Lifco: Dentistry, Demolition, and Decentralization - [Business Breakdowns, EP.168]

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0:45This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Today, we are breaking down LIFCO, a Swedish conglomerate recognized amongst a group of notable Scandinavian serial acquirers. To break down Livco, I'm joined by Adnan Hadzefendik, a portfolio manager at REQ Capital. Carl Bennett, the current chairman, is the architect behind Livco. Carl was the former CEO of the famed Electrolux in the 1980s. After acquiring a business out of Electrolux with a friend, Carl formed the group, which is now today's Livco. The roots of the business are in the medical sector, dental more specifically, but has since grown into a diversified conglomerate as an acquirer of dental instruments, demolition equipment, and a wide array of specialized industrial businesses.

1:37The company is guided by a clear philosophy centered on constant long -term growth, a focus on profitability, and an intentionally decentralized organization. Livco's business focus is to acquire and develop market -leading niche companies that run independently and are largely self -funded business units. We hope you enjoy this breakdown of Lifco. Adnan, thank you for joining us to break down Lifco, a serial acquirer that has developed somewhat of a cult following amongst investors in the same way that Constellation Software has. Lifco presents itself as a safe haven for your business and their acquisition strategy.

2:19So maybe just to start to kick things off, can you explain the basic business model and a little bit about the history of the business as it stands today? Yeah, so Livco is a Swedish high -performing conglomerate. It has a $10 billion market cap and revenue around $2 .5 billion in an EBITDA margin of 23%. It was actually relisted in November 2014. and if you had bought shares at LIFCO in 2014 upon today, you will actually have 14x on the share price, which is better than Constellation or any other high -performing conglomerates. LIFCO's history goes back to Carl Bennett, which is a Swedish industrialist and he's the main owner of LIFCO and he has a successful track of building industrial companies in Sweden and in 1998, he'd employed Freddy Karlsson as the CEO of LIFCO, which has played an instrumental role in developing LIFCO into what it is today.

3:10And during Frederick's tenure between 98 and 2019, he actually compounded earnings 100x. I understand the business grows through acquisition. I think they do anywhere from 10 to 20 acquisitions per year. What are kind of the core segments of the business and how do they think about dividing those acquisitions into different baskets? Yes, so Livco comprises three business areas. It's dental, demolition tools, and system solutions. The largest is System Solutions, which is basically on sector agnostic business area where they focus on buying highly niche family -owned businesses. You have Dental, which is a leading materials and equipment distributor, as well as manufacturing in northern and central Europe.

3:53And then you have Demolition Tools, which produces and sells remote -controlled demolition machines through its subsidiary Brock, as well as tool and accessories for crane excavators like teal -trotators, quick couplers, demolition hammers, etc., through the company King Sulphur. Lifco has this rich history. The company was once public, it was taken private and then taken public again in 2014. Can you just kind of explain the backstory here and how Carl Bennett came to run this business and serve as chairman and his background and what he's built? Absolutely. So if you look at Lifco's website, they actually state that history goes back to 1946.

4:33and I just want to point out they actually have some longer history from 1903. I'll come back to that point just in a second. But starting off with 1946, there was a company called LIC that was founded and that was a public Sweden country council central purchasing entity for medical equipment and services. And this company was public throughout until 1989 when it was acquired by a company called Axe Trade, which was a listed company owned by one of the largest Swedish family offices. And then in 1990, this company merged with another company within that kind of same sphere of owners. And that company was called Axel Jungs & Instrument.

5:15And Axel Jungs & Instrument actually in 1985 completed an acquisition of a group called STI Group. And STI Group at that time comprised two businesses, which is Dab Dental and Nordenta. And those businesses Livco still owns today. And Dev Dental was, I don't know if it was the first, but it was one of the first dental distribution businesses in Sweden founded in 1903. This company went through some ownership changes. And ultimately in 1995, Yetinge acquired this company. And at that time was called LIC Care or L -I -C Care. and Yetingen at that point in time had called Bennett as the CEO and main owner.

