Lifco AB (publ)

Good morning everyone and welcome to the LIFCO Q2 presentation. I'd like to directly turn to page number two in our investor presentation and just on a very high level conclude that this was a very strong quarter for LIFCO with strong underlying market demand in I would say almost all our segments. And that resulted in a very strong sales development, organic growth of 34% in the quarter. Acquisitions contributed with 15% on the top line. And then we had a slight negative effect on exchange rates of about 3%. And I'd also like to continue. We have then obviously an even stronger development on the EBITDA numbers, going 79% in the quarter. Obviously, the comparison numbers here from quarter two last year are obviously fairly weak. We were quite affected in the early phase of the pandemic, especially in the dental area and also in the demolition tools area. And this year, we obviously see a strong market condition across the board. But despite that, we are very satisfied with the results in this quarter. The strong EBITDA number is obviously due to greater sales and operational leverage combined with our acquisition work that tends to help the margins. And then we are also in this quarter, as we've now been saying for quite some time, seeing an effect of lower sales and marketing costs due to the pandemic. And already here I can mention that it's still no doubt exactly how that will develop in the future. now when the societies are open up. So we are still having a close look at that, but also open for all possibilities when it comes to this. Going further down in the numbers here, we have a solid cash flow in the quarter. We're growing cash flow, despite that last year in the early part of the year and in the pandemic phase, we had a strong cash release in working capital. This year we have a little bit of the other effect when the strong sales growth also leads to especially high receivables as normal. But still very solid cash flow. And then we can turn to page number three and go a little bit more into the different areas in Lithgow. If we start with the dental business area, this was the area where we had the most dramatic COVID effect last year where basically all the markets were very low level in April and early May, and then it came back to more normal level in last year's June. This year, the market conditions were more, I would say, normal. Even you can argue in some areas of dental, there could be some effects of some stock buildup coming back in the customer end of the business, because what happened last year was that all customers were keeping stock at lower levels. when uncertainty in the lower market level was apparent. In this area, we have a very strong EBITDA development due to acquisitions and also due to the fact that we have lower sales and marketing costs also here. If we then move over to demolition tools, it's a very strong quarter. Last year, we had more uncertain market conditions in the early phase of the pandemic. this year we it's a very strong market condition across the board i'd like to highlight already here that it is an area where profits and sales can fluctuate quite a bit between quarters and also obviously over between years depending on the on the underlying market conditions um and then if we go further and look at the the profit level in dimension tools it's also done um mainly due to operational leverage but also here we have acquisitions helping us in this year on top of that we also have in this very good quarter also a positive effect for for some extra possible special products projects that as most of you are aware of can fluctuate and will fluctuate between quarters and even between years so uh the measure tools is it's um yeah a super good quarter basically um the system solutions uh this was the area where we had relatively the least negative effect last year due to the pandemic and also this is the area where we grow the least this year still very solid development most this is obviously an area with many different type of market exposure but for the most part it's good market conditions all over the board almost all of our companies are performing very well in this year And last year, in the second quarter, we had some companies that had some positive effects from COVID and some that had some negative effects. And this year, it's more flattening out the effects of this. But I also want to highlight here that it's still very good market conditions for the most part. The only area where we had some weaker development in the first half of the year is in the forest area, where it's not so much correlated with the market conditions. It's more correlated with what type of products we are taking in and how they are developing. So I'd like to remind everyone about the forest division here, that it's not really a market-driven situation. It's by itself a volatile area that I've mentioned in previous calls. And then we can move from page number three to page number five and look a little bit at our balance sheet and mainly focusing on the net debt to EBITDA level. We are now, despite the fact that we've done a record high acquisition pace the last 69 months. We are still at lower interest period net debt compared to the same period last year. Also, our total net debt TBT is lower than last year. So still a very solid financial position, which gives us room for further acquisition opportunities if we find great companies to buy in the future. I also like to just highlight that last year we did pay the dividend in the Q3 due to the pandemic, and this year we paid in Q2. So that's also something that shows that we are in a strong position here. And then we can move over to page number six and just look at the high level and the long-term history performance of NIPCO. And looking at the EBIT margin development in 2014, we have a continuous and gradual improvement of margins. And this is not a coincidence. We always strive to make our great niche companies even more niche and more differentiated and focus on the high margin part of every segment where we can. We have learned through many, many years that it builds greater barriers for our companies and better competitive situations. This is a long-term development. And what other drivers that helps our margin is obviously acquisitions. We have been, you know, the last seven years acquiring on average better quality companies with higher margins coming into LIFCO. And then in the recent period, the very last year or so, we have also been increasing our margins more than the normal due to the lower costs for sales and marketing due to the pandemic. But I think I'd like to remind everyone that it's not only that, it's also the long-term strategy of LIFCO going in that direction. And then we can turn to the next page, number seven, and also more on the high level. Remind everyone that we have a very high return on the capital employed, especially on the right-hand side where we measure it exclusively goodwill. This is basically looking at each individual company and summing them up. And here you can see that we are now on record high levels also on return on capital employed. It's an indication that we buy and own high-quality companies with great cash conversion, which is fundamental for our long-term strategy of growing LIFCO gradually from acquisitions. And then we can actually move all the way back to page 29, which is listing our acquisitions that were being carried out in the last six months. and um it's quite quite a long list at this time we have carried out 14 acquisitions that have been consolidated from january 1st or announced now uh in june some of them have not uh one of them have not been consolidated yet will be done in in the next couple of weeks um and this activity of buying companies of course very fundamental for us it's um it's a key focus area for lisco we involve today much more people in the work of doing this i'm not talking only about acquisition dedicated people, we also involve a lot of our group managers sitting in the subsidiary levels in taking care of new companies and developing in these roles. Our target is to acquire very good companies with typically market leaders in small niches with very solid financial history. And then we, as always, stay very disciplined and strict to quality standards, but also valuations. This means that if you want to do this in a very long-term perspective, which LIFCO is trying to do, we have a very long-term perspective on this, it leads to a situation where sometimes we get great results that we had in this year, and some other times it could be lower activity because we are not forcing this. We try to avoid mistakes and we try to develop LIFCO with high quality. And I often get the question, what is our pipeline? And that's always difficult to predict because there's so many factors and it's so unclear when the deal will happen or not happen. And we also are backing off quite often things that we don't feel fully comfortable about because we're going to own the company forever. That's our mindset. So with that, I would like to open up for any questions about the development in the second quarter.

