Lifco AB (publ)

Thank you very much and good morning and welcome to the LIFCO Q3 conference call of 2022. We can start directly by going into page number two in our investor presentation. And on this slide, we present the data for the quarter and for the last 12-month period. And we can conclude that the third quarter of 2022 was another very successful quarter for LIFCO. The trend with increasing sales continued, and also the margins came back to a stronger level for many other companies. And for the group as a whole, sales grew with about 21% in the quarter, of which 10% was related to organic growth. Acquisitions contributed with about 7%, and then we also had some help from exchange rates that helped us with 6% positivity. I'd also like to highlight that we had a small negative impact on the sales from a divestment that we made in the second quarter of the company Ecotech, which impacted sales negatively with a bit less than 3%. Going further down and looking at the profit levels, the strong growth in sales translated into very strong development in Evita. where we had a growth of 28% in the quarter and also the EBITDA margin increased to 22% compared to 20.7% in the similar quarter in 2021. And here I could comment that general inflation and of course specific price increases from our suppliers have been a challenging situation for us for quite some time and not only for us, for many companies in the world. But we have now, after a period of time, can we conclude that the vast majority of our companies are adjusting very well to the increased cost levels and basically been able to pass this through price increases. And here I can already mention also that the LIFCO portfolio companies are typically in very strong niche positions with high value propositions to our customers. And that helps us in this period of time because it means that our products are very valued by the customers and we have a pricing power position. And the issue that we have experienced in the last, let's say, 12-month period has been more related to timing effects of increasing our prices rather than the actual ability to do that. And I think now in this quarter we can show that this works very well. Going further down on page number two, looking at the cash flow, and there we are still a bit lower than normal, I would say, and also lower than the Q3 in 2021. And this has to do with the same explanation that we had now for a few quarters, that the increase in inventory levels has been necessary for our companies to basically create some safety stock to compensate for the difficulties that we have experienced in the supply chain with unstable deliveries from our suppliers because of all the supply chain constraints. And you're all very aware of this situation. And many of our companies are now in a mood where they're trying to gradually reverse these effects step by step. But this also takes some time because the supply chain issues have led to a situation where some of the goods that we receive now have been ordered quite early in the year. It takes some time to reverse this. And also here in the cash flow situation, it's worth reflecting on that we still have very strong demand and strong sales growth. So it's not something that will dramatically change into low inventories. But also here, despite the higher inventory levels and the increase of that during the last 12 months, we still managed to generate a very healthy cash flow. But of course, we want to improve on this dimension going forward. Just to round off page number two, we can also mention that for the nine-month period, accumulated numbers for 2022, sales has grown with 24%, of which 12% is organic growth. And then EBITDA has also grown with the same percentage number, 24%, for the whole nine-month period. So a very strong first nine months in 2022 for LIVCO. And then we can move over to page number three, where we highlight the different business areas. And going directly into the dental area, we had a slightly weaker quarter here compared to the same period last year. And the trend from the second quarter basically continues. And within dental, we are still suffering a bit from the production issues that we had in China early in the year due to the COVID-19 restrictions. This actually took place in the first quarter, and the production issue itself has been working, has been sold for quite some time now. and but basically we still suffer from lower uh lower demand by dentists uh basically seem to favor more locally produced uh dental procedures uh and we think that time uh will be helping us here and we're working very hard to to uh to get the customer uh comfort back uh and that deliveries actually works and they do work very well right now uh but that's something that is an ongoing uh work for our companies here, getting that trend reversed, basically. And the reason we bring this up is that it's not a very big part of NIFCO, but it's a highly possible part of dental groups when we have lower sales in the dental prosthesis business. It affects also profits and margins quite quickly. Going further to the next area, demolition tools, we have continued strong market conditions now, and we have that for quite some time. And also the third quarter, 2022, was a very good quarter, with sales growth of 33%, thanks to a combination of strong organic development and acquisitions. And then EBITDA grew 31%, and also a very strong EBITDA margin of 26%. And the reason why it's actually slightly lower than the previous year is more related to a mixed effect. that last year we saw a little bit more of the high margin or even more high margin products compared to this year where we have high growth of the more just high margin products. So that's basically a product mix effect. And then going into the third area, system solutions, also I would say an excellent quarter with sales growth of 13%, driven by also their combination of organic growth and acquisitions, and then profit grew even more by 47%. leading to a very strong margin. And also here, it's a combination of very strong organic development in our companies, but also, of course, acquisitions that are helping the margin development. And here we can also conclude that ongoing work on managing the high cost levels with price compensation to customers have resulted in very good results. And then we can move over to page number five and look a little bit about our NetDebt situation. And if you take the longer, well, actually starting about the situation right now, LIFCO ended the quarter with a net debt to EBITDA of 1.9 times, which is slightly above the level for one year ago. And the interest-bearing net debt to EBITDA is now at 1.3, which is also done slightly higher than the 1.1 we had one year ago. But here it's worth mentioning that LIFCO has been very active in acquiring companies in the last 12-month period. And also we can look at the graph on the left-hand side to also look at that Lyft has kept the debt ratios fairly constant over quite a long time now since the IPO, while being able to grow our profits both organically and through acquisitions quite substantially during this period over the last seven, eight years. And also worth highlighting that Lyft has paid dividend every year. And with the current debt level situation, LIFCO has a very strong financial capacity to continue to acquire companies if we find the right ones. And I would like to remind everyone that we try to buy very good companies at very reasonable valuations. So it's always more important for us to buy the right companies rather than maximizing acquisitions at any given point of time. And this work is continuing and ongoing as usual within LIFCO. On page number six, I'd just like to round the whole presentation off by looking at our very long-term history. And here we track the long-term development of our profits. And our target is obviously to every year improve our profits. And for the very most part, we have succeeded with this through a combination of organic development and then complemented that with acquisitions. We have been doing that once again while still paying a dividend every year, and we have never requested any money from our shareholders via capital infusions to Lithgow. And after nine months in 2022, we can then conclude that we are now on a record high level. And it's also very pleasing to see that the margin now on the bottom of this slide is back on track, actually on par with 2021. And also, as you can see from the last quarter, a very strong momentum. And I think this is the last point I'd like to make, and instead I'd like to open up for any questions.