6:00So Yetingen on 1st of August in 1995 acquired Liquor and the reason for that was that it would be suitable for Yetingen's other businesses which also was in healthcare and the main reason was to drive synergies from that acquisition. Now those synergies never turned out to materialize And so Lifco in 1998 was spun off out of Getinge and become a separate listed company with Carl Bennett as the main owner. They also employed Fredrik Karlsson as the CEO. And Fredrik Karlsson at that time was actually CEO of a German company called Mercatura, which was a turnaround case which he successfully managed.

6:40And that helped him to get a job at Lifco. And Livco at that point in time had approximately $100 million in sales and had a low single digit margin. During the first years, post IPO, the results were very poor. So Carl Bennett actually in 2000 decided to take Livco private. So from that point in time, from 2000, 2006, it was through a restructuring phase. So margins went from low single digit to kind of mid to high single digit. And that was purely organic. And then in 2006, Lifco merged with a company called Sorb Industry. And Sorb Industry was a company that Carl Bennett also owned and that he did an LBO of in 1999.

7:27Sorb Industry is what later became system solutions and demolition tools business areas. So it consisted of the Brock business and some sawmill equipment contract manufacturing businesses. So from 2006 forward, the kind of glyphco, as we know today, was shaped. Yeah, they clean up the business, it's a private company, they make the decision to re -IPO, not all that long ago on a relative basis, but approximately a decade ago. What was the motivation for coming back into the public markets? And then how is their business history as, and again, public company transpired? So I think we have to go back to Freddie Carlson.

8:07He's been a turnaround guy. he's always been profit oriented. He's a sailor as well, and he likes competition. So being in the public market makes you want to compete. They did have some thoughts going public already in 2004, but it was a little bit early and then decided that 2014 was a good start because they've started to do some acquisitions and felt ready that now we have enough size to go and enough track record to be on the stock market. And so if I kind of look at the revenue trajectory during the business performance since the 2014 IPO. I think they've maybe 25X their share price. They continue to kind of grow revenue at a double -digit CAGR, EBITDA at an even better CAGR.

8:51What is kind of the secret behind their M &A strategy, the business makeup? What is Lifco today in the context of that rich history that you outlined at the onset of the call? To understand Lifco, we had to understand that these guys came from a restructuring phase They've been through the workout cases and they've seen how bad it looks like. So over the years, they develop an appetite for acquiring higher margin and higher quality businesses. And kind of fundamental part of their business is to drive organic profit growth, not sales, but profit growth. And that's one of kind of the main incentive targets is to drive profit growth a little bit more each year for all the MDs.

9:30So over the years, they develop an appetite to acquire nice businesses. as they grew in dental they did see that distribution business because it was made a distribution business prior to ipo and was 70 80 of the business back then they saw that they wanted to kind of move up the value chain to become even more specialized and that's the kind of secret sauce behind livco because they want to have companies that are so specialized that you can have so much pricing power and one of the business concepts in livco is to get rid of high volume products and be even more niched. So today, the CEO, he actually talks about when you meet him, that there was a CEO in some years back that he lost 30 % of the revenue, but increased margins.

10:12And he said that should be the CEO of the year. So they have very strong focus on increasing margins all the time. Over the years, they've seen that family businesses that are well run fit very nicely into LiveCost kind of perpetual ownership structure. So that's kind of the reason for them acquiring these businesses. And as you pointed out, they've grown EBITDA for 22 % since IPO and free cash flow at 25 % CAGR, which is fantastic. And going to that, if you look at from IPO, it's of those 22 % EBITDA growth, it's actually 8 % on average, that's organic. And then the rest is acquired and a little bit FX there as well.

10:49What does a Lyftgo acquisition look like? How many acquisitions are they doing? What is kind of the caricature of a typical acquisition. Yeah. So kind of the average deal size is around 10 to $12 million in sales. It's a little bit more. It's around $20 million in demolition and tools and last couple of years, a little bit smaller in dental because dental today is a little bit more add -ons, but kind of average is $10 to $12 million, frequently family -owned businesses. And if you look at the history of the business acquired, they are on average 40 years. So their acquisition criterias are it should be stable operations.

