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

Welcome to Lifco Q4 Report for 2024. [Operator Instructions] Now I will hand the conference over to CEO, Per Waldemarson, and CFO, Thérese Hoffman. Please go ahead.

Good morning, everyone, and welcome to the Lifco Q4 presentation. We can, as usually go into Page #2 in our investor presentation, I'll start with a quick review of the overall performance for Lifco as a group in the last quarter and also some comments on the full year. And if we start by the quarter specifically, we end 2024 with a strong quarter where we have organic growth of nearly 4% in the group in sales and then we also have contribution from acquisition of 6.4% and some positive foreign exchange effect. In total that leads to 11% growth in sales for the quarter. We also grew EBITA around 9%. We come back to more details around that. And profit before tax increases with 12.5%. Operating cash flow is on a high solid level. We also had strong cash flow in last quarter 2023. We also grew earnings per share with around 8%. And then if we look at the whole year, it's been relatively more difficult here for Lifco given the difficult or more difficult market conditions especially in our Demolition & Tools division or business area where we have exposure to the construction market. So overall we grew sales 6.9% for the full year and EBITA grew 4.5%. And in the full year numbers, we actually have a slight organic decline in sales of negative 0.5%. And acquisition is then contributing with around 8% in sales and pretty flat foreign exchange effect for the full year. We would also like to mention that the Lifco Board has also proposed a dividend of SEK 2.4 per share, which is an increase of about 14% compared to the dividend in 2023 that was paid out. And then we can go in a little bit more into details on the next slide, Page #3. If we then go into Dental business area first. Maybe we should start on the full year numbers. And it's been, I would say, a quite stable and normal year for Dental. We are growing low single digit organically and also profit with stable margins and a little bit extra growth coming from a few acquisitions also in this year. If you look specifically for the quarter, it's little bit weaker than the previous quarters. I would say that in margins, we are almost 1 percentage point down there. This is more, what I would say, normal quarterly variation, some extra costs in certain companies. I wouldn't extrapolate that too much. More variations between quarters is our view on that. If we go further into the next business area, Demolition & Tools. We can just -- it sounds like we're repeating ourselves here, but it's actually how the market is. It's still relatively weak market conditions out there. We are still facing negative organic decline or negative numbers there organically, which of course given the high margin characteristics of this business is difficult to keep the profit levels. But in relative terms, we still have very solid margins. Just worth highlighting on the last -- on the quarter -- the last quarter 2023, we had actually extraordinary good margin due to very strong business mix effect and also some extra deliveries of special characters that helped that margin. So in 2024, we did not have anything on that. And if you look at the full year numbers, as you see here, it's been really throughout the year, weak market conditions, and therefore that leads to decline. But I can already hear mention that our companies have done a really good job in protecting our margins. It's been a substantial volume decline from very high levels in '22. But throughout this last -- I would say 18 to 24 months, really good job in making sure we do everything we can to protect our margins. Of course, also maintaining a good focus on the long-term future development of the business, meaning that we also want to continue that in the right people development to make sure we maintain very strong when the market picks up at some point. And then if we go further down to System Solutions, it's a very strong quarter and also a very strong year. We are growing in the quarter 22% sales and EBITDA 26% and margin is actually increasing here. And this is, of course, in general, very strong development. We also had some effects, which we also had in Q3 from strong deliveries in contract manufacturing that continues. And so that's basically something that is going very well in the last 6 months. In the last quarter, we had one special effect, which we have mentioned in our report that impacts profitability positively. We had one completion of a project. We don't have many of those projects anymore. But in the Q4, we had a sort of release of the final calculation of that project that impacted profit only positively. It's not enormous amount, but it's worth mentioning that has some positive impact to System Solutions. And then also maybe also worth mentioning here, we have also in System Solutions, one part, which is a division called Infrastructure products, and they are similar to Demolition & Tools facing the weaker construction market to some extent. So they are have been in the fourth quarter and also throughout the year suffering from that. But there are many other areas in System Solutions that are developing very strongly. So the organic has a whole is very solid in this division -- sorry, this business area, I should say. And then also, just by rounding off when it comes to the construction market overall, we are not seeing any improvement in Q4, we don't see any worsening. So the message is very much the same as previous quarters. We're still waiting for hopefully improvements in the future, but we don't know when. If we go down further to Page #4, and then we will take a step back because once per year, we actually do present a little bit more detailed numbers around our EBITDA development. So in this table, you can see every year how much Lifco has grown from acquisitions in profits and also how much we grow from organically every year. And if you look at 2024, I guess this is not a big surprise to anyone. We have actually a negative development in EBITA in the group, and this has entirely to do with the Demolition & Tools division. The weaker market condition has had a major impact in