Investor AB (publ) (OTCPK:IVSXF) Q2 2022 Earnings Conference Call July 15, 2022 8:00 AM ET
Company Participants
Johan Forssell – CEO
Helena Saxon – CFO
Viveka Hirdman-Ryrberg – Head of Corporate Communication and Sustainability
Conference Call Participants
Joachim Gunell – DNB Markets
Derek Laliberte – ABG
Oskar Lindstrom – Danske Bank
Operator
Welcome to Investor’s Q2 Presentation. Today, we will start off with our CEO, Johan Forssell, presenting the results and then followed by our CFO, Helena Saxon. After that, we will open up for a Q&A session. You can follow this presentation over the web or over the phone.
And by that, I would like to hand over to you, Johan.
Johan Forssell
Thank you, Viveka, and welcome, everybody, to this report about our second quarter results.
As we all — let me see, I should probably flip here. As we all know, we are living in a very turbulent times. And the combination of sharply rising inflation and increased interest rates and most macro economies worrying about the macro outlook, of course, we have seen a sharp correction in the stock market.
If we look forward, I think we should be prepared for tougher times. But as always, the outlook is uncertain, but we are for sure preparing for tougher times if they should come. In this environment, we stay very close to our companies. And I must say that I’m pleased with the development of our subsidiaries within Patricia during the quarter.
We are seeing price increases gradually coming through. And I think that is important given the cost increases we see worldwide. And from that perspective, of course, it is a strength that our companies have market-leading positions in attractive segments. And that means that they have pricing power so they can gradually now put prices up and price management remains a key priority for us.
If I then move over to the second quarter, we can see that our share price was down more or less in line with the market being down 17% compared to the stock market being down 16%. But we can also see that our net asset value was much more resilient being down only about half of the development in the stock market.
And there are two main explanations for that. The first one being that our listed companies were down only half of the stock market in the quarter. And the second one is the strong operational performance in our subsidiaries during the quarter.
If I then say a few words about the listed companies. As mentioned, the total shareholder return was down 8% in the quarter, while the stock market was down 16%. And here, of course, AstraZeneca, Saab and Sobi performed strongly, and significantly outperformed the stock market. And there are two main reasons, I think, for that. First, we have had good positive news flow in these three companies. And secondly, there is, of course, also a market shift to more defensive stocks.
As mentioned previously, we are staying close to the companies, and we are basically working both when it comes to managing the current challenges, make sure our companies invest for the future R&D in transformation within sustainability, for example.
And finally, also, in some cases, to make sure you prepare for potentially tougher times, even though many other companies, of course, have active in more resilient industries. And for some of these companies, the focus is more capturing all the growth that is out there at the moment.
Moving over to Patricia Industries, the total return was up 2% in the quarter. And that’s a combination of a strong operational performance, currency gains and mitigated then by multiple contraction. If we look on the operational performance, the aggregate sales was up 26%, of which 8% organic in constant currency. And the adjusted profit was up 17% in the quarter.
Advanced Instrument and Piab completed the strategic add-on acquisitions of Artel and Joulin, and Patricia invested about SEK 0.7 billion in these investments. And we have a continued high focus on capturing additional opportunities and the pipeline remains strong.
Then a few words about the different companies. Atlas Antibodies grew at 21% organically and with increased profit margins. And we see a very strong development, not the latest acquisition Vectura, which today is a very sizable part of this business. BraunAbility continued the recovery growing nicely and also improving profitability.
In Piab, we saw an organic growth of 17% in the quarter, and the profit margin remained at a good level but was down somewhat, and that is driven by a combination of investments in sales and marketing and also increased costs.
Advanced Instruments had a very strong development once again with 16% organic growth and high profitability. Here, the margin deterioration compared to the previous year is a combination of significant investments to grow this business and also the mix effect of the acquisition of Solentim, which have lower margins. So that is a pure mix effect. But the underlying performance here is very strong.
Laborie grew 9% in the quarter. And here, we actually saw that the margin was down 7% compared to last year. That’s a combination of increased costs and some supply chain challenges — but it’s also, to a large extent related to significant investments in new product launches and one important one being the recently acquired Optilume that the company acquired.
