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

Thank you, and good morning, everyone. We can move directly into Page #2 in our investor presentation, where we look at the group's overall financial performance in the first quarter. And it was overall on the group level, a mixed quarter with mixed outcome in various parts of Lifco. But overall, on the high level, solid performance for the group. We had a 15% growth in sales, driven by around 8% organic growth, particularly strong growth in sales in Systems Solutions, which we'll come back to in the next slide. We had also strong growth from acquisitions of 8% in sales. If we go further down and look at the EBITA, we grew that with 17% and we had slightly higher EBITA margin compared to the previous year. And this EBITA margin is driven by a very strong performance in Demolition & Tools and offset by slightly lower margin in Systems Solutions. And the profit before tax grew by around 20%. Cash flow only grew 3% in the quarter. Cash flow, obviously, is more volatile between quarters. And this first quarter, we had slightly higher tax payment compared to last year and also some working capital buildup. We can then go into more details in Page #3 in the presentation. If we go down into the different areas. In Dental, it was a quite normal quarter, low single-digit growth, both in terms of sales and profit. We had here some positive effects on a later Easter in this year compared to last year, which had some impact on the growth. If we then go further to Demolition & Tools, we grew sales with 10%, which was a combination of organic growth and some acquisition growth. We had a very strong margin of 25% in the quarter, which is basically due to organic profit improvements in several parts of this business area. And EBITA overall then grew with 37% in the quarter. And just to continue commenting on Demolition & Tools, we actually saw after a quite long period of time of what I call weak market conditions now, we saw some first indications of slightly improving market conditions in this first quarter of 2025. Having said that, we have to keep in mind that the first quarter took place before the most recent turbulence relating to tariff, et cetera. So we just have to wait and see how this plays out going forward. We don't have more visibility around that than anyone else. But at least so far, so good, you can say, and I'm talking about slight improvement. We're not in the situation we saw in '21, '22 where the markets were very strong, but improvements from the quite low level we had in '23 and '24. In Systems Solutions, we had a very mixed performance in the first quarter, if you go further down in that segment. Overall, the business area grew with 24%, but EBITDA only grew with 15% due to some mix effect of growing stronger in slightly lower margin areas and also some weaker profit levels in 3 of our subdivisions, Environment Technology, Transportation Products and Special Products actually had a little bit lower organic profit development compared to last year. If we then also make a specific comment around Contract Manufacturing, during the second half of 2024, we had very strong deliveries coming out from Contract Manufacturing. That also continued in the first quarter. And we have, however, now in early April, some indication that this is now turning back to more normal levels again. But visibility is very low. So we cannot say more than that. We have not a long order book in this business area. So it's really related to what happens play forward. But we see some indication of going back to lower normal levels in this quarter. And once again, the lower margin then of 21.6% in the Business Area Solutions is then a mix effect of lower margin in Contract Manufacturing and some weaker organic profit development. If we then go into Page #6 and look a little bit at cash flow. I just want to highlight that we have updated Page #6 with some updated data. It's measuring the free cash flow per share after CapEx and before dividend acquisitions, and we still do that, but we have also now deducted in every year here in this graph, we have deducted also dividends to minorities. We have in our companies, some minorities. And when we pay out the dividend to them, that should, of course, be deducted in this graph, and that has now been updated. The cash flow per share must obviously be measured over long time periods as cash flow can vary between quarters and even years. It has been on a little bit stagnation level in the last 2 years. And the main reason for this low growth is, of course, that we did experience quite weak market conditions in Demolition & Tools in '23 and '24. If we then go further into Page #7 and just quickly look at our debt position. We are staying now at 1.1x interest-bearing net debt to EBITDA, which is a very healthy level, and we stay there despite quite a large number of acquisitions in the last 12 months. Obviously, we still have plenty of room to continue making acquisitions when we find the right opportunities. And I repeat myself from previous calls, we remain very disciplined in terms of quality of the business we decide to acquire and also the valuations. And as always, the exact timing on when different deals materialize is always difficult to forecast. But we continue to work very hard and actually expand our search for great companies all around Europe. And then we can go into Page #8. and just take another step back and look at the long-term historical performance of Lifco. And once again, we can conclude that we are coming out of 2 years of quite difficult market conditions for Demolition & Tools, which has led to lower than, I would say, historical growth in '23, '24 and so forth. And we saw some indications of some improving market conditions for Demolition & Tools in the first quarter. But once again, the global economy now is, of course, very difficult to forecast going forward. But I think you can also conclude from this graph that despite this situation, we've been able to grow our profits also in '23 and '24, which is a strong indication of -- we have a great diversification in the group, and we also have maybe even more importantly, very strong management throughout the Lifco system that is steering the companies and the portfolio in the right direction. And if we then go to Page #13, I'd just like to also a little bit take a look at what we're actually doing with our portfolio. I just want to remind everyone that we have been since the end of 1990s, developing a very strong operating model on how we steer companies in Lifco. It all starts with having hundreds of motivated and very action-oriented, result-oriented managers in all our companies. And equally important, we also have a quite large team nowadays of very experienced former directors that are now taking the ownership representative roles in all these portfolio companies that govern this process going forward. That's extremely important and something that takes many, many years to develop. And I just would like to mention the great work that they place throughout the Lifco system and how crucial that is for our performance. The other point on Slide 13 is just also a reminder for everyone. We continue and we have always focused on going up in margin, becoming more differentiated and not focusing on the volume segment. We do that in all our businesses across Lifco. And we've done it for many years, and we continue to do that. That's also one of the reasons why we've been able to expand our margins over the last decade. We continue to run Lifco in a very simple way. Despite being a quite large company overall, we keep the entrepreneurial spirit in all our companies, and we make sure that the most important people in the subsidiaries can shine in such a model. We are focused on outsourcing wherever it's possible. So basically only doing what's necessary in-house and have the focus on typically the product development and the sales. And then sometimes we have to do a little bit of production because of the situation in that specific niche. But in general, it's important. And then cash flow is a strong focus in all our companies. Also when we acquire companies, it's a very important part of our screening to ensure that we can own the company for a very long period of time with strong cash flow generation. And we do all of this with a very long-term perspective and try to do things a little bit better every year. So with that sort of overall comment, I'd like to open up for any questions.