that division -- in that business area. And if you look at the acquisitions, for 2024, we are growing at 9%. Which is not the best year in Lifco, but it's still okay, I would say. We have done, as always, working very hard to find the best possible companies to buy, and this is the outcome [indiscernible]. And the average for the whole period since we were listed, the annual average has been around 12%. And for the organic EBITA growth has been 7%, also now including one weaker year. This is the first time since listing we actually have a weaker market condition here to round off. And if we go further down on Slide Page #4, we also have listed out some data on the average organic EBITA growth in the listing from 2015 to 2024, and there you see that the 7% that we have as a total average for each period, is now the annual average of growth, has actually been coming from quite slow growth in the Dental part, which partly has to do that we have over this last 10-year period, had some challenges in our distribution markets. I think this has been not so dramatic in any given year, but accumulated over the period of time had more difficult part of distribution. And then we have been growing more in the manufacturing and prosthetics and software part of this business and as we see today, and you can look further down at the presentation later on, we will not present that slide specifically. Lifco now in Dental is -- the Dental distribution part is now quite small part of our profit making. So that affects sort of keeping the growth lower for Lifco, was more an effect up until, I would say, 2021, '22 and it's less of an effect nowadays. If you look then at Demolition & Tools, an area that is volatile, and we're coming out of a fairly weak year in 2024. On average, however, this division -- this area, once again has grown by 9% per year, including a weak 2024. And this shows that this is a business area with very strong growth for us, a strong growth profile and many companies have opportunity to develop new products, get into new markets and also have some positive effect from the efficiency measures and the safety measures that they offer to their customers. If we then go all the way down to our Systems Solutions area, here, we have, on average, been growing 12% organically per year since the listing in 2014. And this number is, I think, a good indication of how many strong companies in these niches that we are developing and how good of a job, the management of these companies are doing to actually grow this business. And we have many companies with strong potential in the area. This does not mean that we know that for the next 10 years, we will have the same growth rates, but an indication of how Lifco has developed the last years. And once again, I'd like to mention that this is not happening just like that. It's a lot of great work from very good management teams in our Lifco company and make sure that this profit development has been taking place. And then we can go further to Page #5. And this is also a long-term slide. And now we have added another year, in 2024. And there we can -- we can then conclude that our average -- the CAGR is -- I would just say before I go further, the previous slide was not the CAGR, it was more the flat average of growth because that's how we can do with the organic slide. When you look at -- this slide, we have the CAGR numbers, EBITA has been growing 20% since 2015. Earnings per share 17%. We have grown our interest-bearing debt to 17%, which basically means that we grow profits more than debt. And therefore our interest-bearing net debt to EBITA has gone down since we were listed 10 years ago. Operating cash flow has been growing 19% on average and dividend, we have now grown 17% throughout this period. If you go further down the slide, you can also afterwards -- also we can also present on this slide how much we have spent on acquisition and the enterprise value of the acquisition we made and also the full year effect -- estimated full year effect, as you say, because it's an estimation of first in the beginning when we make an acquisition of what we have bought in every year. And there you can see we were not able to get the same effect from acquisitions in 2024 as 2023, but I think I mentioned in the past that this is a more volatile. We cannot have it exactly linear every year, and it should not be exactly linear because we should only buy the best companies when they are readily available for us to acquire them. If we then go to Page #6, a very important measure for us is, of course, the cash flow. And the way we measure cash flow here is that we look at the free cash flow per share after basically everything, but before dividends and acquisitions, which we basically say that we control from the central level of Lifco and then we have redrawn that since 2014 with around 23% on average. In this year, we have only a moderate growth, but we had a very good comeback year in cash flow in 2023 and the problem we measure in cash flow is that it's a very good indication for long-term development, but short-term there is always some turbulence in exactly when the cash flow come in. That is, of course, an extremely important measure for the long-term success of the company. And then just going into Page #7, we will only then comment once again that our financial position remains very strong despite quite a number of acquisitions in last year. We still sit at interest bearing net debt of 1.2, which was only slightly up from 1.1x EBITA 1 year ago. We have plenty of room to continue looking for great companies to acquire. But once again, we are selective and with very high ambition, of course, to continue this journey, but also making sure we don't acquire the wrong company. And then just to round everything off on Page #8, we have reached our target also in 2024 to improve our profits. It was a difficult year. We had weak market conditions throughout the years in Demolition & Tools, but we are still satisfied with being able to grow profits even though with slightly lower margins due to the negative operational leverage in the Demolition & Tools, we end up with 22.6% EBITA margin, but still a quite satisfied level given the circumstances. So with that, I'd like to open up for questions.

