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

Hello, and welcome to the Lifco audiocast with teleconference for Q4 2021. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Per Waldemarson; and CFO, Thérese Hoffman. Please go ahead with your meeting.

Thank you very much, and a warm welcome to everyone. Good morning, and we would like to present the Lifco Q4 2021 numbers. And we can start already by going into Page #2 in our investor presentation where we have the summary of the key figures for the quarter and for the full year. And as you can see from this page, we can conclude that 2021 was another very strong year for Lifco. And we also saw the same trend in the last quarter with very strong development, driven by strong underlying markets in Demolition & Tools and Systems Solutions area. Overall, in the quarter, we had a sales growth of 32%, of which 20% was organic growth, and acquisitions contributed with about 15%. And for the full year figures, Lifco grew the sales with 27%. And there, we had organic growth contributing with 15% and acquisitions, 13%. And if we go down to the EBITA level, we had also very nice growth. In the quarter, we had 30% growth, but, however, a slightly lower margin compared to the same quarter in 2020. And I'd like to remind everyone that in the second part of 2020, we had the extraordinary good margin development due to lower cost levels following the early phase of the pandemic. And for the full year, the EBITA grew by 37% due to a combination of strong organic development and acquisitions, helping our EBITA development. And further down in the graph, you can also see that the cash flow has been solid and growing compared to previous years, thanks to increased profits, but partly offset by slightly increasing inventory and receivable levels due to the very strong market conditions which have led to this development. But all in all, if we go all the way down to return on capital employed, we have ended the year in the quarter on a very high level, 23% return on capital employed. And if you take the return on capital employed, excluding goodwill, we are now at 162%, which is a very strong level for Lifco. And then we can go into Page #3 and go a little bit more into the different business areas. And if we start with Dental on the top, we had -- and here, I'd like to remind everyone, we had a very strong end of 2020. Last quarter and also the third quarter in 2020 was a little bit of a comeback situation from the early phase of the pandemic where we suffered severely in Q2 2020. And in the second half of 2020, we had lower cost levels due to the sort of freeze coming out of the early phase of the pandemic, which led to extraordinary high margin development in 2020. And then if you look in Q4 2021, we are back into more normal levels, more in line with how things were in end of 2019. And we are now seeing in the Dental that activity levels have now been back, in sales and marketing activities, et cetera, more back to normal levels since basically mid-2021. And the companies are more in a forward-looking mindset. If we go further down then to Demolition & Tools, we have had now, for quite some time, very strong market conditions, and that has continued in the fourth quarter. We are growing sales with 55%, thanks to very strong organic development, but also quite substantial acquisition help. We have done some larger acquisitions during the year in this field. And the higher margin that we have now generated in the last quarter in Demolition & Tools is mainly explained by strong operational leverage due to the strong sales growth in this business area. If we go down to Systems Solutions, we are growing sales strongly, both thanks to the underlying market demand and from acquisitions. The margins in the last quarter of 2021 are slightly lower than previous years -- or previous year, I should say. And that's also the same reason that we had also extraordinary low cost levels in the later part of 2020, and now we're back into a more normal level. And here, I'd also like to mention that in this area, we have a few entities that have longer order books, which have had more difficulties getting a quick compensation on the increasing raw material pricing or the material prices overall in the value chains. And this has been a challenge for many companies, but we have overall managed very well, I have to mention here. So on the whole Lifco level, we've been doing a very good job in quickly adapting our price levels. And the ones that are suffering more, of course, are the ones with longer order books where it takes a longer time to transfer this order. And with that, I'd like to move over to Page #4, and that's a little bit more of a historical review, a long-term perspective on Lifco. And this is, once again, another reminder of how Lifco have been growing our business for now the last 7 years since we came into the stock exchange. And I know there's a lot of data on this page, but if you go to the third row, we can see the growth from acquisitions that have been -- last year, in 2021, it was a record year. In modern time, we grow Lifco's EBITA from acquisitions with 18%. But as you can also see, it's been a strong growth driver for many years historically as well, ranging from 9% to 14% and then last year jumping up to 18%. If we go further down in the table, you can see that organic EBITA growth has been more volatile, but it's a very important area for us. We have a strong focus on buying high-quality companies and then developing