Lifco AB (publ)

Thank you.

Good morning everyone and welcome to our Q4 conference call. We can directly move into page number two in our investor presentation and just on a very high level look at the group's financial performance where we had a net sales growth in the quarter of 7%. We had an EBITDA growth of 13% obviously leading to better margins. If we then look at the full year numbers, we grow sales with 13.5% and EBITDA with 21.5%. If we look at the quarter specifically, we had an organic decline in sales of around 5%. We will come back a little bit later to the reasons behind that. We had a positive effect from foreign exchange of 2.5% and acquisition contributed with 10% in the quarter. If we look at the full year numbers, the organic sales development was flat and we had a positive effect from for exchange of four percent acquisition helped with ten percent and we had a slight negative effect from a divestment that took place in q1 2022 or minus one percent i can also already here just mention we publish every on a yearly basis the organic beta development and the beta development organically was plus six percent for the year which is basically in line with our strategy. It's always focusing on the profitability and profits in our companies. So despite a flat year in organic sales, we are still developing our profits with 6% organically. Just a short comment on the cash flow. We have strong cash flow in the Q4 2022, also a good cash flow in this quarter. On the full year basis, we have a big improvement of 45%, mainly related to weaker cash flow in 2022 due to the material supply situation and the inventory situation. That is now gradually reversing in the right direction for us. And with that, we can go into page number three and look a little bit more specifically on the different business areas. If we start with dental, it's both a solid quarter and a solid year for dental. I would say back to normality after a period of time where we had COVID and mixed effects happening due to external factors that are now being stabilized for us. So both the quarter is developing strongly as we want it to do, and the same for the full year numbers. Basically a combination of organic growth, helped by acquisition, and also we have foreign exchange contribution in this business area. If we then go further down to demolition of tools, we have a decline in sales in the quarter, and that is now basically the third quarter in a row with slight negative organic development. and we basically are facing weaker market conditions. We do have in Q4 some positive effects from what we call special orders that have slightly higher profitability than the normal orders, so that's helping us in the quarter, which also helps the margin development in the quarter. But overall, we can say now also on the more high-level perspective that we had a period of time with very strong organic growth in this business area, in 21, 22, and in the early part of 23, and now we are now seeing more of a weaker market conditions than we are currently in. But despite that, we end the year with 16% growth in profits, partly thanks to strong focus on profitability organically, but also helped by acquisitions. And in the third area, fiscal solutions, we have a very strong full-year development. uh where basically all all areas organic development was positive acquisition helped and also foreign exchange in the quarter specifically we have more of a i would say more mixed market conditions we have many companies doing very well we have a few and some companies having a little bit more challenging market conditions due to the business cycle that they're currently entering into also here it's important to highlight that this is an area we also have very high organic growth in 21 and 22 So with that, we can go into page number four. And this is now a slide that we normally only look at year end. So now we have summarized another year in LIFCO. We follow the development of LIFCO's growth in profits since the IPO. And you can see that 23 was another very strong year for us, 22% EBITDA growth, constituting of 12% coming from acquisitions. So that's basically in line with our average growth of this period since the IPO. We have been growing our company profit-wise from acquisition with average 12%, and we do the same in 23. When it comes to organic development, we are in 23, growing 6%, which is slightly lower than the average. But we're also coming out of a period with extraordinary high organic growth in 21 and 22, as you can see in this slide, where we grew 21% in 21 and 11% in 22. This year, we only grow 6%. And we had also, if you look at the very left column here on this page, we can then conclude that the average of LIVCO has then been 12% acquisition growth, 8% on average, every year, 8% organic growth on average. And then we have been helped through the week Swedish krona, you can say, during this long time period. Yes.

And with that, we can go to page number five and continue looking at some long-term development trends. We have been growing with CAGR, EBITDA with 22% since the IPO. We have been growing the earnings per share with 19%. We have basically reduced our net debt to EBITDA, which means that we had very strong cash flow generation during this period, and so we grow our interest rate and net up with 17%.

