us to say, because it's not like we have a backlog of dentists putting -- dentists putting the order transfer when they get the patients in the dental chair. So I guess what you're referring to more, is there a pent-up demand. And of course, you could argue that it's likely that there will be a slightly bigger need for more treatment when this pandemic is over. But exactly when and how that will play out, it also has to do with the capacity of the dentists in Germany specifically if they can -- how quickly they can cope with that. But it's likely, too, that there should be some kind of effect at some point in time when the pandemic is over.

Okay. Perfect. And also in terms of SG&A, you managed to take out roughly, I guess, SEK 60 million year-over-year. I mean, just in terms -- in general, I know that you don't give guidance, but what could you say is more defined as long-term savings and how much could be sort of will come back when the situation normalizes?

So we haven't communicated that specifically. But I think in previous calls, I've been mentioning that certain companies, especially more in the cyclical area, they took the chance and the opportunity to do a little bit of a slight restructuring in this year and they have been going through all their cost levels. Whereas in other areas, maybe as an example, in dental, it's more of a sort of short-term effect where -- what activities is at lower level because the dental market is basically a stable business. So they have the right capacity going into this and the capacity is likely to come back. But exactly in what form this will come back and how quickly it will come back, it's impossible to answer because it has to do not only with us, it also has to do with competition, how they act and how the general market develop in terms of how will trade shows be carried out in the future, activity levels with customers and so on. So it's very difficult. I can't give you a more precise [ response. ]

But at least the certain degree of the cost savings should you consider to be long term sustainable?

Of course, in certain parts of the business, there's been a little bit of that. And if you look at number of employees and if there's been certain companies have reduced that because of the lower demand throughout the year. And yes, of course, a little bit like that. And Lifco is, as always, a story of a many different companies. So you see both. But quite a lot of this, of course, has to do with general savings that is -- potentially could come back to normal levels at some point.

Perfect. And in terms of Brokk, could you give some more flavor on the current market condition? I guess it is CapEx-driven demand. Would you say that it is still a high degree of uncertainty impacting the order intake or what do you see there?

So the way to look at this Demolition & Tools segment is -- the underlying market has been improving sequentially over the year now and up to Q4. And that also has been impacting all our business. But it's been -- it's slower development or the more CapEx, the more expensive type of product. It's not a -- we see it more quicker in the more, if you like, more simpler and less expensive products. That's more one-to-one correlated with immediate construction market development. So we don't give any guidance, and we don't know -- it's always an uncertainty about the future, but as I've been mentioning here and also we published our report, it was a better quarter for the underlying markets in Q4 compared to Q3 and Q2. ===