Thank you. Ladies and gentlemen, if you do wish 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 to cancel. And our first question comes from the line of Carl Ragnarstam from Nordea. Please go ahead. Your line is now open.

Good morning. It's Carl here from Nordea. Just coming back here on the dental margin. So is it fair to assume that the full year-over-year decline in the margin is sort of driven by the lower prosthetics volumes, or is it anything else we should sort of consider in the margin drop? Maybe it could be raw material, headwinds, et cetera.

I think the majority of the effect is related to that. Then there are, and if you drill really deep down, there are, of course, some companies with some longer, for example, public tenders that have some lag effects on price development that makes a more minor impact on this. But the major explanation to the quarterly performance comes from the continued lag from the business of prosthetics, but we're still working very hard to get the normal situation back.

And also coming back to the prosthetics business, have you sort of started to win back some practitioners or will it, obviously you said it will take time, how will you do it? Is it one by one or and what's the response so far when you sort of try to come back?

Now I think it's one by one situation in the south that Typically, a dentist would have, in any given situation, they would use us as an alternative and they would have a local laboratory basically next door as they have the option. And here we've seen a little bit of shift there. It's not that many customers just stop buying, but on the margin, they shift a little bit more volume to the local situation because of the uncertainty that they experienced after the first quarter. We are working very hard on this, and we don't know exactly when it will be coming back to normal, but of course we expect that time will be our friend in this market decision.

Okay, very good. And also on system solutions, I think the margins there stood out quite a bit in a historical sense as well. You mentioned it's a combination of a little bit of everything. Could you perhaps try to be more, if possible, be more specific? What's M&A driven? and what's organically driven in this, and also if it's any mixed effects.

Well, I think the most important reflection on the system solution area is that most companies are doing really well, basically. And they're doing really well both in sense and also really well in handling the margins in this period of time. So that's the starting point. And then we are also helped, which I tried to highlight here in the presentation, that It also helps that, as we have done now, not every year, but for most of the time, we actually have also helped that the companies that were required have been a little bit higher in margin than the average, but it also helps it. So it's really across the board strong performance in the systems business area. So when we go through the list of companies, it's many companies that are doing very strong performance.

And in demolition tools, the market, at least looking at the quarter, is seemingly holding up quite well, right? I mean, looking at construction-related indicators, it looks like you and your competitors might face a tougher situation ahead. I mean, I wonder, have you seen any signs so far of a weakening market in sales orders or quotations? And could also perhaps remind us how much of the segment that is related to sort of new production of either commercial or RECI?

Well, first of all, we have a lot of companies in this business area. But if you want to generalize, I would say that we are mainly related to infrastructure and commercial construction, both, of course, renovations and new commercial and RECI. but not, I would say, to less degree to the residential side, to take the whole business area. So that's the starting point of the exposure. But when it comes to the indicators that you're trying to find out about, we can only say that same picture as we had three months ago in our last earnings call, where basically the ordering income and activity is still on a healthy, good level, is not as crazy as it was maybe 12 months ago when orders were coming in month by month in an extraordinary way. And the order book was building up, I would say, too quickly back then due to the situation. So it's still running well, but of course it's a little bit more, I would say, normalized. And also maybe a little bit more, I think at this point of time, a little more different also by... by different countries and sectors, but still on a solid level. That's all we can see right now.

So it sounds like a positive organic order intake in demolition then, or is that correct?

Yeah, but we don't present order intake for various reasons. One is that it's something that will require a lot of, in such a diverse group like Lifco, what is an order and how do you value an order? We don't publish that. But we still feel that the third quarter was on a healthy level.

And as you mentioned, it varies between geographies. Is it possible to give any flavor on where you see sort of a weaker market and where you see perhaps a better market?