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

Good morning, this is Carl from Nordea. A few questions from my side. Firstly, you mentioned the margin drop in the 110 basis points. You also said -- talked about extra costs. And you said that we should not extrapolate. So I'm a bit curious what these extra costs are, and yes we start there.

Basically, it's related to many small things that just happens to take place in the same quarter and this -- if you look at the full year numbers, it's a very stable picture. And what I'm saying is that we will see how the future goes. We are not -- this is not a guidance in any way, but I'm just saying that we are not overly concerned about the margin drop in the last quarter yet. I mean if this continuous one more quarter, of course, it's not good, but this is sometimes, this can happen to in relation to -- we have strict rules for inventory valuation and then some companies sometimes need to do some small changes of organization that can increase the cost temporarily, stuff like this that can take place in the quarter. And then I think also we had -- we didn't comment on that. We also had a little bit maybe compared to previous year, even more difficult Christmas period. But now I said it, I should really say I don't like to talk about these calendar effects too much. But this is where we sit. But we will see next quarter call how this develops, but this is not something that is -- the business is pretty much as usual, I would say.

And what portion is related to inventory write-downs or obsolescence in inventory or discounting of inventories? Is it anything related to that?

I think in this quarter is a little bit of that, and then it's some extra costs that was taken -- in some companies little bit go down in size. And then it was more like that. So it's not anything that is major specifically. But then if it happens if you -- and I think this happens in every quarter, maybe in one company, then it happens a little bit more [indiscernible] this quarter, and that's why you can see in the numbers.

And you also mentioned, of course, the project completions in special products, if you [indiscernible] accounting, obviously, it could be margin boost. But could you mention a bit or roughly the size of this on the margin, especially on absolute EBITA as well.

I think the margin will be more in line with previous year in this System Solution area, if this delivery didn't come. I think it's always dangerous to say that because no quarter is -- I mean, every quarter is special, but this was -- this final product delivery, which only impacts profit because you basically release the project reserve, is not something we have very often nowadays because we don't have much project companies left. So therefore, we thought it was good to sort of mention that, especially when we look at the numbers one year in the future. So that's it. So it has some special. But also maybe just to round this off is that -- it means that in Systems Solutions we have -- if you look really down into the different parts. In some companies that have little bit difficult to market condition. I already mentioned infrastructure products. The are a few others. And then there are quite a number of companies that are doing quite well. And overall, then we stay solid in this area.