The operating cash flow has, on average, been growing with 21%, and once again, can remind everyone we had some problems with cash flow during the raw material crisis, supply chain crisis in 21, 22, and now 23, we are back to normality again, which is very pleasing to see. We've been growing our dividend with 70%. I can also here just mention that the recommended dividend from the board to the shareholder meeting is a dividend of 2 krona and 10 euro for a 2024 dividend, which you would then be decided in annual meeting in April. On the bottom part of this page there's a lot of data here but we also put in the data for acquisition spend and as you can see here we don't put a CAGR on that because that's a more it should be a more volatile number it could go a little bit up and down between years but during the last year we spent We actually spent 3.7 million and then the enterprise value of the acquired companies that we acquired were 4.3. The difference there is obviously that we have some options agreement for future payments that will come in the next 5 to 15 years on these companies. And then we have the estimated impact on EBITDA of the acquired entities of 659 million. Obviously not everything coming in in 23, some of course coming in 24, which you can see further information in our note in the annual report about acquisitions. And then we can quickly go into page number six. And this is another way of looking at cash flow. We have now broken out the cash flow, the free cash flow per share, where we actually also deduct capex. And the only thing that remains after that is then before dividend acquisition. And if we look at this from the title of the IPO, The average growth of LIFCO operational cash flow after CapEx has been 26%. So that's also a solid number. And you can see here also 23 was a good comeback here in cash flow. And if you look down at page number seven, when we are looking at our net debt and financial position, We have, during the last three years, been on a very stable level, basically meaning that we have used our cash flow generation and standard on acquisition and paying our annual dividend. So we're on a stable level. We sit at 1.7 net debt to EBITDA, including all the IFRS 16 leasing items and also the future option agreements. If you look at purely the interest-bearing net debt, we are at 1.1 times EBITDA. once again we can conclude that there is plenty of financial rooms to continue looking for excellent acquisition when opportunities arise which is a constant work within LIFCO trying to find these great companies to buy and then on page number eight it was again an even longer term perspective on LIFCO and we have been growing our earnings both from Very strong organic development in profits and also helped by acquisitions during the last decade.

As you can see also at the bottom of this page, we have been growing our margin every year since the IPO. This is not a coincidence. We strive for always improving our margin in our existing companies. our appetite for very high-quality companies has basically increased. However, I would like to also here put a statement out that we are not necessarily in acquisitions because we always have a higher margin on acquisitions. Now we're on a level where we think there's companies that could be good enough for lift goals with slightly lower margins so the outcome here can be quite could be a little bit different in the next coming year however we have a preference for very high quality companies so we still strive for that and then we can look on page number nine we have you know very solid numbers both in including the Goodwill at 22.6%. And also now, when we see a little bit release in our working capital, we are now getting our numbers back up when it comes to return on capital, excluding Goodwill, sitting at 139% at year-end, which is also an explanation of why we have been able to constantly able to generate very strong cash flow, also in years with very strong organic growth, we have been able to do normal high cash flow generation.

And then we can move all the way down to page number 19 and just briefly look at the long-term development of dental. As many of you know, we had some turbulence in the Delta area for the first time in many, many years during the COVID and the years following COVID. And now in 2023, we have more of a normal year, which is pleasing to see. So the profit growth is back, and also the margin is coming back to what we think is more normal levels. And then we can look at a similar graph on page 21, where we have the demolition tools area. which has been, once again, the area with the highest organic growth historically. It's also the area where we have the highest cyclical exposure. As we mentioned earlier on in this call, we are now facing some slightly weaker market conditions, which is impacting the organic development on sales in this call. But we have also a very strong group of companies that are able to generate good profits over time with some cyclicality, of course, between quarters in that, but still sitting at a very good level in this area. Phase 23, we ordered, I'm just looking at the same graph for system solutions. And this is the area where we had the biggest change of our business since the IPO. If you look back to 2013, it was a fairly low margin business, partly because of operational issues that were fixed over the years. So many of the companies we had back then, they are doing much better organically right now. And that's thanks to great management in all these subsidiaries doing excellent work. And then we have, as you also know, been constantly looking for better margin businesses with high differentiating factors. And the portfolio we have today, if you were to do a pro forma back to 2030, 2040, would be way, way much higher margin than we had back then. So there's a portfolio that has a high margin generation also historically pro forma. And with that, we can move back all the way to page 32. And just a little bit about the acquisition.