But it's more random than that, I would say. If we saw that very clearly, we would have written something about that in our report. So it's more random and it's a little bit more one month here, one month there, the other one. overall, we have felt over this year that the U.S. has been stronger to some extent. So that's something that you may be, but that's not talking about a longer period, not specifically for the quarter year, but over the time period. But also in Europe, where we have a lot of business, it's still holding up or it's on a solid level.

And you also mentioned that sort of a normalization of inventory levels may take some time. Is it possible to give any guidance on that when we should expect you to sort of, when inventory levels should come down? Is it in Q4 or is it too early, rather next year?

The reason why it's difficult to give an indication on that is that still our companies are struggling with the supply chain. Still our companies, many of our companies are having a very high demand situation. They have order orders that should be delivered. So they are working on this, but they have to maintain a balance between making sure they can deliver and also getting the inventories slightly down to a more normalized level. If that will happen in October or December or in February, it's difficult to say on the whole. But we are working on it. It's a theme that has been in place for quite a few months now. But it's not happening as dramatically as maybe you would have hoped in terms of normal inventory reduction levels. So We have to maintain this in a balanced way. And exactly what month will be the major effect of this. It's still not 100% clear because it's so many different companies, so many different situations. Some companies are actually still building up some safety stocks for certain products where they have components where they still have huge problems. So it's not the one answer on this. But I think the key message is that we are working on it and we would like to see that gradually go down.

Okay, very good.

Thank you.

Thank you. And just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad. Our next question comes from the line of Carl Bokvist from ABG Sunwell Polyo. Please go ahead. Your line is now open.

Thank you and good morning. So my first question is just on what you mentioned there, Per, with mix in demolition and tools. I was just wondering if it's possible for you to say if it's, you know, overall a slight negative mix effect, you know, from various reasons across a number of businesses or if it's a business mix within demolition and tools.

It's a business mix. So we have certain certain companies that have, you know, even higher margin than the average. And then we have companies that have very good margins, but slightly lower than the average. And if the companies with slightly lower than the average margin grows even stronger in the quarter in terms of sales, then you have that mixed effect. And it's a relatively small effect. So, you know, we should not, you know, over, maybe make too much noise about that. But That is the explanation if you compare the distance between last year, which was also a very strong quarter in Q3 2021.

Understood. And just a bit of a technical one in systems solutions. With divestment of Hecotec, should we assume that perhaps if Hecotec would have been part of systems solutions, it might have been a seasonally stronger Q3 and Q4 for them? I'm just thinking about... the other margin effect from divesting that particular business.

Sorry, can you repeat that question? I didn't really understand.

Sorry, let me just clarify directly. The divestment of HecoTech, do you think that has meaningfully also supported margins positively in systems?

It has supported margins meaningfully. I wouldn't maybe say that, but it has supported margins. So it was lower than the average.

All right. All right. Thank you. Understood. Then just most demand questions have already been asked. So if I may then just perhaps stick a bit to some more technical aspects. If I look at the year-to-date consideration you've paid for acquisitions, it seems like the consideration paid is a bit higher than perhaps last year compared to the earnings that have entered the group. So I'm just a bit curious if you think there's any meaningful deviation to the multiples you've paid so far or if the Q4 for these businesses you acquired this year will be greater so the multiple still will end up in kind of normal multiple ranges.

No, I don't think it's significantly different than previous years. I think maybe just to highlight that the outcome of the 2021 numbers were extremely good in terms of multiples paid because the extreme development on the first year's earnings in that year. We will see where we end up. We still don't have the full year earnings of the companies we acquired this year. But in the note that you're probably looking into, we only represent so far up to nine months. So you're looking one quarter on the earnings. data there. So it's not significantly different. And, you know, we've been, you know, every deal is different, every company has different situations, so it's, of course, different multiples for all companies we require. And then, of course, the mix can be a little bit different between years, depending on what we buy. But I think, in general, everything has been, up until now, valid for the last five years in how we value companies and so forth.

All right, all right, fully understood. And then my final question, that just relates to outside of the prosthetics business in dental. Is it, you know, a stable performance there or anything that should be worth highlighting?

No, I mean, it's not, as you can imagine, it's not, you know, extraordinary good performance because then you would have maybe have been compensating this, but it's it's quite business as usual across the board and nothing that we have been you know decided to lift up specifically in this then of course in every you know there's always some variation between quarters and and between different companies and there's always when you drill down to many small companies there's always some effects here there but there's not something that is you know here the only thing that i did mention here in the previous question is that Maybe there is some effect in companies in the Nordics, but we have some tenders that we're struggling getting the prices through as quickly as we would like because of the contracts that we work on. This is not an extremely very big part of our business, but in some companies in the Nordics, it has some impact. So that's maybe the other thing that we could mention on a high level.

All right. Understood. That's all for me. Thank you. Thank you.

Thank you. And as there are no further questions at this time, I will hand the word back to the speaker for any final comments. Please go ahead.

Well, thank you very much for listening, and we will look forward to making another call after the fourth quarter. Thank you.