Sarnova, good solid development, growing 6% organically with good profitability. Mölnlycke, I will come back to. And then finally, Permobil was the only company that didn’t grow organically in the quarter. We saw a good growth in Europe, but the growth in the U.S. was negatively affected by supply constraints. I should also say that when it comes to Permobil that during the quarter, the company also changed their ERP system, which affected both sales and profitability somewhat.
Then moving over to Mölnlycke. Here, we saw a very good development in the quarter with organic sales of 5%. If we exclude the PPE contract last year, the organic growth was 9%. And this was the last quarter with the PPE customer contracts in the comparison periods, and now we are through that comparison period explanations.
If we exclude the PPE contracts, all business areas actually grew in the quarter. Wound Care reported a very strong growth at 11% organically. And I think it’s great to see that gloves is now also back growing again they grew 6% organically in the quarter. Following a period with severe production and distribution challenges. The production is now up and running, but the company is continuing now to invest in more manufacturing capacity because the underlying demand out there is very strong.
If we then look on the profitability, you can see that we continue to see a sequential improvement — and if you look on the development in the quarter, we can see that despite continued cost increases in raw material and logistics costs, the EBITDA level was EUR 125 million, and that can be compared with about 110 million on average for the last three quarters that were also unaffected by the PPE contracts. So we are seeing an improvement also in the profitability in the quarter sequentially.
Moving then over to Advanced Instrument. This is the first quarter that we market value Advanced Instrument. We have held it at cost for the first 18 months since we acquired the company. And just to repeat, this is an excellent company, which I’ve highlighted before. They have really leading market position in attractive segments with strong growth.
And since we acquired this company, the average annual organic growth has been about 20% per quarter. And you can see that the profit margin has been well above 40% over this period. The company has also made two important strategic acquisitions with Solentim and Artel, really strengthening the position within the important biopharma segment.
If we then look on the valuation of the company. In total, we have invested SEK 7.5 billion in this company and the estimated market value now is SEK 10.6 billion. The value increase has mainly been driven by the very strong operational performance IR shows, but also strong positive currency effect since this company has a very significant part in the U.S., and we have seen a very much stronger U.S. dollar. This has been offset by a multiple contraction.
And just to give you a flavor of it, when we acquired Advanced Instrument, we paid 24x profit for it. And now in this valuation, we value the same legacy Advanced Instrument at 19x. The add-on acquisitions, we will keep at cost for an 18-months period like we did with the original acquisition.
But all-in-all, this means that we have seen a multiple contraction of about 20% since we bought it. And still, we can actually show this good value increase, which I think is an excellent start of this company.
Moving over to EQT, down 26% in the quarter, and that is mainly — the key reason here is the sharp decline in EQT AB and the stock market being down 43%. The funds actually was up somewhat in the quarter. We had an excellent cash flow of SEK 3.8 billion in the quarter. And as you can see to the right, of course, one should be aware that this can be lumpy over time, but a very strong cash flow this quarter driven by a couple of successful exits.
So to summarize, I must say that I do believe that we are well positioned if we will now enter tougher times. And I should say, I don’t have a crystal ball. I read the newspapers as everybody else. It is not unlikely that all the headwinds facing the consumers worldwide will gradually start to affect the demand in the world economy and not as now mainly the supply challenges.
But I think that if we enter tougher times, we are in a very good position for two main reasons. First, we have, for many years, invested in and built up a strong portfolio of companies within health care, medtech, automation, companies that have high profitability and strong cash flow generation. And of course, this is the strength if we enter tougher times. So I do believe we have a strong and resilient portfolio.
Secondly, we have been active over the last 3.5 to four years to really refinance our debt. And Helena will come back to that later on, but that means that we have a very good duration and low interest rates on our long-term bonds, and we have a strong cash position.
So I think the combination of a solid strong portfolio and a very good financial position puts us in a good position if we enter tougher times. So of course, if tougher times come, one need to be prepared for it, but I do believe we are well positioned if that would happen.
So with that, I hand over to Helena.
Helena Saxon
Thank you, Johan.
Then we will have a look at the net asset value development over the last five years. And we can see that the quarter ended at SEK 610 billion, and the average annual growth with dividend added back was 12% during the last five years.
