Lifco AB (publ)

and welcome to the LIFCO Q2 conference call. And we can start with going into page number two directly in our investor presentation and looking at the quarterly performance of LIFCO. And the conclusion is that we had a rather strong quarter for LIFCO. Once again, driven by continued positive development in our demolition tools and systems solutions business areas. And overall, the sales growth was 22% in the quarter, of which 12% was organic growth. Acquisitions contributed with 7% and exchange rates had a 4% positive impact. We also had a small marginal negative effect of divestment of the HecoTech business, which took place in May 2022. And as we've been communicating previously, this divestment is not something we do. We basically don't do divestment. This was a special case where the exposure to Russian mortgages was the reason for divesting HecoTech. If we go further down in the numbers, the EBITDA growth of 20% in the quarter, which then means that we have a slightly lower margin compared to the second quarter of 2021. And I would like to remind everyone that the second quarter of 2021 was a very strong margin quarter for us. And in that year, we still had some positive benefits of lower cost levels following the pandemic, especially in our sales, marketing and administration side. And then another comment on the margin is that, as you all know, the raw material and costs in general have been increasing now for quite some time. It's been a challenging environment from a perspective, but we can now conclude that the vast majority of our companies are adjusting very well to this and are able to pass prices through the system. And I would like to also already here highlight that the LIFCO portfolio of companies or you know typically in strong niche positions which means that there is a very good potential for pricing power um and the issues we had on the on the mortgage side during the last nine to twelve months has been more related to timing timing effects of passing things through adjusting to inflation, et cetera, rather than the actual fundamental possibility to compensate. So we still think that we have a very strong position in the vast majority of LIFCO. If we go a bit further down, we can make a comment around the cash flow, which is somewhat weaker than you would normally expect from LIFCO. The reason for the decline in cash flow is mainly driven by the increased inventory levels. We saw the same effect in the first quarter of this year. And this basically has to do with the fact that the underlying demand has been very strong for quite some time. And the supply chain issues are still a factor. It's still challenging to be able to deliver on the strong demand. And to do that, many American companies are basically being forced to increase the safety stock levels. And that's the effect that we see there. Another component, of course, in the cash flow is that the receivables have increased due to the strong sales development in the recent last quarter. Yes, these are the main comments on page number two. We can then move into page number three and look a little bit more on the different business areas. If we then start with the dental area, we already informed in the last earnings call about one issue, a specific issue we had in our prosthetics business. Basically, the lockdowns in China were creating production problems during the first quarter. Those production issues have been up and running. We've been back to normal capacity. But we're still suffering in the prosthetic business from that basically shutdown we had in February and early March. And there is very hard work going on with the German dentists to create comfort around the supply and delivery capacity that we now have. But basically, that also impacted somewhat, not to a major extent, but to some extent, it impacted our sales and the profitability in the second quarter because of that sort of lag effect. Also here, I would like to highlight that dental in last year's numbers had extraordinary high margins, partly due to the lower cost level since the marketing activities were not fully back to normal in Q2 2021. and also there was on the margin a little bit extra steel from safety products for dental offices. But overall, basically, these are the drivers of the slightly lower margin in the dental division. If we go further into dental tools, we have experienced continued strong marketing conditions for quite some time now. And sales goes with 26%. And that's a combination of strong organic development and acquisitions contributing. I would like to also go further looking in the margin side to highlight that there was also very strong development in the second quarter of 2021. And the margins in this quarter is also very strong. We are very satisfied with 27% EBIT margin. And they were on the 28% level last year, extraordinary high, due to also partly some special product leverage that had extraordinary high margins, which we did not have in this year. But as I've mentioned in previous calls, the exact specific margins of this area have been a little bit volatile, but on a very high level for quite some time. And there is, of course, always the effect of product mix effects that can come into play. We are very happy with the development in the second quarter of 2022. Going forward to our third business area, system solutions, there's also very strong growth in sales and profits. Once again, driven by strong organic development in many of our companies, complementing with acquisitions that's contributing positively. and most companies in this segment had a very solid quarter and this growth also translates into the strong margins and I think in this area we can also conclude that the ongoing work of adapting and managing the higher cost levels have been done in a very good way and we've achieved good results here and with that we can go further down into page number five And just briefly comment on the financial position on LIFCO. We are ending the quarter with a net debt to EBITDA of 1.9 times, which is slightly above the level from one year ago. And the interest bearing net debt level compared to EBITDA is 1.3 times, also slightly above the level of 1.2 times one year ago. And we have still this strong balance sheet position, despite the fact that we've been very active in acquiring companies during the last 12 months period. With the current debt levels, we have a strong financial capacity to continue acquiring companies when we find the right ones, the ones we want to own for a very, very long time and at reasonable valuation levels. I also already here would like to highlight that for LIFCO, it's always more important to buy the right companies. rather than maximizing acquisition growth in any given quarter. And the reason, obviously, is that we're going to own the companies forever, so we'd better find the right one. Going to page number six, just to give the long-term history and the perspective on where we are, we've been having a strong development for many, many years, and this development has continued in the first six months of 2022. And this has been for many years a combination of organic development and acquisition growth. And we think that's very important. And we are doing this while still paying dividend every year and not so far asking our shareholders for any money. We are capital infusions. And this is one that we aim to continue for years to come. And you can also, on the bottom of this page, follow the margin development, which has for many years been positive. In the last 12 months, it's still slightly below the 2021 numbers. But as you can see in this report, we are working very hard on getting back strong margins in EFCO, despite inflation problems in the short term and also the extremely low There's a marketing cost that we had following the pandemic. If we can then move all the way down to page number 17. Just looking at the same type of graphs, but for different areas. And here we can then see the effect of extraordinary high growth following the pandemic. in 2021 and this is now slightly going down in the last 12 months, but still we are on a level that is quite comparable as 2019 numbers. Of course, obviously higher sales, but the movement is on that level. So this will give that perspective. And incidentally, if we take a very long perspective, just to remind everyone, The reason the margins are on a totally different level than 5-10 years ago is that Livko has, over the years, increased our dental business in own manufacturing and in prosthetics and software. Whereas in 10 years ago, we were mainly a distribution company. That, by definition, has slightly lower margin potential. And then going further, we can go to page number 19, looking at the demolition tools area. which is an area where we actually have experienced the highest organic growth in live growth over a very long period. And this is an area where we are in very interesting sub-segments, where the potential for organic growth development is high, and we have been taking very good care of that for many years. In this area, the development and also both in terms of sales and margin can be more volatile, uh it doesn't come in a straight line but but over a long period of time uh we're achieving a very good result also in this area and also the last one 12 month numbers are strong in this area and then if we go to the same type of picture in page number 21 looking in our system solution business area And this is the area that, when we went public in 2014, was a collection of companies that had, relative to today, had slightly lower margin potential than we stand today. And since 2014, we've been adding a lot of very strong, highly differentiated companies with strong market positions. Many of them actually, or quite a few of them, are global market leaders in the niches. And that has generated, in combination with a lot of great organic development, both in sales and in margin, to this area that today has about 20% EBIT margin. And I often also highlight here to new investors in IFCO that the companies we own today, who will own them Let's say in 2014, the margin would have been substantially much higher than the reported numbers of the portfolio we owned back then. So we have totally changed the type of companies we own in this area through our acquisition work over the last eight years. This is all I wanted to share in this presentation, and now I'd like to open up for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you were using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Your first question comes from Carl Ragnestam from Nordia. Please go ahead.