And also on contract manufacturing side, last time we asked you, I think, at least, it sounded like it will continue in the short term, but it's hard to tell. Do you have any update on your view of the time frame of the momentum in that business area because it's actually growing quite heavily now right, 60%.

Yes. But when you are in contract manufacturing, it means that you are dealing with OEMs. So we don't really control the -- unlike the rest of Lifco, we have more control of the -- we have more contact with end users. In this area, we don't. So it's more difficult to predict -- even more difficult. It's always difficult to predict. I mean, in this area even more difficult. But now we have 2 strong quarters. So I think that indicates that it's lasting longer, so we will see how long this very positive trend develops. So we don't have any signals right now that it would suddenly stop right now. But on the other hand, we have also very difficult to predict in this area.

And the final one from my side is, you touched upon cash flows. It grew 3%, 3.5% year-on-year in the quarter. But looking at your inventory levels, they are still quite a bit above pre-pandemic levels, right? Then -- so I mean, how should we look at the possibilities to reduce inventories to pre-pandemic levels I guess it's 2 to 3 percentage points lower in that case or are you fine with this level? Because it seems to have stabilized here as a percentage of sales.

I think it's a good reflection. I think the gradual improvement is, of course, the target. But it's not going to be dramatic from this level. But we still have companies that are -- especially the more cyclical companies, they are not happy with inventory levels they have right now, I can say. So they are still working on getting them done.

But are you pushing the companies or managers to reduce it? Because I guess when you're getting used to have more inventories at hand, I guess, is quite comfortable, as a salesperson to always have inventory right? That I guess the stickiness is difficult to tackle, I guess or...

No, we systems to ensure that people focus on inventory and receivables, yes. We have incentive system and we have a culture around that. So it's always a tradeoff between profit and capital employed in every company. Very important part of business.

The next question comes from Karl Bokvist from ABG Sundal Collier.

A follow-up on the Dental comments you made there and apologies if I didn't hear you properly there. But was it part to some company realignments and if so, is it due to some change in market dynamics in any particular regions worth knowing about?

No, the trends -- the change in Dental is extremely slow trends. So we have -- I mentioned this when I presented one of the slides here. We have 2 negative effects that have been hitting the Dental market for 20 years. And one is a more difficult distribution market. It doesn't impact in any given quarter and any given year. But over a 5-year period, you see it's been slightly more difficult especially if you compare it to almost 20 years ago. This is one trend. And the other trend is, of course, in some product areas, we have slow change of technology that's in one of our companies that is a production company, they have to realign their product assortment in that. But that's not happening over quarters or years, but gradually, that's the trend. And sometimes, then you have to do a little bit of small changes around that. But I think we're getting a little bit too much into this comment now. So it's a mix of a few effects, and therefore, the margin was slightly lower in the fourth quarter. I think that's a concluding message around that.

And then on Demolition & Tools. Again, we know we might get maybe a little bit too much into detail. But do you hear anything different when you look between like more pure construction related, forestry, the different kind of businesses that you have within the division regarding potential changes in the market and such.

I can say that in general, the more infrastructure part of the business has been holding up better. But actually, the forest part of the construction part has been both kind of depressed recently, you can say. But that we have to also remember being -- it can be slightly lower, it can be a lot lower. So it's not -- we're still on pretty okay levels in this. We're coming from very high levels and we're on lower levels. I just want to be clear to everyone that this is nothing compared to how it was in the financial crisis. Of course, the financial crisis was a very short-term crisis that we came back. So it's more of a slow crisis and not so severe, but if you look at last year, we had pretty weak market for actually also the forestry part as well. Infrastructure was maybe the driving of -- and then, of course, you have a little bit different geographies. Some construction markets were a little bit better than others. We don't go into those details, but I would say pretty much everywhere it was weaker in construction.

