Lagercrantz Group AB (publ) (LAGRB) Earnings Call Transcript

[Audio Gap] So we posted a strong revenue growth of 39% in Q2 and also a very good -- we believe very strong organic growth. We had some strong -- really strong organic growth last year, but it likely went down a little bit in Q1 but picked up, here again, a little bit in Q2. So that's a strong sign from us, we think, that the organic growth is keeping up at a good pace. And then we added some 24% of the revenue growth was coming from acquisitions, and then we have a positive currency effect of 4% as well. The quarter has been for us, but we have also done very good -- I think, very good proactive management with a lot of price adjustments still, even though a little bit slightly less than before, I would say. But still, we have been able to keep our margins at a good level and have some pricing power in the -- where we work with the very specialized companies we have in many instances. But we have been dealing with increased -- seeing raw material cost increases still. And we've also seen some companies, especially within the control division still struggling with component shortages and long lead times from Far East, especially suppliers. But generally, we -- I think we conclude that good -- have had some good delivery capacity looking from a broader perspective, but some companies are still affected by the difficulties in the supply chain. But of course, the increased macroeconomic uncertainty due to everything that is happening in the world with the geopolitical turbulence and the risk for the downturn and -- of the business cycle. We have higher inflation rates and interest rates and stuff like that. Of course, we are very observant looking into that and being very sort of prepared to take measures if we feel that things would go sort of would enter worse times. But so far, so good. I think we completed a good quarter, and we will work from here. And -- but if things would deteriorate, we are very well prepared with having some preparations, some resilience plans or yes, the Plan B, as we call them here internally, and that, we will work with along the way, if necessary. So that was the Q2 sort of overall. Looking a little bit more specific into the numbers on Page 5, you can see the net revenues in the quarter grew by 39% and organic growth was then 11%, a very good number for us, looking from a long-term perspective. The EBITA grew by 43% to SEK 275 million and the EBITA margin improved a little bit to the 16.5% as opposed to the 16% in the corresponding quarter last year, a very good level and something we've been striving for, for many years. And now we're there, and it feels very good to have a very strong EBITA margin when we move ahead. It gives us room -- profitability gives us room for good investments also into the future. The profit as financial items then increased by 37% to SEK 214 million , and the profit after tax increased by 45%. The cash flows was better in Q2 to the SEK 211 million as opposed to SEK 113 million last year. So a good cash flow is also in the quarter, especially from improved profits but also some better development on working capital, even though we are not satisfied or done with that yet. We have more to do there but still in a positive way as opposed to previous quarters. The return on equity was at an all-time high then with 32%. There, we'd never been before. For those of you that have been with us for many years, you know that we've been in the neighborhood of 25% for quite some years. We have been acquisitive and we've done some good work also with the companies we have. So the return on equity at 32% is an all-time high as opposed to the 28%, which was last year and sort of a long-term average of 25%. The equity ratio was up 30% as opposed to 34%. We still have, I think, good room for more acquisitions, even though we've been quite acquisitive now for a while. So I don't think we will have fully the pace we've had here in the last quarter or so looking forward. I'll come back to that. So to conclude the period, over the 6 months, over the first 6 months of the fiscal year, the net revenues grew by 30% and organic growth for the full 6 months was 10%. And it was 9% in the first quarter and 11% in the second quarter, so posting 10% for the full 6 months. And EBITA increased by 34% to SEK 540 million in profits as opposed to SEK 404 million for a year ago. So a very strong EBITA growth. And the EBITA margin was -- also, for the 6 months was 16.5%. Yes, looking also a little bit of the other things we could look at here, the 5 acquisitions. We concluded 5 acquisitions here during the 6 months. The PcP in Denmark, we concluded in June. The other 4, we concluded here in the second quarter. So it's been in August and September really, where we've concluded July, August and September, we've concluded the other 4. So we've been quite active in that market. We feel that it's been a good market. We feel that there are plenty of companies, good companies to look at, and we also feel that the room for sort of concluding good deals is good at the moment. The earnings per share, they have hit an all-time high as well at SEK 3.25 on a moving 12 months basis as opposed to SEK 2.80, to be compared to SEK 2.80, which was for the fiscal year last year. So that's for 6 months, the change in the 6 months really. The return on equity, I've already talked about, the 32%. So we'll move on from there. Looking at the divisions. On a divisional level, I think we see that we have 5 really strong divisions. We have -- 3 of them are really becoming big for us. That is the Electrify, the TecSec and the Niche Products division. The International division did a really good pickup here in the quarter and reached an all-time high of 16.5% in terms of EBITA margin. That's the height they've ever had and a very good quarter for them. The Control division have a seasonality in the numbers, but they also had some companies more struggling with supply chain issues and those type of things and a couple of companies that really fully reached their full potential, so that Control division posted a profit the same level of last year. And given that the top line was slightly higher, then the margin came down a little bit. We are not worried about the control division. I think they will pick up again, but they need to fix a few things, and also as they deal with their supply chain, things will probably pick up in the Control division. And they're also entering the