Thank you. If you would like to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02. There will be a brief pause while questions are being registered. The first question comes from the line of Eric Castle from ABG Sandal Collier. Please go ahead, your line is open.

Hi, good morning, Brad. So first off, in demolition of tools, obviously an exceptionally strong margin at 28%, but I would like to understand it a bit better. So could you please help us bridge this margin uplift in terms of special orders, margin accretion from M&A and OPEC savings to understand how sustainable this is going forward?

Yes. Well, I think this is the area where the operational leverage is maybe most apparent. It's also because it's a quite volatile area, as you've seen historically. So operational leverage is clear. When we get these sales increase, we don't increase the fixed costs as much. So that's a key driver, obviously. It has always been a key driver when we have these periods of high growth. In this quarter, we have on top of that, the icing on the cake, that we have this special project. It's not a huge amount in this quarter, but it's still a very high profitable order, basically, that triggers the margin up even further. And then, as you pointed out, we also have acquired some very high-quality companies recently that helps on the margin a little bit. And so this area consists of different types of business. We have the box and leisure robots, which everyone knows it's a very high margin area. When they have higher sales, it typically falls down to a lot of it to the profit level. Then we have the attachment area, which is a little bit more scattered. We have some areas of the attachment with very high margins and some with more, I would say, just good margins. So it's a little bit depending also where the strongest growth takes place in that segment. But I think I like to repeat myself here. This was an exceptionally good market condition in this quarter and exceptionally good basic outcome. And then on top of that, we have these lower sales and market activities. There's no trade shows taking place. There's no, a lot of this, I would say, normal marketing costs and sales costs that we typically would see are not happening this year. So there's so many things happening here in this. But operational leverage is quite apparent thing here as well that we would see in any year with this type of sales development.

Thank you, that's very helpful. This is a volatile segment, and the markets as well. Do you have any indication that it could become worse in H2, or do you expect it to continue at this level?