11:25It should be a leader within their niche. They're very focused on having the best companies in each niche with high pricing power. It should be an attractive position in the value chain and no dependency on a specific supplier or a customer and no limited exposure to xentology risk and also documented profitability. And as I said, their companies have a long history back. So they prefer companies that have proven themselves over the cycles. So these kind of small businesses. And if you look at all the companies acquired, it's only three, four companies that have been over $50 million in sales.

12:01The majority has been around $8, $14 million in sales. What does the team look like that's executing on this M &A and how many acquisitions are they doing a year and how can they keep up the pace? going back to 2006 after kind of merge with sorb it was basically just two people in the hq doing acquisition it was frederick and then later it became parval de machon today the ceo so lifco what they do is they have scaled mna over the time but compared to other companies they scale mna as a scaled organization so scaling organization comes prior to scaling the mna so today they are doing around 15 to 20 acquisitions a year.

12:43Last year did it in 18 and the year before that 12. And it stands at two acquisitions so far this year. If you look at since 2006, they've conducted 128 acquisitions. So that's roughly 8 to 10 acquisitions a year. Today, there are around 20 people that do acquisitions of which half of them are people that sources deals. And half of them are group managers that help out and source deals through internal contacts, etc etc if you look at the hq there's only three people at hq and no one is responsible they had one head of mna that was employed in 2015 but he later quit for other journeys but there's no mna people essentially in lifco so everything is in the business areas themselves and then once an acquisition is made presumably there's a playbook to integrate these businesses but my understanding is that they're buying well and that the multiples are not super aggressive and they're not under writing significant synergy.

13:41So where's kind of the value add? What is the Lifco playbook post acquisition and integration? You're completely right. There's no synergies whatsoever. So what's Lifco's value add is, is their culture. So when you come into Lifco, you become a part of a group that is performance based where you kind of drive profits each year. So Lifco's add on here is following these companies and making them even more kind of specialized. What they also do is they outsource production if there is some. Everything that's not sales, marketing, or driving customer value is kind of outsourced. So that's what we've got value at.

14:17And it's clearly that becoming a part of a group where you can talk to other managers and other MDs has some benefits to this growth. And what's also interesting about the playbook is if you go back to from 2018, they've actually started to not buy 100%, but actually leave out minorities of 5, 10, 15 % of these companies, because they see that entrepreneurs that have some equity share actually perform better. So that's Livco's track record so far. What's also interesting here, it's Livco does never sell a company. It has sold some, which has its explanations. One of the latest sell was actually a sawmill equipment company that had operations in Russia, but for obvious reasons that had to be sold in 2022.

15:01So, Lifco doesn't interfere with the management teams of the RMDs as long as you perform. So, there's no forced synergy integrations and never has Lifco moved a business from its current state. They have this unacquired and get this preferred buyer status by having and keeping their promises off their business. And the culture is basically just based on simplicity, common sense, and no bureaucracy. And I think that reasons well with a lot of these entrepreneurs that they are used to doing stuff as they always done, and they can do that in LIFCO. The only kind of difference here is you have to report on a monthly basis and you're measured on profit growth and return on capital.

15:42What does organic growth look like for the underlying businesses and how do they deal with the underlying cyclicality of some of the construction businesses? they don't disclose the organic growth on business area level but if you look at lift because since ipo the organic ebita growth has been eight percent on average and they don't measure sales organic growth it's more profit but if you look at the kind of different characteristics of the business is distributional dental business is a slow low organic growth business we're talking about one to three percent but it's very very stable over time and if you look at financial crisis, it did very well.

16:20And basically, that was what kept Livco profits up. Then if you look at the demolition tool business, it's much more cyclical because you are exposed to the construction industry. However, that business has inherently higher organic growth over time. And our calculations shows somewhere between low to mid -teens organic growth since IPO. But you have a lot of cyclicality, of course. And then System Solutions, which also has this place on organic growth, but that's a little bit harder to measure. But looking at what the companies they buy, we do believe that there is some organic growth going on there as well.

