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

Hello, and welcome to the Lifco Q1 for 2021. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Per Waldemarson. Please go ahead with your meeting.

Thank you, and welcome, everyone, to the Lifco Q1 presentation. I'd like to start directly by going into Page #2 and give a short overview of the overall performance in the quarter. And as you can see from the numbers, we are quite satisfied. It was a solid quarter across the board. We can conclude now that the first quarter of this year had not the same effects of COVID-19 that we were experiencing in -- during 2020, especially in the second quarter. And we had some of these effects also remaining in the fall. And now in this first quarter, we are, overall, very limited, impacted by COVID-19. I'd like also on this high-level summary to just pinpoint the operating cash flow, which is the only number that maybe stands out. All the others are very good. But here, I would like to highlight that the numbers from last year are extraordinary good. We had good cash flow in quarter 1 2020, partially due to release of inventories, but also the fact that COVID-19 came in, in early March, had an effect on extraordinary good cash flow. And it's also important to acknowledge that normally Lifco has the weakest cash flow quarter in the first quarter. So what typically happens is that we have a release of specialty receivables and also to some extent, inventory in Q4, and then we build that up in Q1, if you look back in historical numbers, for example, in '19 and '18. As referenced and conclude that also the cash flow in this year was stronger than historical numbers. Also to summarize the high level, we had an organic growth of around 2% in the first quarter. We had a negative effect from exchange rates of about 3%, and then acquisitions contributed with about 7% for the quarter. But with that, we can go into Page #3 and talk a little bit about each business area. Yes. The Dental area came back quite strongly in the first quarter. And we now see that, I would say, most or all of our markets in Dental are back to more normal levels. We are then helped by acquisitions that we've been carrying out in the dental field, that also contributes to the growth. And then we have a very strong margin expansion in the quarter, partly due to acquisitions, but also due to the fact that we have lower sales and marketing activities because of the -- basically, it's not possible to carry out the normal activities. And this is the same trend we have now for the last couple of quarters that remains in the dental field. If we then move over to the Demolition & Tools area, we are -- experienced better market conditions. They were quite good in the first quarter. And here, I would like to highlight that the numbers from Q1 2020 actually included some special projects that we didn't have in this year. So that's important to understand. It has not a huge impact, but it has an impact on that. So there we stand. And also we are helped here by better margins. It's the strong market conditions and then the continuous work on trying to improve margins and Lifco is coming up well here. Also in this area, of course, we have some lower sales and marketing activities, as many companies experienced during the COVID-19 times. And Systems Solutions, the same story. We have good market conditions. And the reason we are not growing top line here is more related to specific companies. For example, we have a project business that is volatile, and they had a fairly weak quarter that is dragging down the overall sales numbers. But for the most part, most of our companies in these areas are performing well in the first quarter. And also here, we are improving our margins due to acquisitions, due to organic improvements. And then on top of that, we also have some effect of the lockdowns that we are carrying out, lower sales and marketing activities also in this area. And with that, we can move over to Page #4, and this is just a reminder for everyone, who's listening in that Lifco, what we try to do is to grow Lifco on a continuous basis from acquisitions. We are -- historically, we've been generating around 9% to 14% every year from acquisition in EBITA growth. And then, of course, we are striving to also improve our organic performance in our EBITA. And for the most part, we've been successful historically with the exception of last year, where we had a lot of difficulties due to the COVID-19 times. So that's just a reminder that acquisition is extremely important for us. Also on this slide, we can highlight that we have been able to do this type of growth from acquisitions without stretching our balance sheet, which is an indication that our cash flow from operations are very strong over time. So we can go to Page #5 and just continue on the cash flow and balance sheet. We are -- at the end of this quarter, despite quite a few acquisitions, we are having a very strong financial position. Our interest-bearing net debt-to-EBITDA is 1.2x, which is very, very low. So it gives us good room to continue to try to buy good high-margin companies that are very strong in their niches also going forward. I can also highlight that the 1.2x EBITDA in this quarter should be compared to the 1.6 1 year ago. So we are actually better positioned now than 1 year ago. And then we can go into Page #6. And normally, I don't talk much about this slide, but I just would like to remind everyone that Lifco, we are striving for profits and for margins. We have in our DNA to continuously make all our companies even more niche, so that they become even stronger in the more profitable part of their business. And as you can see on the bottom of this slide, Lifco has been growing our margins continuously over the last 6, 7 years, and we are now standing at an EBITA margin on rolling 12 months at 20.5% compared to 14.2% in 2014. And this is a continuous work that we're doing in all our companies. It's also being, of course, helped by acquisitions that we've been making over the last 7 years that they have been on a higher-margin level than the portfolio we had going into the stock exchange in 2014. And then we can go to Page #7 and just conclude that our focus on strong margins and trying to buy asset-light companies leads to a situation where our return on capital employed, excluding goodwill in our operations, is very strong. We are now standing at 151%, if you take the rolling 12 months data. And this is a key criteria in our acquisition work. We want all our companies to be very cash generative, so we can continue to build Lifco through acquisitions for many years to come. So after that, I'd like to go to Page 28, all the way back in the presentation. And just highlight that we had a very strong period in acquisitions in the last few months or last few quarters. So we have actually now from the 1st of January this year consolidated in 1.2 -- roughly SEK 1.2 billion of businesses into Lifco. And it's a good mix of Dental, Systems Solutions and Demolition & Tools companies that we've been able to acquire. It's also a good mix of geographic spread. And I can come in to Page 29 and just highlight that we have due in the last 4 years on the right-hand side of this slide, we can see that we have now a very broad sort of hunting grounds for companies to acquire. And as you can see, the period from '17 to '21, we've been pretty broadly spread out between Sweden, Germany, Norway, Italy and U.K. and then added complementing geographies from time to time. And this is continuous work to expand our acquisition opportunities in as many markets as possible because we're looking for really good companies that we hopefully can acquire at reasonable valuation. So to do that, we need a huge or enormous big funnel to be able to source these deals. And that's not an easy job, but we work very hard on improving that and get us many good opportunities as possible. And that was my last point here in this presentation. And with that, I'd like to open up for any questions.