We don't give any forward-looking statement. I can only conclude that the market conditions up until today are still very solid. so so right now everything looks good but but how things would be in in in two or three months it's not where we put our focus we adapt our business to any market conditions but but so far we don't see any change in the strong market development and we're only you know two weeks into the new quarter so it's very early to say anything anything about that and i think the one thing we we haven't talked about which could be worth mentioning as well is that you know we are With this type of high increase in demand is also, of course, a factor of making sure we get the delivery capacity up. And that's not only our own internal capacity, it's mainly also getting goods from the supply. So far, as you can see from our numbers, we've been able to deliver on the high demand that we see. That's, of course, also a question mark if there will be problems later on in the fall. due to the general business activity now that we see. So it's not only our companies that are screaming for more components, it's a general thing in the whole world right now. So that's also an uncertainty that we don't know right now if that will play out.

Okay, thank you. And then I'm a bit curious on a per country basis. You have obviously acquired a lot of great companies over the past year. And sort of the Italian companies have become a large part and stand out in terms of margins and growth rates. So I'm sort of wondering if you're seeing a more rapid recovery in, for example, Italy, which is supporting the margin expansion, or if any other region stands out as well.

So first, to answer the specific Italian question, if you look at the companies we've been acquiring in Italy, they are not so much exposed to Italy. They just happen to be located in Italy. They're great companies that are located typically in northern Italy, and they have a high level of international sales. So these are typically the companies we like to own, global niche leaders. So I wouldn't say we will in next year's figures also lift up Italian market exposure. You will see it's not increasing at the same pace as our Italian acquisition list is adding because they're all, for the most part, very international leaders in their initiatives. So I don't think that's... And when it comes to markets overall, we see pretty strong development across the board right now. I don't think this is a quarter where I want to lift any specific geographies. So it's pretty strong across the board.

Okay thank you Per, good answer. And then you're still able to keep SG&A at a relatively low level despite the high volumes and some of it are of course short-term savings as you said that should perhaps start to ramp again in H2. And I know, of course, that you don't give any guidance, but have you changed your perception in any way of the timing of these cost decreases and sort of the magnitude of costs that should come back going forward?

No, I still think there's a big uncertainty around that. And I think it's partly, you know, we're not going to spend costs if it's not adding to our business short term and long term. So it's a little bit unclear how we will act in this field, and it will be different by segments, different by companies. But there are certain parts of the business where I think we want to increase the sales and marketing, especially in the distribution business, where a close connection to customers is fundamental. It may be different if you have a totally unique product selling to a relatively stable base of customers that know you very well. know then it's maybe not a big rush and and if you're not launching any new products or very strange or very you know radical new products maybe you don't need to push extreme amounts of exhibitions or other types of sensitivity so it will be very different but i keep this i keep a conservative approach on this until we know more we have to assume that that maybe not all but the part of this cost will come back if it will come back in next quarter I don't think fully because it will take some time to ramp this up due to COVID and all that. It will gradually take some time, but it's difficult to answer in a more specific way. It's so different by company level. We are a very decentralized organization. Our success is based on rational local management making rational decisions. They will not spend money if it's not adding value to the business. How that will develop, it's still Okay, thank you very much Per.

Very helpful and congratulations on the very impressive quarter. I'll jump back in queue. Thank you.

Thank you. The next question comes from the line of Carl Ragnestam from Nordea. Please go ahead, your line is open.

Hi, it's Carl here from Nordea. a couple of questions on my side first of all maybe we touched upon it a bit but on demolition tools i mean when at least looking at the construction indicators it seems that it seems like demand accelerate that towards the end of the quarter i mean it's would you say that that that it is a fair assumption for for your business as well or

I think we've been seeing the strong market condition now for quite some time. And for us, for our type of companies, it's not a couple of weeks indicators that leads to this. It's a longer period of increased demand combined with a much better sentiment. People are willing to invest also in the more expensive capital goods right now, which we saw in this quarter. which was not the case maybe nine months ago when we started to see the increased activity in the underlying markets. So I wouldn't say that it's a two-week factor here. It's been strong throughout quite some time. And there is, of course, a little bit of effect that if we get good orders in March, you don't see that fully in Q1 that comes into Q2 and so forth. But it's not an enormously long order book, but there's still a little bit of that effect. The market levels have been quite strong now for a period of months, I would say.