stronger season now with especially the radon measurement business, which has a very strong winter period, so that you can see if you look at the numbers quarter-by-quarter in the Control division. We also, on Page 8, have some comments by division. So to go over that, within the Electrify, we saw that the electrification of society is still driving demand for the larger companies. We see, for instance, the Elpress, the Elkapsling and Norwesco having a good trend there. Even though we also see some changes in the structure, especially looking at wind, for instance, in China. We see sort of more of local production there. So -- but the yield price is picking up very nicely in Europe and in the Nordics related to the electrification, not only wind or renewable energy but also in building transformers and building electricity grid is a strong customer segment for both the Elpress, the Elkapsling and Norwesco. The harnesses businesses continue to perform very well and especially Cue Dee has had a very strong year here with installing -- with their installation materials for deployment of 5G telecom infrastructure. They are the brackets, the antenna bracket is the main product. And they posted another strong quarter with some project deliveries of some -- approximately some SEK 30 million, which is affecting the numbers here in the quarter as well as more of a temporary thing, even though it is a lumpy business, the Cue Dee. So there are -- there have been lumps over the years, and there will be more lumps in the future. But Cue Dee had a strong quarter here. The Control division was the slight disappointment then. So the revenues grew by 24%, but the EBITA stood at SEK 17 million, which is same as last year. The EBITA margin was at 10.4% then as opposed to 12.9% last year. And we saw some good growth for some of the companies. The Radonova, Direktronik and Precimeters continue to do it very well, while others on the top line --while others' companies struggle more with component shortages and long lead times. Recent acquisitions, the Geonor, which we acquired here in December, was it, last year, and the Stegborgs here in July, and they delivered according to plan, but those companies are fairly small, so they're not really affecting the tone very much. But they have plans for growth in the future, and therefore, we feel a good acquisition still. The TecSec division, on the other hand, had a very strong quarter and a very strong first 6 months here. with revenues growing 117% and EBITA, 118%. So they kicked up the good margins, moving then the EBITA to SEK 74 million as opposed to SEK 34 million last year. And EBITA margin of the 17.3% then, very strong Q2 with especially coming from acquisitions. Although that 14% was also organic sales growth. So -- and we see -- within TecSec, we see the larger units, the CW Lundberg, the R-CON, the ISG Nordic and Frictape reported very strong sales growth, while a few of them are struggling with -- to fully compensate for higher raw material costs, and that is affecting -- negatively affecting margins in a couple of those companies. So on the other hand, we saw that the recent acquisition of PcP and Door & Joinery added -- was good contributors to earnings in the quarter. And since we have made the biggest acquisition ever in the PcP, we decided also to release a little bit more numbers there, and they have delivered some DKK 24 million with an EBITA margin of 15.6% during the first 4 months as part of the Lagercrantz, which we think is a very strong start in the group. PcP will be an important part of TecSec and also for Lagercrantz going forward. They have some seasonality towards the summer, but we also have -- I think we're getting a good grip of the company, and we're also sort of planning for improving the margins along the way, sort of having the system sustainably above 15%. And as said here then, they got off to a good start, and we plan to move on from there, really. Looking at Page #9, we see another few comments on the Niche Products division, a couple of more to cover here. The business situation within these products remain positive and had -- at a strong 16% organic sales growth. We saw improvements in earnings across most businesses really, particularly, the Tormek had an all-time high quarter in -- especially in the U.S. They continue to do very well. The Profsafe and Kondator and Asept also provided very strong quarters. The Westmatic, which was acquired in 2022 -- in January 2022, reported strong order intake, particularly in North America, they are doing it very well for us and are picking up and having new sort of offerings, especially in the U.S., that is starting to sort of bring in orders, and that's very good to see. And within Niche Products division, we also had a Waterproof Diving acquisition here in September. And even though it's only a month, they still got off to a good start in the group. Last but not least is then the International division. They grew revenues by 16%. And we see a strong EBITA margin of 16.6%, which is a record high for them; and a 7% organic sales growth, which is also a good number looking back. Strong development across the board, really, especially the marine businesses, which is becoming a cluster for us in the International division with the Libra in Norway, the ISIC Group, a couple of companies under the ISIC umbrella in Denmark And also now the Tebul as a new acquisition in Finland, is providing -- is building the marine cluster of businesses in -- within the International division. Also, Schmitztechnik in Germany and the ACTE companies, as well as the NST in Denmark all contributed also with good earnings improvements. So as I move over all these, you can see that we provided a very strong quarter, and it was very broad-based as it's been with us for a while. I think the quality of our portfolio is increasing over time, and this quarter was really no exception, a strong year sort of performances for many, many, many places, really. So that was the quarterly figures. Let's look at a little bit on -- touch back on what we have communicated earlier and where we feel we are with the group. We are still looking then at Page #10. We have the Lagercrantz towards the SEK 1 billion, which was our strategy program, which we released here 1.5 years ago, where we are -- where we sort of concluded that we had a SEK 5 million in terms of earnings before tax, and we wanted to double that. And now we are at the SEK 851 million, right? Isn't it?