My final one is just on contract manufacturing here. Could it also be that some of the businesses within that group that they've now won or obtained new contracts and so on, i.e., that could see actually more than just a quarter or in fact, perhaps a year or 2 or 3, where do you see a notable step-up in deliveries?

It can be so yes, but we don't promise that.

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

I've just got one follow-up question on the margin in System Solutions. You said that it probably was in line with last year when adjusting for the project delivery. But I'm thinking, I think -- last quarter, we said that the contract manufacturing part has a lower margin than the rest, so should you see that the rest of the group when adjusting for that has performed better? Is that the correct way to see it?

Yes, slightly better for the rest of the System Solutions comparing Q3 to Q4, yes. But still, the overall message here is that we have some companies, including contract manufacturing example and some others, they are developing very well not due to specific market, but more general bigger trends that they're developing well and do a great job there. And then we have actually a number of companies, thankfully fewer than the positive ones that are having a quite difficult market. And once again, mentioning the infrastructure products and also some other special niches where they are more difficult due to the general weaker economy out there right now. So it's a very -- it's still a very mixed picture within this area. But overall, very strong companies in this business area. I think it's worth noting that we have some very strong niche companies that can do great things over a long period of time.

Next question comes from Christian Binder from Redeye.

First one, I wondered whether you could elaborate a little bit more when it comes to the difference in organic growth over time for different business areas, and specifically Dental, these structural challenges that you cited, does that in any way either positively or negatively affect your view of M&A in that sector?

Yes and no. I would say that we have not been acquiring much where we've seen more negative market or general situations. So we have acquired more in the areas where we think we can have a better potential for organic growth. And not -- once again, we're talking Dental, it's not going to be dramatic organic growth, but it should be more than 1% on average that we have here. These are has to do with special effects that we've been suffering through over many years in this -- especially in the distribution area. Now distribution is -- if you go further down in our presentation, you can find a slide where we present that you see the sales mix. But I can openly mention that of our profits in Dental distribution is now less than 1/3 of our profit. So it means that we have now built a portfolio of companies with slightly better opportunities for organic growth going forward. And we also see in the last couple of years, without going into too much details, that this effect of the negative trends is tapering off. So we should hopefully -- we are seeing a better -- slightly better organic growth in the last couple of years, even though there were some turbulence with COVID and all that. So to answer your question, yes, of course, we learn and we adapt and we try to grow where we want to be successful. But Dental as a group is still an interesting area for us to acquire companies. But once again, the strength of Lifco is that we are not forced to buy any specific company. We are never forced to buy the company. We can buy where we think we get the best possible companies to grow with for many years to come.

Yes, perfect. Got it. And my second question, and I'm sure you receive it all the time, but I frequently get asked when it comes to Lifco versus potential competitors, are there any specific things that you're implementing to kind of differentiate yourself versus other acquirers. And as an extension of that also obviously, key persons in your M&A machinery, you kind of teach them the craft, so to speak. Do you do anything to prevent them from eventually quitting and so to speak, starting their own sale acquirers?

Well, I don't really know how to answer that question. We don't spend much time following other companies. We are trying to focus all our energy on developing Lifco. And we've done so for the last 25 years. So I think there are probably better -- other people are better to answer your differences between different companies than I am. So I don't know how to get into that. When it comes to keeping very important employees, it's of course, one of my most important jobs to make sure we have the culture and the right system and incentives in place and also giving people the right opportunities to develop in Lifco. And I think we have been very successful with that so far, and we hope that continues also in the future. It's one of the key success factors of Lifco, maybe this one is how we have been able to keep very successful people growing in the company, and if you look at the team around me, the average seniority of my major team members is I would say, 15 years, just guessing now, but around that level, 15 years with Lifco is -- that's extremely important not only for ensuring that we have a very strong governance culture and a very strong ownership -- implementation of our ownership thinking of our different companies and acting when we need to act, but also it's a key factor when we acquire companies is that we don't send out someone who worked few years at Lifco trying to represent us. We send our people that really know what -- how it's like to run a business in Lifco that we raised the bar in our culture and then also how to be a leader of new [indiscernible] that situations. That's extremely important. And then how others are working, I think they should comment on that.