16:56However, it's hard to measure in exact numbers how much it is. But it's also a business that historically has been much more volatile. But if you look at the kind of portfolio of that business, it looks completely different today than it did 15, 20 years ago. Today, it's much more niched, much more specialized. So we do believe that the companies within System Solutions have other structural trends driving growth compared to 15, 20 years ago, and when there was a sawmill equipment business, et cetera, et cetera, and contract manufacturing business on that as well. Lifco had their roots in dental.

17:29That business has grown. Are there any kind of relevant businesses within dental that are most interesting to talk about, or perhaps the overall value proposition of their dental segment? Absolutely. So going back to 2006, Dental was more or less finished with the restructuring phase. So from that point in time, Livco started to acquire companies. One of the big acquisitions that were made in the dental business was a company called European Dental Partners, EDP, in 2011. That was actually a private equity deal. And that was a 1 .5 billion dollars or $150 million in sales business. And that's actually their largest acquisition to date.

18:10The dental business itself has been a low or still is a low growth organic business. So what Livco did is, as it done in other parts of the business, they moved up the value chain from a pure distribution business and actually bought companies higher up the value chain with increasingly higher margins. So another significant acquisition was a German company called MDH in 2014, and that was a prosthetics business. and that was kind of a first step from Livco's dental business going from a pure distribution to a more product -based business area. From that point in time, they've done a lot of add -ons.

18:49Now, look at the dental business. As I said, it was a slow organic growth. So a lot of the cash flows that Livco got from dental business has actually been used to buy companies in the other two areas because they don't like to be forced to buy dental businesses just because they can. it should provide some attractive returns on capital. So whenever they didn't find any businesses to buy dental, they actually buy other companies in system solutions and the machine tools, which they've also done very successfully over the years. So today, distribution is only 57 % of the business. Prosthetics is 15%.

19:24Manufacturing is 24%. And you have some software businesses as well, around 4%. So going from a pure 100 % dental business to approximately half of the business today is dental. And the margins have improved from 11 % to approximately 20, 21 % during this time from 2006 to 23. How important is kind of leadership here? It seems like most of the executives have been with the business for a long period of time. I know they had a high profile leadership transition not too long ago. Carl was at this from the start. is the executive chairman and has voting control of the business. What is kind of the story as it regards to the chief executive here and who is calling the shots?

20:07Yes, of course, Carl Bennett, main owner of LIFCO has and is still playing an important role here in the LIFCO history. Just to give you a background history to Carl, as I said in the beginning, he's a Swedish industrialist and he actually started working out in Electrolux in 1980, where he was part of the commercial kitchen division, which he later then became the CEO of. And Electrolux is a company, actually a pioneer in Sweden of the decentralized business structure. They had a CEO called Hans Virtan, which was employed by Electrolux in 1967. And Electrolux at the time was a very centralized, bureaucratic company and was all about management by fear.

20:48And what he did, he basically broke up all the structure and delegated all responsibility out to these operations and focused mainly on two things, which was profitability and return on capital. So Carl being employed by Electrolux and being under kind of leadership of Hans Sertén ultimately and the other guys from Electrolux has inspired him to this decentralized business model. And that's what shaped LIFCO still as of today. And I know that Frederick, when he started in LIFCO 98, he wasn't a decentralized guy, but he learned a lot from Carl Bennett. So Carl Bennett has played an instrumental role in this journey, but it's been Frederick and ultimately then Per.

21:29And if you look at how Frederick has developed this business is that he's been very keen on finding the right people and educating them into the kind of Lifco culture. Per started off as a CEO for Brock, I'm sure we'll come back later to, in 06 and then later became the head of business division Dental in 09 and then ultimately became the deputy CEO and in 19, the CEO. So if you look at Livco today, and all the group managers that they have within the business, no one is externally hired. They are all hired internally. So that's how they have built Livco over time. So you can say under Per today, you have 10 -15 group managers that basically have the same journey as Per has had.

