Lifco AB (publ)

Good morning, everyone, and welcome to the LIFCO second quarter earnings call. We can start with going directly into slide number two in our investor presentation and have the high-level look at the overall group performance in the second quarter. We are growing sales with 8%, consisting of actually small negative organic decline. sales helped by around eight percent growth from acquisitions and a small 0.6 percent uh help from from foreign exchange rates uh the ebitda is also growing with around eight percent uh margin ebitda modern is in line with with uh with previous year around 24 percent uh and then we have slightly lower profit for tax due to uh continued higher interest costs um affecting this quarter. We have strong operating cash flow, increasing that with 37.5%, and then earnings per share growing by 5%. If we look at the first six months of 2024, we obviously have slightly lower growth numbers on sales, given that we had a weaker start in the first quarter. I just want to remind everyone that, as we mentioned in the last call, the first quarter had a negative effect from Easter, especially in the dental field, and And we now get a little bit of a bounce back effect in the second quarter. So you should keep that in mind when reviewing this quarter as well. With that, we can go into, I can also just mention, sorry, on this page number two, that for the first six months, we had a negative organic sales growth of minus 4%, acquisition contributing with around 8% for the first six months. And then we can go into page number three and look a little bit more into the different business areas. As mentioned in the previous slide, if we go into the dental field, there is some effect from the Easter, which we already mentioned last quarter. So we have a bounce back, a little bit of a bounce back quarter. If we then maybe look a little bit more on the six-month period, you know, we are growing sales with around 6%, helped by acquisitions. And then margin is obviously growing a bit more and better EBITDA growth of almost 10%. And that has probably to do with the relatively better performance in the higher-margin companies, which typically would mean an own-product company, or prosthetics, own-products, and or software companies compared to the distribution business where we have slightly lower margin, obviously. So that's the dental field. If we go into demolition tools, we basically are still facing weak market conditions. We have been now measuring that for quite some time. And in this second quarter, we are declining sales with 8% despite acquisitions in that case there as well. And then obviously with that weak organic development, it's basically a negative operational leverage leading to lower margins. Still, we are holding up margins pretty well. We are doing 26% EBITDA margin in the quarter compared to 20% last year, which basically is one of the reasons that we have slightly better performance in the high margin companies in that field. And for the first six months, we are then declining quite severely with almost 13% in sales and 23% in EBITDA. And I just want to take a short moment to a little bit describe where we stand in this market conditions. We are obviously facing a tough construction related markets around, especially around Europe, where we have the majority of this business. And we saw that, you know, the early signs of that decline started already more than two years ago. And it's been a slow, it was a slow sort of negative change, directional change up until about, you know, Q3 last year when we've been seeing the market on this lower level condition now for some time then any given quarter can of course be slightly different depending on you know deliveries from from certain companies and all that but the feeling the underlying market is same is still the same at low levels as we've been mentioning now for for some quarters so that's important to mention um if we're going down to system solutions the last area uh we are growing strongly there with 90 percent in the quarter in sales and 21% in profit margin. Obviously, it helps by acquisitions, but if you look more on the like-to-like organic development, it's overall a solid development, both in the quarter and for the first six months, but we should be aware of that it's a very mixed view in different parts of this business area, and it's not really, you know, it's more on the company level than maybe on the divisional level. We are reporting also sales on different divisions in that area, but within any given division, there is quite a different type of development. So basically, we have some companies that are facing a little bit of what we see, demolition tools, weaker construction markets, and then we have other companies that have more positive development because of different specific things in their relative niches. And overall, we can just conclude that we have a very broad and diversified business area that holds up strongly also in this economic times that we're facing right now with very strong modules in this area. But then we can go into page number, actually next page, page number four. And we only update this slide once per year. So I just want to give a little bit of a sort of pre-information now after six months. You know, we have a negative organic growth for the first time in the first six months since the IPO. We're working very hard to hopefully address that, but market condition will be important for the second half, and we don't know where the market will turn or if it will turn in the near future. But I want to also mention here that acquisition is an important part of our growth, and we keep contributing also in 2024 from acquisitions. And then we can go into page number six. It's also a long-term slide. And I just want to mention that we are very focused on the free cash flow per share. And in this slide, we measure it in the best way, I think, where we actually measure the real cash flow after CapEx. And the only thing that remains is the dividends and acquisitions. And we have been growing that with about 24% on average since the IPO, and also growing it this year, as you can