Yes.

SEK 851 million here after 18 months. So we have really been pushing and done it very well here. We had the ambition, when we started out, to do this within 5 years. And now we've been doing it -- gone more than halfway here in just 18 months, and I think that's well before schedule then, really. That's great. What we have as the key themes within the Lagercrantz SEK 1 billion program is really to clarify some strategies of financial growth to reorganize into the 5 divisions where we see better underlying growth more related to sustainability and also some structured underlying growth in the market segment and customer segments we would like to address. And that has been clarified and it's been working very well for us. And we're also increasing capacity within M&A, and we are also putting a focus to the sustainability -- with some clear sustainability goals and things like that, which we have communicated along the way here. To touch a little bit on those. I mean, what we are aiming for is really to be in a very strong portfolio of companies, and we see the sort of ambition here on Page 11 with the vision, which is that we should be a sustainable supplier of value-adding technologies with market-leading positions in several expansive niches. That's our vision statement, we would like to build a very strong portfolio of very sort of high value-adding companies and do it via what -- for our customers and by that, creating some market-leading positions in all the niches that we're working. And we would like to do that by also then providing good growth in terms of EBIT, earnings -- profit growth of more than 15% per year, meaning we should double our profits once over 5 years, really, to be seen over a business cycle. And we also stated that at least 1/3 of that should come organically and the rest through 5 to 8 acquisitions per year. And we should do this in a very profitable manner. So we should have a return on equity of more than 25%. Currently, we are exceeding both of these financial targets well above, really, with some EBIT growth, well above 15%, the return on equity at 32%. And let's see what happens, but let's try to keep it at these good levels. That's our ambition going forward. But we will see what happens along the way here if things start to deteriorate. The 5 divisions, I won't go over this. I think you've heard them many times around our 5 divisions. The ambition here, we're setting a new -- reorganizing the whole thing was that to sort of focus more on areas where we see some underlying growth, where we see a clear connection to sustainability and where we could also provide some good sustainable solutions for customers and thereby creating good growth -- good things and also good growth for ourselves and our shareholders. And you can see also that we have revenues in all these, and you can see that they're picking up the revenues along the way here as well. To have a little bit on that, I also put in an extra slide here on Page 13. I think it is important to really analyze where we are with all things. I mean we are currently -- as we are saying here, so far, so good. We feel that things are going well for us so far. And we don't really see any -- the order book is also strong, and we also see some good orders coming in still. And that -- but of course, we also read the newspapers. So what we are -- we are preparing ourselves for some worse time. So we are preparing with some contingency planning. We haven't done very much of it still because we haven't felt the need for it, but we are planning and having some plan Bs being sort of put together in some of our subsidiaries along the way, and that's where we are with those type of things. Looking at where we have our sales as well, I put in the next page per market segment on Page 13, and you can see where we have our dependencies. And I must say there are a number of things to take out of this one. I mean, we have a very broad customer base. No customer stands for more than 5%. And the main customers we have in the group are related to power and electrics. Renewable energy is a big -- and especially wind turbine manufacturers, are a big customer group of ours also, companies making power transformers and also building electricity grids. We're working quite a lot through the wholesalers, especially in the Nordics, so we had quite a lot of big customers in that section. We have, over the years, also grown in these segments with power and electrics and also infrastructure as opposed to when looking back 5 or 6 years. We had -- or even 10 years really. We were quite more dependent on electronics, telecom and security. And those segments are still in here, but it's very much more than it used to be. So I think we have a stronger customer base and more broad-based than before. What is also worth mentioning, I think, is the other, which is the 17%. That is really a broad-based and very scattered in many different sort of customer segments and also different geographies. So I think we are much more broad-based. It's also important to point out that, I mean, we have also a strong portfolio of companies. We have some 70 subsidiaries and the EBIT margin, in total, is around 16%, was 16.5% EBITA margin, where we ended. [ Live ] is down during 2010, we were at some 5%, 6%. So it's -- the EBITA margin is quite a lot stronger nowadays than it used to be. We also see that some 50 out of the 70 companies in the group, or 48 to be more exact, have an EBIT margin of more than 10%, meaning that we also have a very broad-based sort of profitability in the group. And of course, these are all strong points, I would say. And if things start to deteriorate, we will definitely work with that and put some Plan Bs in effect. But I think the group also is providing some resilience and some strength at this point. So just to highlight, we see things there. Moving over to Page 14, we can see the aim of -- we are still working with the aim of 75% proprietary products. And you can see with the way it was back in '08 and '09. We had some 18% of proprietary products. So