Good morning, it's Carl here from Nordea. Firstly, as you said, you are building quite a bit of working capital in this quarter as well. Could you perhaps comment which segments this is primarily related to?

Well, Carl, it is preliminary related to, or primarily, I should say, not preliminary, it's primarily related to to the initial tools and parts of system solutions and the reason for this is very simple you know when you have a product with many different components being, you know, assembled in a difficult entity, and you have a very difficult supply chain situation for quite some time, the need to increase the safety stock is there, if you have at the same time a strong and light demand. So we've been basically forced to attract this in order to fulfill deliveries. And I think, as you can see from the numbers, thanks to this strategy, we've been able to deliver quite well to the last few quarters. So it's been a sort of uh obvious strategy to take in this in this path i think we're reaching a point now where we are you know of course uh carefully evaluating how how how long will the supply chain issues remain and and will it even up and but we're still in this sort of evaluation phase around that uh but but this is basically the main areas but also to be fair also even in dental just these supply changes so it's also sound effects there so i think it's pretty much across the board uh but but the major major effects has been in the integration tools and solutions here.

Is it too soon to say or to tell whether we should expect this pattern in H2 as well?

I think at some point when the inventory levels and the safety stock has now been increasing, at some point hopefully we will get to a situation where we can feel more comfortable about our delivery capacity. Exactly when that point will be achieved. I'm not 100% sure, but we are in the discussion phase internally around this quite frequently in the last, let's say, three months. We have to prepare ourselves for being ready with this and getting back to normal, or at least not increasing levels more. But we're not guiding on this specifically, but we are in the mindset of looking at it very carefully.

In Dentel you had 280 base points margin contraction. You mentioned effects from the prosthetics disruptions in Q1 lingering in Q2 as well. Could you quantify these effects in Q2 and should we expect these effects to ease going forward gradually or is it something that will take some time to win back your German dental clients again?

Well, I think it's difficult to give clarity on it because what we saw was that, first of all, it's not a major effect in terms of sales, but given that it's a highly profitable part of our business, it has the impact on this business area. So that's maybe my first comment. But we are seeing, we hope that, you know, we feel that in the later part of this quarter, it's getting slightly better. We're working very actively with our customers, and as longer the time passes by, since we had these disruptions in deliveries, it should become hopefully easier, but we don't really have a clear view on exactly when things will be back to normal in December. But gradually better, hopefully, yeah. We're talking about a slightly... lower market demand due to this sort of risk that dentists have experienced. Our living capacity has been very good since mid-March, basically, but we are still working on getting the comfort back. Once again, we also have this uncertainty that what will happen in China regarding the COVID reaction to COVID-19, so it's still an unknown in that respect. But we hope that time will be our friend in this matter.