see that we are going in the right direction. Obviously, when it comes to cash flow, we should not be too focused on individual quarters, as that can be varying between quarters. But the long-term directional improvement of this free cash flow per share is crucial for LIFCO. If we then go to page number seven, just briefly mention our financial position. Our interest-bearing net debt is now at 1.3 times net debt EBITDA, which is exactly the same as one year ago despite the acquisitions we don't and despite the dividend and with that position we have you know financial capacity to continue doing further acquisition when we find the right companies for the reasonable valuations that we look for we will come back to acquisitions in a few moments if we can briefly then touch upon page number eight also a long-term slide you know we are looking for Continuous increase in our profits. We have done that for most of the years since LIFCO was started in the late 90s. And actually now after six months, we're also growing the total EBITDA profit for LIFCO in the first six months. You can see that on the row in 12-month basis. Obviously, with a big negative effect from the demolition tool segment, that is actually shrinking quite severely in this year, compensated by a strong performance in telehealth solutions. So that's where we start right now. If we then go to page number 13, which I don't normally present, but I would just like to take a few moments to talk a little bit about what we do. As you all are aware of, we are facing more difficult market situation in parts of LISCO. And I just want to highlight our operating model that is very much based on having really strong management at each individual company. And these we've been working on for many years, and we constantly work on making sure we have really the best possible management in all companies, and I think we really have that. And I just want to take a few moments to really mention how strong these individual local management teams are working in adapting and addressing the changing market conditions. And they've done a really good job, continue to do a really good job of being very, very close to the market and take the actions where needed directly. And they are, of course, supported by a very strong team of excellent group managers that all have been born and raised in LIFCO, which really puts the right culture into this playbook. So I want to put a big thank you to the whole team in LIFCO for being very, very good in acting in these type of market conditions. And then we can go to page 21. A little bit specific look on the demolition tool segment. We're actually looking at the development here for quite some years. And as you can see from the right-hand side, we have been facing difficult times before. You know, in 2009, it was a very severe drop. The market condition we are facing now are not even close to that situation. So it's much softer recession, if you like to call it, right now in that field. And we also had, you know, some weaker development in 2013, when there was a euro crisis, and then in 2020, when it was COVID. So, we can just conclude that this is a cyclical area, and from time to time, we are facing this. Despite, you know, this, we are still holding up margins, I think, on a quite good level, which is another indication of the great work that's been taking place in all these companies to address the market situation. And then we can go to page 23 and do a similar deep dive into the system solution area. And here I just would like to mention on the long-term perspective, and I think many of you can see that from our numbers, it is a totally different business area now compared to, for example, 2009, where we were severely impacted by the financial crisis. This was a very small part of our existing portfolio that was the LISCO system solution back then. And also compared to 2013 or even five, six years ago, it's a different area. And as you all know, we have a very mixed exposure, but it's a very, I would say today, well-balanced and differentiated business area. Of course, with some challenges in certain areas. Just like with the emission tools, we have some companies with the same type of problems. But we also have many other companies with more stability and also some companies with some structural growth in their respective niches that sort of composites in this. And then I can move all the way down to page 33. and just conclude a little bit on the acquisition side. We have now, after the first half year, we have consolidated or actually announced five acquisitions, contributing with a little bit more than one billion Swedish krona in sales. And these are all, you know, great niche companies with good margins and solid historical track record. And on this line, I just want to repeat myself, which I normally say on these calls. We are very active in searching for companies. And we have a very, very good team, quite small team, but very good team looking for companies. And the timing of when deals materialize is always unsure. And once again, we only acquire companies when we really find the best ones and when we can get them at reasonable valuation. And there are many opportunities out there. We are basically looking all over Europe nowadays. And being broad in the structure like Lidco, you know, first of all, we're very broad in terms of where we are in our industries and our verticals. And also then we are open for finding new great niche companies. That is a big advantage with that broad look because we can, if we use this in the right way, we can basically really look for the best companies and be sort of patient in our deep screening around Europe. And a big advantage that we're never forced to acquire in any specific segment if we don't feel the conflict around it. Having said that, of course, we often find adjacent business in areas where we also complement with quite new niche companies in the field. So that's where we stand right now, and I think this was the last page I wanted to present, and then I would like to 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 Karl Ragnastam from Nordia. Please go ahead.