[Operator Instructions].

It's Carl from Nordea. So just a couple of questions here. Firstly, on System Solutions, I mean, a bit of a quite unusual margin drop from a historical perspective. You mentioned product mix. So I mean, is it purely Contract Manufacturing you're referring to? I mean, obviously, you mentioned also environmental tech and transportation having a sort of a negative trend. So both of those questions I would like to dwell into a bit. And also when you talk about the negative trend, are you talking to a short-term negative trend or a negative trend that you've noticed for a while? Yes, and also what is behind it?

It's a good question, Carl. And I think the answer is, as always, in Lifco, there's many things coming into this one number. One reason is obviously that when we grow a lot in contract manufacturing, we have slightly lower margin there. So that has a mix effect. But that's not the whole explanation of the margin drop in this quarter. There is also some companies that had, I would say, a little bit a bad luck quarter. So maybe the margins were a little bit lower, which is normal. Quarterly profitability can vary on different subsidiaries up and down, but we have a little bit of that. And then we had a few other companies that maybe had a little bit also weaker market conditions coming into play and hence, lower margins coming in. So this is all playing together into this quarter. So it's a combination of, I would say, bad luck, luck is the wrong word, but a little bit more onetime effect that probably will not be in the next quarter. Some companies that are experienced weaker development. And then you have this mix effect where we grow much stronger in a relatively lower margin segment, so to say. So these are the 3 areas playing together.

That's very fair. And you mentioned contract manufacturing perhaps in April coming down to more normal levels. The problem to me at least is that I don't know what the normal level really is. Maybe you don't either. I'm not sure. But what is the normal level? Is it sequentially flattish? Or is it back to precontract? And also on that, how fast are you able to take out costs if volumes would come down?