22:14So you start off by being an MD, and then you get more responsibility, maybe become a chairman, and then you get the second chairman role, and then you become chair of some other companies, and then you become a group manager, et cetera, and then you become a capital allocator. Ultimately, of course, you can become a CEO at LIFCO. So basically how they've scaled this organization is truly fantastic over the years and very, very long term, so to speak. Can you just provide some examples and explain how decentralization is so paramount in Livco's story? Livco is where I've seen one of the most decentralized companies out here.

22:52It's basically three people at HQ. It's Per, which is the CEO, is the CFO, and is the head of system solutions. And the last time I visited Per, he was actually alone in the office. And it's so decentralized that you have a CEO of a $10 billion market cap company making you a coffee. This really speaks about Livco and this simplicity and no bureaucracy. What you also do in acquisitions is that they get rid of all the middle managers. They don't want any middle managers. Really walk the talk. So Per, the CEO, he has no secretary. He does all by himself. So it's super, super decentralized. And as I said, perhaps the most decentralized company I have seen.

23:32Now, of course, they have 20 -25 people centrally, but those are not based out of HQ. Those are based spread around Europe in different positions. But the HQ itself is only three people. And it actually reminds, going back to Carl Bennett and his time with Electrolux. Electrolux also had three people basically at HQ as well. He has been inspired by that journey and really taking that and implemented that to LIFCO. Decentralization is really the key here to building a company like over time. We really do believe that it comes to four pillars when it comes to decentralization. Why is this important for these models?

24:10The first is kind of business reliance on customer intimacy. These are small niche businesses and they require inherently customer intimacy. Therefore, we believe that decentralized decision -making with this local knowledge enables these entrepreneurial companies to collaborate closely with their customers. Secondly, we believe that scaling these businesses is also relied upon decentralization. Decentralized structure is essential for managing the rapid pace of numerous small private acquisitions. And without this independence at each business units level, the acquisition process, we do believe, at the holding company level, become very sluggish.

24:48Onboarding 20 to 25 or even 100, as some companies like Constellation has, it's a too overwhelming task for a management. You have to decentralize the businesses. Also, this decentralized structure gives these companies the ability and adaptability to changing conditions. These companies are often very fast on adapting to new situations. Just to give an example, during COVID, 98 % of Lifco's companies actually proactively reached out to the HQ before they even had the chance to call these companies and said, we have taken measures. It's typical of these types of businesses to expand beyond their borders, typically the mix of North America grows pretty meaningfully over time.

25:32But this one is atypical in that they've primarily stayed away from North America. I think it comprises 10 % of their business. Why has it evolved that way? I guess going all back to Frederick. Frederick came from a German company. And if you look at the early acquisitions they've made, that was a Kinzhofer in 2007. That was a German company. EDP, European Dental Partners in 2011, MDH prosthetics business in Germany, also in 2014. And I think that goes back to Frederick knowing the German culture. He's been fluently speaking German, et cetera. And I guess if you look at a lot of these other peers to LIFCO, there has been no meaning to going to the United States because you have so much opportunities in Europe.

26:14And if you look at the prices of acquisitions, I think that's much higher in the States than you can find in Europe. And if you look at the prices they've paid so far, it's an average seven times EBITDA versus their target of eight. So they actually acquire companies to much lower multiples than they have set a target of. And as long as they have these growth opportunities in Europe, which is culturally very close to the Nordics, I think there's no reason to, at this stage, go beyond that. And so your commentary kind of begs the question, why is it that they're able to acquire at such modest multiples and the market is willing to assign such a rich multiple to the conglomerate itself, what have they proven that has supported that multiple expansion?

26:57I do believe it's worth reflecting upon what the dual engine of growth really means for this type of model. So firstly, the dual engines of growth, which are organic and acquired, applied across different niches and markets and geographies, means that you potentially have a significantly longer runway of growth. And this durability of growth sustained over decades at very attractive returns is really the reason why we have seen the stock returns being outstanding. So this can also be compared to a single engine growth company across a single market or industry, which can, of course, be very valuable if you're Walmart in the 80s or 90s.