Nordea, a few questions from my side. Firstly, I mean, the big sequential margin delta in demolition was a bit surprising to me at least. You mentioned mixed effect as one. Is it possible to sort of quantify the special order deliveries in Q2 maybe versus, or putting it to context versus deliveries in Q1? Because this was a clear uptick.

Yeah, I think in this quarter, you know, there was some what we call special deliveries, but not big enough for us to mention them specifically in our report. But the main effect was that the companies where we have higher margin are holding up slightly better than the lower margin companies in this field. And I'll give you one example without going into too many details. We have, for example, one business that is quite resilient in this area with very high margins, and that company is, of course, just being stable, you know, helps on the proportion of mix. and then we have some of the of the sort of machinery companies that have been performing slightly better than a little bit lower attachment companies so that's basically the main driver of this and and this i would say could vary between quarters you know deliveries you know we have slightly more delivery cq1 maybe becoming a little bit more pushed in q2 i wouldn't make it i wouldn't make too big thing around this because it's it's not Yeah, it can vary between quarters. Having said that, you know, I think in the sort of slightly lower margin part of our business, I would say that's the area where we are mostly exposed to pure construction-related businesses as well. Whereas in the little bit higher margin areas, we have a little bit more broader exposure. Also, they're exposed to construction, obviously, but not only.

Okay. It's very clear. Thank you. And also, I mean, I know that you don't disclose order, but on the market sentiment, could you give any sort of indications of the quotations, or if you see differences between quotations and firm orders, maybe if you split it between Brock and sort of the attachment companies, Kinsofer perhaps?

Well, we don't really communicate quotations and we don't consolidate on the group level either. So it would be very, you know, direct anecdotal information if I talk about that. I think it's maybe more to give you a clear picture. We feel that our construction related, you know, weaker part of our business has not changed very much since last fall. It's still, you know, a tough market out there. It's still not, you know, catastrophic as it was in 2009, for example, but it's on a weak, low level. And it has, you know, it jumps between different weeks and different months. You know, if you ask the people around in my team, you know, sometimes, you know, they can be a little bit positive and then two weeks later they have a little bit more negative view and it goes up and down like that. But I would say overall the underlying feeling in the market has not changed much since, you know, since the end of last year, as you say. And then, obviously, we also now have been in a slightly tougher environment for quite some time, which of course means that the order books have been and are now on the level where we don't have much buffer left. We had a little bit of buffer maybe 15 months ago in the system when things were slightly going down. And now we're on a level where it's not much. But I guess what you're really asking is how will the more sentiment be in three or six months? We don't know, basically. And we just, we prepared for a similar condition and we take it from there, basically.

Okay, that's very helpful. And finally, on dental, the mix you're referring to sounds like it's coming from prosthetics companies, right? Is it purely the prosthetics companies, or is it anything else that is driving the mix?

No, I think in this quarter it was a little bit more than that. But I think we shouldn't draw too much conclusion from one quarter around this. It was slightly better deliveries and sales in the higher margin part of business, which is, once again, the manufacturing, the software, and the and the prosthetics and the prosthetic has been you know quite good now since we had this slowdown after covid but so that helps a little bit but it's it's a short period of time we're measuring right now so but is it the one time big order that that i mean or why shouldn't we sort of extrapolate it or Now, because, you know, if you take the manufacturing business, these deliveries there to the distributors, that can vary a little bit between quarters. You know, you get a little bit bigger order from one distributor in one quarter or next quarter. So we have to take a little bit longer perspective on that. And then, yeah, but I think the prosthetics business has been in a good momentum in the last, you know, since we had these problems after COVID, it's been in pretty good momentum. mainly perhaps helped by an inflationary environment and our relative attractive offer to patients.

Okay, very clear. Thank you.

The next question comes from Zeno Engdalen-Richuti from Handelsbanken. Please go ahead.

Thanks for taking our questions. I'll start with just a question on acquisitions. If you count the number of them, they are running a bit low, but when you're looking at sales, they are running at quite a nice pace. Would you say that these larger acquisitions are a result of some kind of intentional push, or is it just more of a coincidence?