And looking at the return by business area, we can see that it is a mixed performance between the three areas, Patricia Industries being up 2%, listed down 8% and investments in equity down 26%. And with the mix that you see on the pie chart on the right-hand side, this all combined comes down to minus 9% in the quarter compared to SIXRX minus 16%.
And looking a bit more carefully at two-thirds of the portfolio, which are the listed companies, we can see that also here, there is a mixed performance. While some of the capital goods companies had a tougher quarter from a share price perspective, we had strong contributions from AstraZeneca and Saab in the quarter. And this all listing portfolios, TSR, was actually down 8% then compared to SIXRX 16%.
Moving over to Patricia Industries, almost a quarter of the portfolio. This graph shows the sequential change in estimated market values or i.e., the change here in Q2 compared to Q1. And Johan has already touched upon it, but an important contributor to the value increase here is the fact that we no longer value Advanced Instruments at cost, but we try to estimate and market value for it.
We can also see that Mölnlycke and BraunAbility contributed while Piab and Permobil had tougher development. And as Johan also mentioned, SEK 700 million has been provided in the quarter in acquisition financing, which affects Patricia’s cash position.
Looking more carefully at the drivers of estimated market value, again, Advanced Instruments for the first time valued at estimated market value. And here also SEK 0.5 billion was provided in acquisition financing during the quarter. Mölnlycke’s value was up SEK 0.4 billion and this was driven by currency, higher earnings and cash flow that were all impacting the value positively. But here, we saw multiple contractions impacting the value negatively.
Looking at three, also up SEK 0.4 billion. This was due to higher multiples as peers have had multiple expansion and higher earnings impacted both positively. There was also distribution in the quarter of SEK 80 million. Piab was down SEK 0.3 billion, and this was due to higher earnings, which were positive, but then mitigated by lower multiples, which impacted the value negatively. And also here, there was financing provided by Patricia in the quarter. And then Permobil down more than SEK 1 billion due to lower multiples impacting the value negatively.
Johan mentioned our strong balance sheet. And having a look at this graph, I just want to start by saying we all know that we have a very long-term ownership horizon when we think about our companies. And with this perspective on the asset side, we in the finance and treasury department try to match that by borrowing really long-term debt. And we have managed actively the balance sheet for the last three to four years and borrowed as much as SEK 23 billion in the Eurobond market, and the average maturity of these bonds is 14 years and the average fixed interest rate, roughly 1.5%.
Our next maturity, as you can see in this graph is in 2029. And if you compare this growth to what is in the quarterly report, you might be missing something on 2023, but that is actually a repayment that went out earlier this week. So we have nothing to repay until 2029 and the average maturity of the total debt portfolio is now over 12 years. And in this turbulent quarter, we still have leverage at the low end of the target range for leverage, 0% to 10%. We are at 2.3% currently.
And finally, looking at the average annual total shareholder return, of course, it has been weaker in the last few periods here. But looking at all periods, we have managed to outperform SIXRX, which is very positive.
Viveka Hirdman-Ryrberg
Thank you, Helena, and thank you, Johan. We will now open up for questions, and we will start with questions over the phone. So over to you, Arianna, who will be facilitating our questions over the phone?
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Joachim Gunell with DNB Markets. Please go ahead.
Joachim Gunell
Thank you, and good afternoon. So starting off with a topic that we’re seeing across most industries with inventory buildup across several steps across the value chain to secure delivery capability. Can you just talk a bit on a broader level, we can stick to Patricia Industries. If you want to, what’s your view on the risk that it could pose a threat to order books for the remainder of the year?
Johan Forssell
Sorry, the inventory buildup that we have seen and that we see, of course, in many cases. What was the question related to that?
Joachim Gunell
Whether you think that there could be some air in order books, so to say? And if these order books are boosted and could that pose a headwind for the Patricia Industries holding for the remainder of the year?
Johan Forssell
Yes. It’s, of course, a very relevant question, Joachim. And it’s also very difficult to answer it, but it’s very clear that we are seeing supply constraints out there. So many companies are, of course, building extra inventory of components to be able to deliver. And I think that is especially true in companies with very high gross margin because then it’s actually a very favorable economics to do that.