that's also, I think, provided some resilience. We are strong believers that having our own products, which means that we also have a definite place in the market, then we have a stronger position when negotiating with customers and providing good solutions for customers. And thereby, by having more proprietary products, we can both see that gross margins are higher. And also, we also see greater opportunities for growth by having that since we can go more for exports as a good example. Higher margins also means that you can invest more in your product portfolio along the way as well. So it has more room, more headroom, which is good. So proprietary product is very important for us, and we have the aim of 75%. And as you can see from here, we are basically about to reach that goal as well here along the way. Looking at Page 15, we move over to the acquisition part of things. It's great to see that we have picked up some 5 acquisitions in the last 4 months. And it's been 5 very good acquisitions, we believe, fine companies that have been joining the group. And this has been a strong ambition of ours. And we would like to also build more of a stronger foothold in new geographies. We will also -- so we have added some new resources to the group as well to be more acquisitive along the way. Now we've been quite acquisitive here in the last quarter or so, and we have the ambition to conclude some 5 to 8 deals per year. But it's good to see that the engine is working for us, and we also see some good opportunities along the way as well in this aspect. Looking a little bit on what we have acquired here lately, I have -- I put together a fact sheet that we used to put together, a fact sheet on all the companies we acquired and just run them through quickly here. The Door & Joinery on Page 16 is a provider of high-quality and customized fire-resistant doors, screens and frames, a company in the Midlands of the U.K., and they're providing these type of solutions. Fire security and fire resistant doors has been very sort of -- had a very good market in the last 3 years, and it's picking up. Rules and regulations have been -- new rules and regulations have been driving the demand here and that's been good for this company, and we see some good growth here in the company as well. You can see this is sort of more of a traditional Lagercrantz company with -- not very sizable, but still on a good level but, nevertheless, very profitable and a good addition to the TecSec division coming in from July 2022. Good to see -- to have a first good acquisition made in the U.K., and we expect more to come there. The second acquisition was also in July, which was the Stegborgs El-evator. They're a provider of hardware and control system for renovation of elevators. They're very strong in the middle Sweden and especially connected to Stockholm and that market area with an annual revenue of some SEK 60 million with good profitability, as you can see down to the right there, coming into the Control division as of July 22. The third one is the Waterproof Diving International. This is our most -- this is -- we made this in September. This is within the Niche Products division, a company in Gothenburg, which is providing different types of innovative dry and wet diving suits for professional and premium recreational divers. You might view this as a B2B, which we very rarely do. But I think you should view it more as a sort of -- not a B2C, but rather a B2B company. Because we are also addressing other customer segments with the marine forces and the military and those type of -- and also professional divers doing photography in very sort of rough environment and doing it very well and providing good margins that you see down -- from the figures down to the right there as well. So also a very good strong company that we are adding to the group. And the fourth one is the Tebul. The Tebul company is the company with -- our most recent acquisition in Finland, adding to their marine cluster, which we are building within the International division. They're providing these electrical sliding doors for ships. And you can see down there to the right, they've also been doing it very well for many years, and they will be a good addition for the International division. So those were the 4 that we concluded here during this quarter. And the fifth one here on Page 20 is the PcP Corporation. PcP, we acquired in July, and this is the group's biggest acquisition ever, really. And they come in with -- as stated in the report, with some starting good 4 months of the group with some good EBITA and a good EBITA margin. So they're adding to the group. Here, we have -- starting up the work with sort of -- yes, integrate to some extent with reporting systems and that type of thing, but also setting some clear targets in terms of the EBITA margin going forward and doing some improvement work around that in order to ensure that the margins are at the right level here. This is a big company for us. And here, it's important that we conclude this in -- or bring this in a good level. But it looks very good for us, and it's been great to work with John and the team at PcP, moving that company to new heights really. Yes. That was my last slide, or where I have one more, really, which is the financial overview on Page 21. And you can see that we concluded yet another good quarter. So far, so good. And as we stated in the report, we are so far so good, but we are prepared if things would deteriorate or go for the worse, as many are expecting. We haven't seen that yet. But if that would happen, then I think we are well prepared. You can see here that I have the net sales above SEK 6 billion now, and we have an EBITA above SEK 1 billion. And you can see the EBIT growth at a very good level over many years, and you can see the return on equity, where we have the goal of 25%. You can see that we hit an all-time high there of 32% and the earnings per share growth was at 35% on an annual base here. So a good quarter for us. So thank you. And with that, we open up for questions.