And also on the cost ramp up, I mean, how much cost have you started? What selling activities or marketing activities have you started already during Q2?

Well, it's been very difficult to do normal uh normal sales and marketing traveling and and in some companies you know very localized they've been doing a little bit of that but not back to normal whereas some others are still on a very low level and and once again i'd like to remind you that we are in a business to business type of environment most of our companies have ongoing relationships so so short term um you know sales can be great without any activities you know it's more than long-term development that we're talking about for the most part of this we have some exceptions where you know where we have more where you need to do very active sales from auction to get sales here and now. But for the most part, that's not required. So still in Q2, it was on a very low level. Restriction has been in place for the most part.

And also given the general market discussion on component issues, would you say that your companies might have been fueled to some extent by a pre-buying effect in the quarter? How should we look at that?

There is some of that in certain parts of our business, but I think for the most part, no, it's real underlying demand. the most part that's been strong in this quarter and what part of your business do you see it where you would see that that it could be like you know filled up i think given that we don't have you know for the most part very long order books i i don't think that that's right what might be a factor also helping uh demand a little bit now is that you know there's a constant you know price increase effect in this year it's not only for us you can read any report that is effective now so it could be that some orders are being you know pushed in a bit earlier around that but i think i think this quarter would have been good no matter what because the underlying market conditions were good in this quarter but but i don't think that affects is enormous but but whether the markets will be this strong going forward is of course a big big question mark and uncertainty

And on the raw material side, we have seen most raw materials rally during last year and also into this year. You're obviously good at raising prices, but have you seen any impact on margins? It doesn't seem like that, at least. And also, should we even consider an impact in the coming quarters from that part?

So in this quarter, we see very little effect, obviously, around that. And that's mainly because I think the price increasing is hitting the deliveries out from our companies more right now than it did maybe three months ago. So it's coming right now. And then, as you say, we are, of course, adapting our prices continuously in all our companies. And there is a little bit of risk, but I cannot quantify that fully. But there's, of course, in some companies, a risk that you will have a lag of a few months due to existing order books. due to promises to distributors that you long-term want to value the customers and the business partners, that there could be time lag. But as you pointed out, for the most part in our company, we have so strong positions that we should be able to carry this forward. But the timing effect in a very short perspective is, of course, difficult to judge. And I think the effect is coming maybe more now in the third and fourth quarter around this.

Okay, but it sounds at least like no major drama in the raw material side. Is it the fair answer?

No, but the prices are going up, but we are adapting, and then the timing effect in a short period could hit us potentially, but it's not going to be any long-term effect the way I look at it right now.

And which market, which segment did you see the biggest risk of a hit, where you see sort of locked in orders, where you don't have clauses, for instance?

But I think we have, for the most part, we are very quick and flexible around that. But there are some areas, for example, if you take, you know, one example is a project business area, which is not the biggest part of LIFCO, but that's one example of where you have long Longer order books, you have commitments and prepayments for customers and agreements that makes it basically impossible to adapt due to the prepayment conditions and all that. That's an area, but that's a very small part of Livsjö. In other areas, the problems are more related to distributors giving out orders, taking orders, having an order book. And then, you know, for us to squeeze our distributors short-term is maybe not the right long-term solution. So then maybe we have to take a little bit of a hit in those areas. But, you know, for the most part, this should be manageable. We have strong positions and we have not huge order books. So I'm talking about more, you know, a couple of months effect that could be the problem. But it is more speculation also from my side. So I don't want to overemphasize. I'm just lifting a potential situation that might arise. We haven't seen it yet. And the same thing, to follow up on this, the same thing goes for the delivery problems that might arise. We still have been able to scramble around. And I think our decentralized model is very good because our subsidiary CEOs have now changed their mindset into putting a lot of focus on getting components into their houses so they can ship the goods out to customers. So I think our decentralized model is very good. But that's also another question mark, I'm certain, in the near future around that area. So far, so good.

OK, perfect. All from my side. Thank you.

Thank you. Just a reminder that if you would like to ask a question, please press 01 on your telephone keypad. There will now be a further pause while any further questions are being registered. We have no further questions, so I will pass back for any closing comments.

yes thank you very much for calling in and i wish everyone a nice weekend and also a nice summer period and we talk later on in the year thank you very much