the profit in these companies organically. Last year, 2021 was a record year here as well. We had 21% organic growth in the profit, thanks to very strong market conditions. But also, historically, we've been doing a decent job on this category. It's a very critical area for us. And these 2 things together, basically buying very good companies and then, of course, having a strong focus on making sure the company is developed in the right direction, in combination with the discipline in valuation, basically buying smaller-sized companies, has led to a situation on the very bottom of this graph where you can see that we can do all this through self-financing and still keeping our net debt-to-EBITDA ratio fairly constant, while paying a small dividend or a dividend every year to our shareholders. And with that, we can move over to Page #5 and just a little bit more details around the net debt development. Obviously, we are growing our net debt in absolute terms as we have grown Lifco. But in relation to our profit development, it's been a very stable level ranging just below the 2x net debt to EBITDA if you include all debt positions. And we ended the year with a net debt to EBITDA of 1.7x compared to 1.6x 1 year ago. And we have done quite a number of acquisitions in 2021, I have to mention here as well. The interest-bearing debt is -- the interest-bearing net debt to EBITDA is at 1.1x, which is the same level as 1 year ago. So we are basically ending the year with a very strong financial position and giving us room for -- financial room for more acquisitions going forward. And with that, we can move over to Page #7 in our presentation. And yes, we already mentioned the numbers here. We have strong development in return on capital employed, both if you include the goodwill and also, on the right-hand side, we have been looking at the company portfolio. Without the goodwill, we have a very strong position now at 162%. And this has been and is a very fundamental part of Lifco because it basically means with this type of key ratios, we can grow organically like we've done in 2021 and still generate a very strong cash flow, which means that we have the possibility to continue acquisitions through self-funding in our own balance sheet. And we take -- we have a lot of emphasis on this one, acquire new companies and, of course, a lot of emphasis in the existing portfolio to make sure we are developing in the right direction when it comes to this type of measurement. And then I'd like to go all the way down to Page #13, which is a slide that I normally don't present, but we update this data every second year. So now we have a new data set. It's a slide that we actually presented the first time when we went public in 2014, trying to summarize how Lifco had grown some of the portfolio organically. And we have now measured now the original Dental portfolio on the left-hand side. This is now a pure organic development of the original dental companies that we followed all the way back to '97. And as you can see, we had very strong development through the first 15 years, up until 2013, basically doing a lot of operational improvements in this subset of the portfolio. But since then, we have been more in a plateau, but still developing overall nicely. And in the last 2 years here, between '19 and '21, we have 6% CAGR in organic EBIT development in this subset. So I'd just like to remind, these are examples. We try to follow this example from a very, very long time perspective. Obviously, we have also strong organic development in companies that we've added in the later part of Lifco's development. But I think these are very interesting because they follow on a very long time perspective. And on the right-hand side of this Page 13, we have then followed our original demolition robots company in Brokk, which Lifco then has had in the portfolio since 2000. And here, you can also see that this is one example of a very long-term focus on gradually developing business from organic improvements, both improving margins and sales and leading to a situation where we now have reached another 10% CAGR between '19 and 2021 and then a record high EBIT margin. I'd like to mention here on the Brokk data that this is now measuring only the Swedish entity because that's the entity we had from the start, but it's giving a relevant picture of the organic development of this type of company. And then we can move all the way down to Page 28, which is the list of acquisitions in 2021. And as you can see, we have been very active in all our 3 business areas. We have -- we are slowly developing and gradually developing our acquisition capacity, which has led to this effect that we are now able to do a little bit more acquisitions than we were maybe able to do 4 or 5 years ago. And this is a continuous development of organically developing our own resources and being active in finding companies, but also being able to take care of new acquisition. That is equally important that we can make sure we set the foundation to continue organic development of the acquired entities. And we take a big emphasis on having the right people involved in steering that development from Lifco perspective. And this is a journey that hopefully will continue. It's always difficult to buy great companies in small niches, but we do a very hard work here. And hopefully, we continue to find new exciting companies in the future in this area. And I think this was all for me right now. And then I'd like to see if there are any questions.