The next question comes from [indiscernible] GMBH.

Congratulations to a great year given the tough circumstances in the world. I have a question. If we look in Slide 17 in the presentation with the footprint. Is this sales originating from the country on Norway? Or is it a bit in this country? Or what percentage is? It doesn't say...

Sorry, this is where the sales takes place. So this is -- as you know, this is basically where -- to which market do we sell our products. And where the customer is located. So for example, we might have slightly more companies located in Sweden, but they were export-driven, and therefore, Sweden is 9%. So I think we have -- and the same thing for Italy, we have more companies than we have sales in Italy because they have a lot of export driven companies, et cetera.

So that's -- this is -- once again, this is sales in the company of Italy or in the country of Norway. Or is it from the company...

No, no, no, it's sales into that market. So for example, of Lifco business, 10% is sold into U.S. to U.S. customers.

And would there be any difference in regional profitability for you? Or is it pretty much the same?

The profitability in region depending on sales is totally do what type of companies are selling mostly to those countries. We have very -- we have a range of different profitability levels. So we have a higher proportion of high-margin products sold into the North America then, of course, the margin from North America is higher and [indiscernible]. But we don't communicate that specifically where we have.

And then dividends, I must congratulate you on increasing the dividend. So the long-term dividend growth is coming up more on par with the growth in long-term cash flow and the EBITA. So that's very well done.

[Operator Instructions] The next question comes from Mats Liss from Kepler Cheuvreux.

Two questions. I mean, you mentioned the tough conditions in Demolition & Tools. And I would just -- I mean you are still performing very strong margins. So what kind of recovery potential do you see there when sort of market normalize and could there be a sort of [indiscernible] impact. I mean, when supply chains are refilled or so, of course, you mentioned that inventory in construction side was maybe not what you like them to be. But could you give some more flavor there about definition of recovery potential?

Well, I think we had -- before things were starting to fall down. We had a short period of time where things were almost perfect for Demolition & Tools. I can't remember exactly what it was because it was perfect as after COVID because then we have supply chain issues and then inflation came and we had order books. At some point, I think it was perfect. Maybe it was beginning of 2023. This rarely happened. But when that happens, we can have, of course, higher margin than today because we have perfect operational leverage in our companies and everything is in control. So of course, there is potential for better margins in Demolition & Tools and I think we can show that historically. But when does this market situation occur, we don't know. Right now, in a situation where even if we see some small improvements in certain parts of Demolition & Tools, we still have other areas where they are a little bit later to falling down and they maybe had even bigger order books. So we don't know right now when that will take place, and even if we see some improvement in some areas, it could also be at some other areas is a slightly more difficult part. And that's the only thing we can really conclude so far in 2024, it was throughout the year, a weak market condition, even in Q4. But of course, the longer we have had that situation relatively easier to meet...

And then when I looked at the numbers there. Our selling expenses grew quite substantially in the fourth quarter, 30%. And if I compare that year-over-year. And if you compare that to the third quarter, it was only 8% or 9% or so. Were there any specific reasons behind that or is it more of a seasonal impact in Q4 you have, but I guess...

I could not really -- are you referring specifically to SG&A costs or something?

It's -- I look at P&L. And if you -- the selling expense line is growing 30% in Q4 and if you compare on third quarter, it was 8% to 10% or so year-over-year. Are there any specific extras there that impact the fourth quarter?

No, but I think this is normal seasonality effects. And then we also have different quarters, the third quarter also includes in some companies, quite an extensive vacation period -- and is taken from the balance sheet cost.

Yes. I thought it was quite a big difference year-over-year. I mean since that you're -- yes, maybe...

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. Thank you, everyone, for listening in, and thank you for the time. I wish everyone good, continued day.