I normally would not comment on what's happening in early April. But since we had the extraordinary good deliveries now 3 quarters in a row, and we have seen a little bit weaker start in April, we have to measure something now. But we don't know what that means for May and June to be quite frank. So it's very difficult to forecast because the visibility is quite low. And we work with OEM customers, we don't have the full visibility on what's happening further down the value chain in this situation. So we don't know. And the second question, it, of course, if volumes is going to go down, then it would be some time to sort of adjust going back to normal. But we are historically being quite fast on that, but it will take some months to get things back to normalized level if that continues. But right now, we don't have visibility to draw any major conclusion on that. It was more a highlight given that we have now 3 quarters in a row, and we saw a little bit weaker start in April.

But I guess, in order to be able to take out costs, you must have some kind of view what the normalized level really is? Is it sort of half of the contract uptick that you've seen? Or do you think will it go down to precontract do you think? Or is it a long-term contract that will continue for many years? Or how do you view the contract overall?

No, it's volatility on the customer side. It's not that we have lost any customers or anything has changed in that regard. It's unclear around this field. So I think we cannot go into further details here, Carl. We have to address, it's very early indication, and it might also come back later on. So we just saw that it was slightly weaker in April than it was in the first quarter, and therefore, we have to highlight. And I think we have to leave it like that for now. And then we have to follow this going forward. But yes, it's unfortunately, a bit more volatile the last year in this area than we normally see, but this is like sometimes.

Sure. Okay. And the final one from my side, you touched upon it. I know the visibility is low. I also know that you don't want to comment on things happening post March in this case here. But looking at the tariffs, the U.S. trade war, have you noticed any sort of impact on demand in recent times here? I guess it's mostly in CapEx-driven companies, I guess, might be hesitancy from consumers to push the button to invest or start a project. Have you seen any of that yet or...

I think it's too early to say, Carl. The major part of this turbulence was it 2 or 3 weeks ago, I think. So it's a very short term. And we did close orders in the last few weeks as well. But does that mean that things will continue to be great in May, June? We don't know. So it's too quick to say. But yes, you can say that we have still seen orders coming in, in April. I don't have the full visibility if it's on what level is compared to, but it's not like a Lehman Brothers situation that we're experiencing. Things are moving around and things are materializing also now. But does that mean that May and June and the rest of the year will be great? No, we don't know. So it's too early to say.

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

Starting out in Demolition & Tools, of course, as you said, a very strong quarter. Could you maybe elaborate a bit on the segment there when we're looking at the earnings growth. You didn't mention that there were any special orders and say that it's organic growth behind it, but can you elaborate a bit more on the performance there?

No. And the reason we didn't mention that because there was no one specific order or any project that drove the profit levels in this quarter. It was more strong performance in quite a large number of areas in this. And I think part of this has to do that volumes were a little bit better, and then we've done a little bit of cleaning up, reducing, getting the organization a bit more streamlined and being ready for this. And then we have this quarter. And then coming back to quarterly variations, there was no negative impact in this quarter, which I mentioned just previously on Systems Solutions, we had some companies where maybe the profits were a bit lower than we would expect in one given quarter. So this can also vary. And this quarter in Demolition & Tools, we didn't have that effect, you can say. So it plays together and then therefore, the margins are very strong. So it's not one specific vector that drives it. And it's actually good performance in different parts of the Demolition & Tools playing together. But not we're not seeing crazy good markets. We're just saying that we saw an improvement from the levels we had last year.

Yes. That was my follow-up if there is any or several particular end markets that showed particularly strong performance if it was more construction or demolition related or forestry.

It was actually in all areas a little bit better, you can say. Having said that, now we go into very details. We still have some areas where they are now maybe suffering a little bit for some reason, later problems, you can say. So it was not a perfect quarter in that sense. But we will probably have some areas here that we still have weaker conditions also going forward. But the major part of this area did quite well across the board.