We had a solid and good acquisition here. We left a little bit at the EBITDA generation before, but we actually had 18 transactions made during last year. And we found a great group of companies in different areas, just like we want to do in Lisko, for, once again, reasonable valuations. and very strong margin characteristics so we are happy about that and we of course continue to work very hard doing acquisitions but as I always mention in this course the timing of acquisition is always unpredictable and we only buy companies where we feel we have a good company for a reasonable valuation that we would like to own for every let's go, and therefore, the timing should be a bit volatile when it comes to acquisition. But the activity level remains very high, and of course, increases every year. So that was my final comment. So with that, I can open up for any questions.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Carl Ragnastam from Nordea. Please go ahead. Carl Ragnastam, Nordea. Your line is now unmuted. Please go ahead. The next question comes from Zeno Engdalen Ritchie from Handelsbanken. Please go ahead.

Yes, good morning, and thanks for taking our questions. Just to start off in demolition and tools, could you give some more background to the special orders and their impact on EBITDA and margins?

Yes, we don't give specifically any information around that, but we can say it was big enough to make a mention. We have these orders from time to time, And sometimes they are more in the immaterial level. In this area, in this quarter, it was a little bit higher than normal. And therefore, we mentioned that. But it is not, you know, super significant, but it has some impact on this. So you should be, it's more of a highlight for reminder of next year that the margins held up maybe a little bit better than it would have been otherwise without this order. So this, I mean, if this order would have been postponed one quarter, you've had that effect in this quarter instead, so. But we're not talking about enormous amount of effect, but normally the range of, let's say, it can be ranging from 2, 3, 4 million euro profit impact when we start coming to these type of things.

Okay. And sticking to demolition and tools, could you talk just in general about the mix? And I guess that it's more of the low margin product that has declined and also maybe how you view the environment ahead in terms of product mix.

Yes. For demolition tools specifically, we have seen it's basically a reversal effect where we saw the highest, strongest organic growth was in the areas where we have the indirect sales channel. So what we're selling through distributors and that's mainly related

or OEM, I should say, where we had a combination of very strong markets and also inventory build-ups in our customer level. And now we see in the last, I would say, three quarters now, a reversal effect, both due to market conditions and then partly due to probably the stocking effect or de-stocking effects of this. So this is mainly related to our attachment business, which goes into truck cranes to excavators and to forest machinery, basically. This is where we saw the strongest organic growth in 21-22.

and early 23, and here is also where we see the sort of reversal effect now in that area.

And here, the next question would be, so what's the exposure there? It's, you know, partly it's construction, but it's also infrastructure, material handling, and recycling and other areas in that where we're exposed. And, of course, forestry equipment. Okay, thanks. And just lastly, ending on dental, which is performing pretty well, how do you see the underlying demand for 2024? Well, first of all, we don't, you know, we're not better than anyone else in four years. market. But in general, I can say that indental is typically a very low growth stable market. That's the general statement. So we talked about low growth historically in this area. We don't at this point see any other situation in that. Okay, thanks. I'll get back to the second line.

Thank you.

The next question comes from Carl Bockvist from ABG Sundal Collier. Please go ahead.

Thank you. Good morning. My first one is on system solutions. You mentioned that some areas saw a bit of weakening in their markets, but in the report, when you go through the segments, you say that most showed a good sales trend. I was just curious if it's possible to say which markets or anything like that where you see a bit of a weaker market condition.