[Operator Instructions]

Can you hear me?

Yes.

Can you hear me?

Yes, we can hear you. Please go ahead and ask your question. We can hear you.

Okay. Victor Hansen here, Nordea Equity Research. So first question here, what was the margin affecting TecSec not being able to fully compensate for the direct material price increase?

Sorry, once again, come again?

Yes. The margin effect in TecSec, for not being able to fully compensate for the direct material price increases that you mentioned?

Well, on the divisional level, I think there's a couple of companies struggling with it. And it's -- I think it's around -- well, it's not -- it is significant for a couple of companies. But on a divisional level, I don't think it is significant. So it's maybe a percentage point or so, 2 maybe, on a divisional level.

Yes. That's helpful. And then I'm wondering here on PcP. You mentioned it a little bit, but how do PcP managed to increase its margin so significant? It's already above its target here in the first 4 months.

Yes. I think there are 2 things going into that. They have been working with pricing and doing some segmentation of the market and are addressing that by working with their prices. They are sort of looking at prices, especially in the part of their business, which is customization and also where there are more unique and having a stronger market position. They are driving prices more than in other parts of the business. But it's also important, I think, to realize that they also have a -- somewhat of a seasonality effect. We haven't been -- we haven't been sort of part of that just for a long time yet. But of course, I think that you all realize that those type of installations are done more in the summer or, yes, at least -- yes, in the warmer part of the year rather than in the mid-winter, right? So it's -- I think that we'll also see some seasonality effect on what we expect from that company. So I think they got into a very good start, and they are above their target. That's right. But let's see as we move along here if that is, yes, fully sustainable on this level. But we definitely have the ambition to have it above 15% on an annual basis.