Okay, very good. And also on demolition, too, it's obviously quite strong acute numbers. But I'm more interested in getting to know more about whether you have seen any changes in demand during the quarter. And also if, I mean, if you have seen any sort of slowdown in demand, I mean, is there maybe no news that that The outlook for the European construction market is a bit so-so, given the inflation, and we read news about postponed projects. Is it something that you see currently, or too early, maybe?

Well, we haven't seen, as you can see in our numbers, we haven't seen any effect. Of course, there's an order book effect that we don't communicate, and there's also in order books, as I mentioned in many of these previous calls, There's different types of companies and different types of order book situations, but if you look at what we actually got in in orders, it's still on a good level, maybe not as extreme as it was in certain parts of the last 18 months. But on the other hand, if you compare to what we get in and what we leave out, we're still feeling quite comfortable in the situation so far.

Okay, very good. And the final one from my side is a bit on M&A. um it's you're lagging a bit uh last year's level it was of course a very good level last year is it something we we is it more difficult than a market currently or how should we look at it well i think you know when it comes to mna there is there is of course uh um there's always this volatility involved with this and and some quarters we have we have more outcome than others the actual underlying work

is constant and increasing in Elifco and the number of companies we look for. There are still a lot of interesting companies for sale, but there are many things that have to be right for us to feel fully comfortable making an acquisition and also to get the type of valuation that we feel comfortable around. I don't think it's so much different than a year ago in that sense. So there is this normal volatility effect that's coming into play. And as you know, as I mentioned many times before, if we don't feel fully comfortable, we have a tendency of not buying the company because we're going to own the company forever, so they better be really good.

Sounds great. Okay, all for me. Thank you.

Thank you. The next question comes from Carl Bockvist from ADG. Please go ahead.

Thank you and good morning. Most of my questions have been answered, but just if it's possible to mention whether or not you felt that any particular business or businesses really stood out in the quarter. It seems to be strong growth in contract manufacturing, environmental technology and service and distribution, for example.

No, I think it's been the same picture for quite some time now. It's pretty strong across the board. And it's not a difference between different types of businesses and no major difference between geographies either. In the geographies, we operate, I should mention, which is mainly in Europe or Western Europe, as you mentioned, partly US as well. But the main exposure is to European markets. So no real big differences that is worthwhile mentioning from our perspective.

Understood. And have you received or heard any indications from your subsidiaries or group companies that they felt any kind of weakening the bond towards the end of the quarter?

Well, I think there's been a few companies that there's always some volatility. But when I look at the aggregated numbers, it's... As I mentioned in the previous question, there was a period, maybe in six, 12 months period here, there was some months that ordering intake was absolutely astonishing. I think in the Laker Party's quarter, it was strong, but not crazy strong, if you like. The visibility we have now, we feel that the markets are holding up well. For the most part, maybe there was a period in the past where we were more astonished about some of the logistics coming on. That's maybe what I can comment on.

Okay. That's all for me. Thank you.

Thank you. Again, if you have a question, please press star, then one. Your next question is from Riccardo Romiaty from One Investments. Please go ahead.

Hi, good morning. Thanks for taking my question. Maybe just coming back on pricing, to make sure I fully understand the pricing trajectory. Do you think that you have achieved all the price increases that you need to fully restore the margin at this point, or do you see further price increases coming in H2? And the second question would be on these comments about the orders. Could you say whether the book-to-bill in Q2 was still above 1? or this not as strong a trend that you commented? I mean, if you can maybe elaborate a bit more on that, please. Thanks.

Yes, when it comes to pricing, it's an ongoing process. If the question is, will there be further price increases in the second half of this year? Yes, there will be further price increases in the second half of this year. And this is, you know, many companies, this may be the fifth or fifth pricing in the last 18 months that it's been implemented. And you have to keep in mind, it's not only about raw material anymore, it's also about the generalization that's coming into this. Obviously, pricing is still a very important topic for us. And it's a normal part of the daily work of our operating companies.

Okay, so it's an ongoing exercise, and you're seeing inflation throughout the businesses, so you're still, let's say, catching up.

Yeah, I mean, the inflation is obviously here right now, if you look around the society. So, obviously, pricing has to follow that. And exactly, with the individual company, there's of course differentiation, there's that type of cost expression and all that. expect the pricing to be continuous, which it always is, but even more so in this type of environment. It's an ongoing thing that's basically being evaluated in every single subsidiary all the time. And I think I'm very happy to say in this course that we are getting better in terms of modeling than we were a quarter ago, so we are going in the right direction. But still, in some companies, the longer order books and all this, it makes it difficult to be extremely quick in adapting to these things. But overall, we feel quite comfortable about it. And then the books are built. If we don't communicate ordering intake, I can't really communicate that, but But I think I just refer back to my answer to the previous question. We had periods over the last 18 months where the order intake was on an astonishing high level, which we could barely believe. I think in this quarter, the order intake was strong and solid for most of our companies. And it was, you know, it was not far off from the revenue that we have recognized. So that's basically where we stand right now. but we don't communicate the exact orders over the court of accordance.