[Operator Instructions] Our first question comes from Carl Ragnerstam with Nordea.

It's Carl here from Nordea. Firstly, a question regarding cost ramp-up. You said that sales and marketing expenses came back from beginning of Q3. So I guess, could you give some flavor on if you're back to the 2019 level currently or in Q4 at least, or if it's sort of more to come if we're entering a more -- or a period with less restrictions in 2020?

Yes. I think, first of all, to make it a bit clear, it's mainly sales and marketing-related, but I think there was a general freeze. Lifco is consisting of many small entrepreneurial-driven companies. And when the pandemic come in the early phase, there was a general freeze in many areas, including sales and marketing, obviously. But also in product development, there were not as many new initiatives taken during the early phase of the pandemic, et cetera. And that, I think, started to come back already 1 year ago, and we saw the effect in our numbers, maybe more coming from Q3 2021. And I think the mindset is very much back to a normal level right now. Of course, we cannot, in every area, carry out every sales and marketing activity exactly like we've done in the past. But our companies are finding new ways to be close to our customers and to make sure we keep our positions in place. So I think we are now back to a more normal level. Then of course, on top of that, we have, in some areas, very strong organic development now, which leads to -- maybe leads to ramp-up cost, but that's more a normal growth-related area. But if you take -- under the more normal situation, I think we are fairly back to normal levels right now in our attitude, in our way of working in the companies.

Perfect. In Demolition & Tools, you have obviously quite good margins in the quarter. Would you say that you had a tailwind from special orders from Brokk in the quarter? Or is it sort of a strong, widespread underlying growth? Because when I look at it, it looks like machinery and tools had a bit higher growth in the quarter compared to construction materials. I don't know if it's a leading indicator.

No, I think the reason for the development is mainly the very strong underlying market conditions, which leads to improving sales and operational leverage. If you go into the very much details here, of course, we have some areas here that, on the margin, have a little bit difficulties on raw material pricing, et cetera, et cetera. But there's no one project order that makes an impact on it. This is a general very strong underlying market condition and operational leverage that creates this development across the board, I would say.

Okay. So no special orders in the quarter then higher than that...

No, I mean no special order that makes this stand out in this quarter. I think the key theme for this quarter is a strong market development and strong underlying demand.

Okay. Perfect. And in terms of acquired growth, I mean looking back in 2019, you had, what, SEK 1.3 billion or so of credit sale. Roughly you had SEK 717 million in 2020, and now you ended up in SEK 2 billion in 2021, which is obviously quite impressive. But would you say that 2021 is partly an inflated number due to catch-up effect from 2020, which we obviously could see by the 2020 number? Meaning that 2022 might be -- or it might be in 2022 to be difficult to reach the '21 level in absolute number? Or is it an effect of a different way of working? Or yes, could you help me with that?

Well, when it comes to acquisitions, we are very picky in what companies we think can qualify to be part of our organic development journey going forward. So we are not -- we are always looking at many different companies, and sometimes we get either more closings and sometimes we get a little bit less. The only thing I can mention, which I have mentioned here in the past, is that we are in a position now compared to at least 2, 3 years back, we have a better organizational structure to take care of new acquisitions. And we can then ramp up the activity to get even more leads into Lifco and work on even more projects. Whether that will lead to an outcome in 2022 or 2023 that is in the same level as '21, it's impossible to say because it's not only related to our work, it's also related to the quality of the companies we get access to and where we strike basically the sweet spot in terms of negotiating the deal with the entrepreneurs. So I can only mention that we are working harder than ever in 2021 as that yielded better results ever in the acquisition work. But we are not giving any guidance on where we will end up. And I think it will be very dangerous to do that also because quality is always more important. This is not a sprint. It's a marathon to develop a company like Lifco. And our ambitions are very high. We strive for always trying to do a bit better than last year, both in acquisitions and organic work, but we are also very patient and quality-oriented. So for us, it's more important that we get the right companies in and continue to develop Lifco for the many years to come rather than stressing acquisitions for Lifco. But I hope that answers your question. Hopefully, we can continue this, but we have no guidance on this.