Yes. And was it, so to say, great across the board through the whole quarter, did you see an improvement towards the end on a relative perspective?

No, it was quite spread out throughout the quarter.

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

My question or some of those that I wanted to ask have already been answered. So the one I'm curious about is when we look at Systems Solutions right now, it's been an upward trajectory in margins over a long time. We started reaching roughly 20% margins in 2021, then it's been 22%, 24%, 24%. And yes, now we're back here. But based on the current company compositions in systems, is there any way of kind of saying what the normal margin interval should be for this division?

It's always very difficult to say what is the normal margin in an area where you have different market exposure and some cyclical volatility in the areas and some very stable areas. But I think the margin levels we have had in the last years is a good indication for a normalized. But then once again, what is the normal market? That's maybe the most difficult question to answer. But coming back to our portfolio of companies, we have very strong market positions. There's a reason why we can have high margins in these businesses. They are very niche and they add a lot of value to their customers, and they are very specialized in their segment. So we, of course, see potential for long-term continued margin expansion in all our areas, including Systems Solutions. Short term, it can always be volatile. And this quarter was, of course, also partly impacted by when you grow more in the lower-margin part of this area then it impacts this area. But overall, we're not worried about the long-term margin development of the area as a whole. Short term, we can also have volatility, obviously.

Understood. And then a follow-up just in general, but perhaps mainly focused on Demolition and Systems, but a bit technical. But when it comes to volume sensitivity, let's say that we do now get a situation over the next 12 to 24 months at least of improving volumes, how sensitive or how positively affected do you think the margins could be from a volume improvement compared to what you have disclosed on several occasions regarding, well, continuous pricing, but also mix on many occasions helping you?

So just to understand the question. So you're assuming that volumes will be good in the next 12 months. Is that what you're assuming in the question?

Well, if we get an upturn, so for example, I mean, I'm not pointing out that you said things are looking up now in demolition and that this should be extrapolated, I'm not saying that. But if we see that volumes start to improve on a kind of more longer-term level, it's not just one quarter here and there, that volumes actually begin to improve. How positively affected could we be from that kind of just volume uptick?

I think the quick answer to that question, of course, if the volume goes up, then you have some positive operational leverage effect of that. But on the other hand, if you look at how we managed to keep margins very strong in the quite weaker market condition, that maybe is also an indication that we are quite good in handling variations around that. But obviously, the theoretical answer would be that if we get more volume, we should get some benefit out of that. But we'll see. We don't know if we'll get more volume in the next 12 months. That's a big unknown.

Yes. And it wouldn't be a kind of adverse effect that the most volume-sensitive parts have a negative mix associated with them.

You mean a mix. Okay, now I understand the question, Karl. The last 2 years, it's been a little bit weak across the board in Demolition & Tools. You can always have that impact, obviously, that, let's say, we start growing a little bit more in the slightly lower margin part, that can have an impact. Yes, maybe it could be some effect around that. Maybe that also a little bit what helped us in the last 2 years that we had a little bit more stability in the high margin. So that's a good part. That can also come into play. But I was more referring to volume across the board. If you get operational leverage effect, that, of course, will help as well. But it can, of course, be some factor around that. But it's very difficult to know. I think in general, all areas in Demolition & Tools saw a weaker market condition in the last 2 years. And there can be slight variation between timing effects of different quarters, et cetera. But if you measure it over a 2-year period, it's been pretty much across the board. Sorry, Karl, just to add to that, of course, if you take maybe the [ attachment ] and tool business, they are more only exposed to infrastructure demolition and construction related, whereas some of our machinery products are, of course, exposed also to that, but maybe also to some industrial sectors and other sectors, which maybe didn't fall as much. So yes, fair point. You could make some theoretical analysis around it. It's very difficult to know exactly how the market conditions play out at any given point of time.

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

Okay. Thank you very much for listening and for the questions, and I wish everyone a good Friday. Thank you.