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

It's Carl from Nordea. In Demolition & Tools, it's obviously quite strong margin for Q1. So could you please help us bridge the 460 basis points year-over-year margin uplift, especially as you guide that you have fewer special orders today compared to last year?

Thank you. Yes, we have -- it's a combination of a few things. We have been lifting our margins in a few of the companies. We've been doing some work during the last, I would say, 12 to 18 months that now generates the effect. Coming into -- some of this started actually pre-COVID and some of these effects came in the COVID phase that we basically went through our companies and made some restructuring during last year that now is paying off. On top of that, we have acquisitions that is helping on the margin and then basically solid performance across the board. So it's pretty solid in this area right now.

Okay. Perfect. On that note also, would you say that the low or the lower level of special orders is due to a somewhat cautious end market still for CapEx-driven demand? Or is it just that it is fluctuating between the quarters?

So the special projects, they are really -- they're like our project business. They don't really correlate with underlying market conditions. They are typically a very long process to get sold. It's in cases where we have one customer with very specific need, that can take years in discussions and planning of the project, and then we can materialize at any point in time. So it's not so correlated with market conditions at all. So as I'm trying to explain in the presentation, the market conditions -- underlying market conditions are better now in Demolition & Tools than it was in last year. But we had also to highlight that given our sales numbers, we also want to show that in Q1 last year, we had this positive effect of a special product delivery.

Okay. Perfect. And on Dental, when I look at utilization rates for practices in different parts of Europe as well as U.S., we could see that they are down quite a bit compared to normal levels, but you're guiding for a quite normal level during the quarter. Is it fair to assume that, that somewhat lower utilization rate is fully compensated by a higher degree of consumables? And also, if so, would you say that you have more favorable margin on the consumable side?

So I don't think the margins are much different there. But I think you're right that there is -- for the markets where there still is a little bit lower utilization rate, there's still -- there's a high use of, what I call, disposable material in the Dental offices still. It's difficult to really exactly guide you this effect, but there is some effect around that.

And I guess the prosthetics business is still quite low levels, I guess, sir?

No. So that's -- I think we try to write that in our comments that overall, the markets are back to more normal condition as well.

Okay. Perfect. And also in terms of -- you're talking a bit about lower selling, traveling, marketing expenses and so on. When I look at the gross margins, up 60 basis points year-over-year, EBITA margin expanded, I think, 300 basis points year-over-year, meaning that the delta comes from SG&A contraction or the main delta at least. I mean, would you say that the long-term sustainable margin uplift is the gross margin uplift? Or how much of the SG&A reduction or SG&A to sales reduction rather is long term sustainable?

So it's very difficult to say because I can say that some of it are more sustainable activities that we have been carrying out during the last 18 months. When COVID came, also a lot of companies took the opportunity to review their organization, their setup and everything around that. So some of it will be sustainable, but also a substantial part is that could be nonsustainable, given that if things go back to normal, which you can debate if that will happen. If things go back to pre-COVID activities, of course, quite a big part will come back. But it's not clear when that will happen and how quickly it will happen, if at all, it will happen to a normal way. So I think it's very difficult to say. But I think it's clear that we strive in Lifco for a good margin, good profitability all the time. So when COVID became also, a lot of our companies took the chance to review if there are things they could shave on. And some of that will remain, some will not remain, but exactly how and when, I cannot tell you.

Okay. Perfect. And the final one from my side is that we could obviously see that contract manufacturing is still growing quite nicely in the quarter. I guess, it's [indiscernible] related still. How should we look at that coming quarters? Do you expect more -- facing more shares in comparisons when you go into Q2 or H2? And also, I guess, that has a lower margin on the Meditec side. So you should, in that case, have a more positive margin mix in the second half?

So we don't communicate margins into different industries in that segment. But we still -- I can only conclude that after quarter 1, we see no major changes from what -- from the trends so far. So it's still holding up well in that area. So we don't give the margins by industry.

Our next question comes from the line of Jacob Edler from Handelsbanken.

I only have 2 ones. Carl touched upon a few of my questions already. But if we start off by looking at the margins within Dental, it's obviously stronger. And should we interpret this as a cost effect or a mixed effect from more software income? Or how does that look?

The margin expansion in Dental is partly acquisition related and mainly related to lower sales and marketing costs.

Okay. Okay. That's clear. And if we just touch upon the System Solutions, it seems like the project-driven business that's been or some of the project-driven business that's been underperforming in relation to the rest. Are you able to kind of elaborate on this a bit on that? How is it looking for the project-driven businesses year ahead?

Yes. Well, the project-driven business has always been very volatile in Lifco. They come and go in different quarters. And they are a little bit the same as the special orders in Demolition & Tools. You can't really plan it. It comes when it comes. And it's not always correlated with market -- underlying market conditions. So it's even for us, very, very difficult to know what's going to happen in any given quarter for this business. And some of them might have a solid backlog. But that doesn't mean that there would be a good result in next quarter because you have to -- how you generate the accounting for that, it depends really what's happening and how much step forward you make in each product, et cetera, et cetera. So that is a very difficult business to forecast, even for me sitting in the head of Lifco. So yes, it's been for many, many years, a very volatile area. I can only conclude that.

[Operator Instructions] And as we have no further questions, I'll hand it back for closing remarks.

Okay. Thank you, everyone, for listening in, and I wish everyone a good day. Thank you.

Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.