Okay. Sounds good. Final question on my side, and this is on the component shortages. Is it mainly in the Control division that's impacted here? Or how should we see this?

I think we see it a little bit in -- especially in the old electronics business, where we also have some of that within the International division. But they have been coping very well with it, and we see some improvements in some areas as well, but still on a very sort of low level or a bad level as opposed to looking long term. But looking at the last year or so, it has been stabilizing, and in some parts, improving as well. But in the Control division, we have a couple or 3 companies that are more struggling with getting supplies from customers -- sort of from suppliers and struggling with that and have been very creative, but still not to the level we wanted to and thereby hitting the numbers a bit. Yes, do we have some more questions from anyone?

If I can…

Yes, I heard you. Would you like to start?

Yes. It's Herman here from Danske Bank. Can you hear me?

Okay. Good.

Yes, I was just wondering if you can say anything about the book-to-bill in the quarter.

I think we concluded -- in the last few quarters, we have concluded that we have a strong order book. I think the strong order book remains strong, but it's not like it's building very much or not deteriorating either, which would indicate the book-to-bill close to 1, right? Then we also see the organic growth. So of course, that is also picking up. So the book is probably a little bit stronger, but...

Yes. Okay. Perfect. And then yes, I was wondering, Tormek had a quite rough start to the first quarter, and now it's having a record quarter. So I was just wondering what is driving this change. And do you expect that we will see the same strong performance in Q3 as well?

Yes. We are approaching some new markets with some new products within Tormek. We have a new [ T1 ], right, with more of a sort of a B2C type product really. And that is affecting the numbers in a positive way. We also saw some good order volumes coming in related -- as we believe, are related a little bit to the Black Friday campaigns that you basically have a lot of in the U.S. especially. That we had last year as well. So it's not like it's a new thing or anything, but it's been very strong here, and that was behind some of the numbers here.

Okay. Good. And then just, you said that you have some company portfolios -- there are some companies where you have a Plan B ready. Is this in any specific market segment? Or is it broad-based?

We would like to look at it. I mean, we are pushing it more in a handful of companies. between 5 and 10, really, companies. We're pushing it more than the others. We see that -- normally, we put a plan together in the springtime. And once we're now entering the fall, we see who's behind the targets, and that is usually initiating some type of action being taken. And in some cases, it's more related maybe to the business cycle, and others, there is not. But we're pushing in some Plan Bs here in a handful or up to 10 companies, really. I think the planning is more broader than that, but what we see, there is -- to put them in effect, this [indiscernible] of the company.

Johan [ Hilfner ] here from [ Amtech ]. Can you hear me?

Yes, we can hear you.

So I wonder how much sales do you have nowadays to Svenska kraftnät and similar customers.

Sorry, I didn't hear you. How much safety we have related to?

Svenska kraftnät.

Svenska kraftnät and similar grid companies outside Sweden.

How much business we have with them?

Yes.

Yes. usually -- yes, that's a tricky question. I think the sector, we are quite dependent upon. But we are working more with it -- in Elpress and those companies, we're working more with the distribution part of -- the distribution network rather than the transfer network. So we are more into the mid-voltage rather than the high-voltage. We have some products and companies that are more into the 300 kilowatts part of the network, while the most of what we have in the midrange. And when you see Svenska kraftnät, they are high-voltage, right? So -- but the sector is definitely changing and pushing for more volumes. But it's a lot of -- as we have pointed out earlier, there are also a lot of sort of approvals to be made and things like that, that usually those type of products take a long time. But it is pushing -- picking up and especially the Electrify is highly dependent upon what is happening in that sector both in the mid-voltage and the high voltage.

Okay. So if we take Electrify in general, is it very much exposed to the improvements that need to be done in the grid generally?