That's a good reflection, Carl. We have large number of companies and the clustering into the division areas is you know sometimes helpful and it is in this quarter is actually maybe not so helpful because there's a lot of things happening within each subdivision so there are specific companies that are growing a lot and their specific companies are declining a bit so so the aggregated picture here is maybe not so easy to say and we will not go into individual companies in this area it's it's not something we historically have done. But basically, in a higher level, you can say maybe it's not the most relevant part to look at subdivisions. Maybe it's better to look at the companies that are more CapEx-oriented to the end customer or having a little bit more difficult time in general, just like we saw in the aftermath of COVID in 2020. So it's the same effect. The higher interest rates are impacting some decisions. And also products that are more I would say indirect. It could be, for example, within environment technology or other areas where you are able to a little bit wait and buy something later, whereas the companies will have more input material into a normal production chain maybe or holding up quite well in this area. So it's a lot of different things if you go further down. So it's difficult to give a sort of general statement, but I think that's the type of economical environment we're in.

We have a lot of, you know, companies also being supported by, or some companies being supported by, but positive, you know, trends or general market trends that are growing very strongly. Whereas others might still be having the same good exposure but having more problems with interest rates and capex decisions and so forth. That's more explanation. And I think that in this area it's very diversified. Keep in mind it's almost a lift going itself you can say.

Understood. And then on dental I believe the comment you made about, for example, the Chinese headwinds that were resolved quite some time ago, and yet dental profitability still keeps on going up.

Is there anything in particular here worth highlighting just how we should think about dental insurance?

in 2024, or it's just stable volumes and you continue to do as you've always done in terms of pricing and so on?

Yeah, I think it's pretty much business as usual, but the exact margin and the exact organic beta growth can, of course, vary between quarters. It's not... always super stable. You have the calendar effects and different things coming into play. The only thing that we maybe could say that if you're referring to the prosthetics business suffering in 2022 after the China lockdown earlier on, they are fully back and have a very good momentum right now. It's actually They're actually growing also a little bit from previous levels. But it's not so significant. And these type of trends are not. So in general, I would look at it as a stable low growth area if we look back the last 10 years. So we don't see much difference. Of course, any given quarter, things can be a little bit more or less.

understood and then on M&A which you know we talked about this before but full year kind of aggregate margin of what you've acquired at around 30% very impressive but is there any segment or division between dental demolition systems in particular where you feel that let's say some more of the high margin companies acquired this year have been grouped into just how we should consider the M&A effect going into 2024?

That's a good question. I have to actually just be careful here so I don't jump too quickly into conclusions. But I would say my immediate reaction is that we had a very strong year if you look at that perspective pretty much across the board. You can say all the companies required were very high margin, except for maybe two. And I'm not going to go into details here in this call, but maybe two that were more sort of linked to one of our existing business. There, from time to time, we sometimes make, you know, more add-on type of acquisition where we could enter in a little bit lower margin position. When we do, you know, and we do in all areas, we do fully, I would say, independent acquisitions that are, you know, really new sub-segment, even within our business areas. And when we do that, we tend to be very careful and only acquire companies with very proven and strong margin track record. It's a way of actually limiting our risk, also having a very solid financial history in companies. And the only time we might compromise on that is on the exceptionals, more of add-on deals that are typically smaller in size as well. But I would say, if I look at this year, it was a year that all areas We're a little bit helped by good margins in acquisitions. But I think it was the record year when it comes to margins. So I wouldn't forecast that every year we'll have this type of margin on acquisition that we're getting.

Understood.

Thank you.

Thank you.

The next question comes from .. Please go ahead.

Hi, Perry.

Congratulations to a fantastic result there. It's very interesting to see what you paid for your acquisitions in total and compared to the profits, because your cash flow effect was 3.7 billion you paid and you acquired 659 billion in rolling 12-month profits. So that indicates a multiple of like 5.6 or something like that. That's fantastic. 17.8% yield on your investment. Yes. Hello, Ingvar. Thank you. But I think you have to look at the full enterprise value. You know, we...

The 3.7 is not, we also have some future depth of the difference between the 4.3 and the 3.7.

But even with that, it's... That adds 600 million into them.

Yes.

Yeah, but that still puts you at the multiple of about six. As you know, it's always a challenge and every deal is unique and there's always hard work behind this. It's not just buying a company in a normal process that gets easier. We have to find the right type of sellers that appreciate this model.