I would say that's more of a coincidence. If you look at the deals we've made this year, they are still in our range. Maybe they are as a group a little bit, you know, on average higher than previous years. But I think that mainly has to do that we maybe didn't do as many of the small add-ons that we typically would do as well. In any given year, you know, we typically would do, let's say, 60% to 70% of the deals would be standalone niche companies. And then maybe 34% will be all sort of deals And then we have done slightly fewer of the small add-ons that come from time to time. So we haven't changed any way of working or any way of thinking about it. We are still working in the area where we think we can find the best type of businesses for the most reasonable valuations. And that hasn't changed for many years.

Very good. And then just a quick on system solutions. You highlight that it's a significant part is company specific but mentioned that there was a kind of a bounce back also on Easter on the Easter effect in some companies would you say that how material is that so to say I think if this is a solution it's not material it's more it's more obvious in a dental field where we really are ticking business and we're

you know, basic dentists take a few days off just before Easter and close their offices in various countries, that has a bigger impact than thesis solutions. So I think that is literally you can do the math on the working days more, I think. In dental, it has a little bit bigger impact than pure working days because the Easter has sort of, there are some, you know, vacation time of dentists also plays into that equation. So thesis solution, it's a smaller impact.

Yeah. Yeah, very good. That's all from me. Thank you.

Thank you.

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

Thank you. Good morning. First one is just on what you mentioned a bit earlier, Per, that the ones that are the most exposed to construction and so on are possibly also ones with the relatively lower margins. I'm just thinking here, how should we anticipate, if we assume that the market gradually improves, what kind of impact that could have from a kind of negative mix effect point of view? And the follow-up would be, I mean, you disclosed that Brock has this very impressive 40% margins, but when you look at the lower end, you know, should we think about, you know, some companies running at 15, perhaps, or are there some that are running even lower?

Well, if you take the margin question first, actually, the variety of margins is actually slightly lower than you described because the Brock margin more than you see in our investor presentation, it's for the Swedish entity only. And if you take the integrated margin abroad, it's slightly lower because all the sales companies integrate sales. So the range is actually slightly smaller. And I'm talking about in the normal market condition. And of course, if the market goes really, really weak, obviously, you know, margins can be tougher when you have a huge volume drop. But if you take a sort of normal market condition, the spread of margin is actually slightly lower than you described. Sorry, the first part of your question, of course.

Yeah, no, thanks. It was just, you know, if we assume that just the construction market, for example, gradually improves, how one should think about, you know, the effect from a, in lack of better words, negative mix effect if those units, you know, benefit from an improving market.

Okay. Well, I mean... So maybe I should go a little bit deeper into that explanation. I mean, the companies that are doing slightly better now, they have both construction and maybe some other segments. So they will also benefit from construction coming back. Of course, not as direct maybe as this one. So there could be some effect around that. But on the other hand, if it comes back, then you also have the operational leverage playing in our favor again. So how that plays out exactly is a bit difficult to describe.

Yeah. Understood. My final one is just on the acquisition strategy. There's been a couple of acquisitions in the UK, Germany, Italy. Now we've seen a couple in Denmark. Now I'm potentially cherry-picking a bit here, but any particular reason? Have you strategically chosen to recruit a few more people there or promote people internally to scout for more M&A in that region?

Not really. I mean, yes. I mean, we have one dedicated person for a couple of years, or not dedicated, but someone that's covering Denmark more actively. Maybe that has some impact. And I think when it comes to the announced acquisition, you really see the tip of the iceberg. So what's happening behind the scenes is that we look for companies in many geographies. And we are in active discussion in many geographies. And then where we find the most attractive targets for the most reasonable valuation is where we strike. And that can vary. If you look back, we did a lot of deals in Norway when there was an oil crisis. We did a lot of deals in the UK when there was Brexit. I'm not saying that Denmark has any specific problems. Let's make it more random that it pops up a little bit in Denmark now. But that's basically how we do it. We look very broad. I think it's a combination of all. Maybe we do a little bit more active work in Denmark, so that helps, but we do also a lot of active work in other markets where you maybe haven't seen the results yet. It might come or it might not come in the next couple of years. We will see. I think the way to look at it is that we are every year trying to increase our capacity as we grow Lithgow. Not dramatically, but slightly, and that, of course, leads to better coverage in more and more geographies as we go along.

Understood.

Thank you. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. Thank you, everyone, for listening. Thank you for questions. And I wish everyone a nice Friday and eventually a nice weekend. Thank you.