[Operator Instructions] Our next question comes from Karl Bokvist with ABG Sundal Collier.

I was just a bit interested in the comments you made about the end market demand, particularly in Systems Solutions. I think the improvements that you see now in forestry, for example, is this the start of a new stable level? Or is it a catch-up from a weaker comparison period or an easy comparison period?

Well, I think the forest area is a bit special for Lifco because it mainly consists of the project-related zonal equipment business where obviously the markets are important, but maybe more important is basically the projects that we take in and how we perform on this project. So I would not really translate the market conditions comment into that specific area. I think there are other factors that are maybe even more important than the market conditions of forestry. That's the situation in driving a project business. It's -- you need the market to be there, but even more importantly, you need to deliver on the right projects and get the right pricing out there and so forth. So I think the commentary is more a general comment throughout all the areas in this subset.

Understood. And then just the comment you made on Systems Solutions also when it comes to just the kind of natural impact from companies having longer lead times and the impact that it has on pricing mechanics. The first question, overall, do you have any kind of insight into your belief on how the lead times have progressed for Lifco overall compared to, let's say, a quarter ago given supply chain challenges? And the second question is more on Systems Solutions, how you look at the business overall when it comes to pricing adjustments and continued cost inflation?

So I guess the question is both about getting components in and then how we deal with raw material pricing. Is that the question?

Yes. Or for the group as a whole, I understand you have different lead times across all kinds of businesses, but just would be interesting to hear how you -- your view on the entire supply chain situation and how that has developed compared to 3 months ago, for example. Just that was the first one, yes.

But I think -- yes, but I think it's been now, for quite some time, a very difficult situation when it comes to sourcing components for many of our companies. It's a constant battle out here. I think we have an advantage being very decentralized and very entrepreneurial and rather small so we can scramble around. Most of our companies have been very successful in having very short predictability on what's going to be able to deliver in the next couple of months, but doing a very good work. So it's still in the same situation. It's still an unknown factor, it has been for quite some while. But we've been able to scramble very well in this area for the most part. Of course, there are examples of some companies that are -- cannot deliver everything they really wanted every month. They're waiting for some critical components. But on the overall Lifco level, it has not been a material impact. But you can also argue that with easier supply chains, we could, of course, maybe have grown a little bit more quicker, so to say, because the demand has been very strong. But I think that's a fact of the situation that when you have this type of strong market conditions combined with the situation coming out of the pandemic, we have this situation. When it comes to the pricing, I think we are, in general, very good in adapting pricing quickly. It's a core fundamental part of our culture in any given year and especially also in this year. Where we had some smaller issues has been in the areas where we have long order books, and there's been some difficulties in quickly getting component pricing and raw material pricing into our own prices. But for the most part, we have very little problem with this, and we have been doing a good job of being quick in adapting to this. And this is more -- it's more a fact of life when you are sitting in very long order books. But even with the long order books, we're also trying to find ways how to address this. And this is a new learning for us. And many of us has been now in Lifco for 15, 20 years. It's the first time we experienced this type of situation. So we are learning also how to look at the order book and how to -- what type of pricing can you give away for how long, et cetera. It's a new learning for all of our companies in these situations. We are also addressing that for the future to be even more flexible if this would arise again or continue.

There are no further questions. I hand back over to our speakers.

Okay. Thank you very much for listening in, and I wish everyone a continued nice Wednesday. Thank you very much.