I'm a little bit dependent on the dividend, and I think you're a little bit... a little bit too cautious, you've got very strong balance sheets and you continuously increase profits and cash flow by over 20%. But the shareholders are rewarded with a 16.6% increase.

Yes, we think it's a good balance dividend payout ratio in this industry. want to be able to continue doing acquisitions in the future. So in total, this is the recommendation from the board.

Yes, but your debt level is super low, but in reality, 1.1 times. And if you take in all the debt, it's 1.8. So there's easily room to increase dividends more than 16%. Yes.

Thank you for that input. We will take that into the full picture. Thank you.

Well, congratulations to the great results.

Thank you.

The next question comes from Robert Redding from Carnegie. Please go ahead.

Morning. Hi. So I also did take a look at those EVs, there's a new line in that graph, and I calculated that you've paid on average in the last three years an EBITDA of 6.3. And in 2015 to 2020, so the prior six years, seven times. And in the prior period, the EBITDA margin on average of the acquired entities, I think, was about 22%. And in the last three years, 29 or 30%. So is it so that when times are good and we're in some kind of cyclical peak years, you get 10% discount on your acquisitions for buying high emerging businesses than in the past?

Thank you, Robert.

No, I think you cannot draw that conclusion. is unique, every situation is unique.

Here we are just mentioning a one-year estimated earnings. When we look at a company, we look at the financial history of the last 10 years. And we do not value them on last quarter or last year's earnings. So every company is unique. Some companies are required or cyclical. Some companies are super stable, it's all different. So we can jump to that conclusion. So I guess the question that you're also asking is, so has the market changed? I actually don't think it has changed significantly. We have also companies here that are performing very well in 2021, 2022, 2023.

But we acquired a company that also performed in 17, 18, 19. and the multiple what we pay should also be justifiable based on those earnings. Maybe not, of course, on these levels that we're referring to here, but it should also be a company that we're happy to own. The profit, for some reason, will be on the earnings they have backed up.

So we have a very long-term perspective. And I think it's a little bit dangerous to jump to the conclusion and look at one-year earnings. Because every company is unique and has different characteristics. We value them very differently also. Basically, the market is not significantly easier for us to buy companies now than it was one or two or three or four years ago. It's very stable over this 10-year period, I would say. But our The activity level is significantly higher now than it was only five, six years ago. And it's increasing every year. We have to increase our activity level with, you know, if we grow a beet with 12% per year, we have to at least increase our activity level with 12% per year. If we grow from macro... So that's what we do.

Yes, because you would imagine in good clients, especially buying higher margin businesses in the past, that you'd pay more. But the capacity from Liffco's side must have been increasing maybe faster than at the 12% per year pace. You must have a stronger setup now than in the past.

Yes, we have a significantly stronger setup than we had at the time of IPO. We had basically zero acquisition setup, and now we have less. well-functioning, not a huge team, but a very well-functioning team. And a lot of operation group managers also contributing in this work. It's not only the acquisition team itself. But you know, the outcome of acquisition, sorry to interrupt here, but the outcome of acquisition is always unpredictable. It's always difficult to buy great companies at recent evaluation. It's always a challenge. So we are constantly battling with this. We have done that for the last 10 years and we continue to battle with that. It's never easy.

Of course, of course. But you continue to scale that organization. You don't see that growing the capability is becoming harder and harder.

No, I think we've said many times before that we want to grow LIFCO from acquisition not too quickly, obviously not too slow either, but growing it in a reasonable amount of growth rate is very important because that's how we build our organic business. Because taking care of all these great companies we acquire is based on a, you know, purely a channel of LISCO people growing up as managers and gradually stepping into the chairman of the board positions. And that, we don't want to stress that process. But we have a significantly higher number of people involved from the operations side that are gradually moving up in those roles. But that's happening every year a little bit. And there, I think it's very wise to grow step by step and not to grow too much in one year. Because then you will have a different type of risk control and way of handling your business.

So we do that intentionally, very gradually, facing up people. The bigger we are, the more opportunities we have with great people in the portfolio. That's something people also forget sometimes.

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

Thank you very much for listening, and I wish everyone a good