So for sure, that is the case. This means that I do believe that you call it, you front run some of the purchasing, and that is one area. That might — must not lead, of course, to cancellations going forward. That’s a different topic. But for sure, we have probably seen some buy pre-buying, so to speak.
Joachim Gunell
Understood. And sticking to Patricia, in Mölnlycke and the pretty strong organic growth in light of the tougher comps here. Can you say anything about the mix of volume versus pricing in this case?
Johan Forssell
No, we report the organic part. But what I can say is that, of course, pricing is normally lagging because in some cases, you have contracts, while the cost increases in many cases comes quicker. There is a very high focus in Mölnlycke to increase prices, and we are gradually seeing that coming through. The biggest price increases have been done with the ORS business, and that is basically because of — we need to improve, where the company needs to improve the profitability within the ORS business. But the company has a high focus on continuing to work with price management to offset cost increases. And we can see that it’s gradually bearing fruit.
Joachim Gunell
Understood. And a final one with regards to that, we have seen, let’s say, limited investment activity in the listed portfolio despite your very strong balance sheet and asset declines year-to-date. So should this be seen in the light of that you expect say valuations to decline further or that you want to emphasize building the Patricia Industries platform?
Johan Forssell
No, you should not read that into it. And first of all, I should say that we continuously try to invest in all business cycles. And actually, we looked into it. And on the investments we have done over the last three strong years in the stock market 2019, ’20 and ’21, where we had very low interest rates and high market valuations.
And during these periods, we have actually invested SEK 28 billion, SEK 10 billion on the listed market and SEK 18 billion in Patricia. And even in these strong markets when we look on the return, the return on the listed part has been well above our return requirement on these investments.
And also, it looks very good on the investment we’ve done in Patricia. The biggest one you saw today with Advanced Instruments in that area. So that’s the first comment. We are, for sure, always looking into new investments. And the one thing that I can say is, if you talk about the listed companies, one should, of course, be aware of the fact that in many companies, we own 30% or more or very close to 30%, which basically makes it impossible for us to buy in those shares because then we need to put a bid on the company.
Secondly, we are actively working on the board in our companies, and that means that we are quite often restricted definitely ahead of the quarterly report, but also for other reasons, we are restricted in many of the companies. But we have a strong financial position, as Helena presented earlier. And we are, for sure, ready to act if we should see attractive opportunities here in this turbulent stock markets.
Joachim Gunell
That’s very clear. Thank you.
Operator
The next question is from Derek Laliberte with ABG. Please go ahead.
Derek Laliberte
Good afternoon. So I was wondering if you could give some details on what drove this really impressive performance in the Wound Care business of Mölnlycke, whether some resolved supply chain issues made deliveries possible. And also, if there are any sort of underlying reasons in the market or product specific and also if there are any specific markets within EMEA that drove this?
Johan Forssell
I think that the strong development, first of all, we have seen for a number of years that Mölnlycke has gained market share in Wound Care. And that, of course, is really good to see. But from a demand perspective, I think we are also seeing, and that is affecting Wound Care but also other parts of Mölnlycke positively is we have seen a comeback when it comes to elective surgeries, and that has also had a positive impact on the company after, of course, the low levels during the pandemic.
Derek Laliberte
Okay. Great. Thanks for the color. Those were from me.
Operator
The next question is from Oskar Lindstrom with Danske Bank. Please go ahead.
Oskar Lindstrom
Yes, good afternoon, Johan and Helena. Two questions from my side. I mean, first, maybe following up on this question regarding Mölnlycke Healthcare and the strong performance in Wound Care, in particular. I mean is there a specific segment or new product which is driving this growth? Or is it more what you mentioned last year, sort of a pent-up demand after the pandemic? And if it’s the latter, I mean, do you see a risk that we’re in a bit of a sort of a bubble in terms of demand right now due to this pent-up demand and that there will be a shadow effect after it?
Johan Forssell
I don’t have a crystal ball but what I can say is that if you talk about the development in Wound Care, I think the company in itself has a very strong market position and it’s gradually bringing forward new products. And in some cases, this might be bigger improvements and some it might be smaller, but they are really actively working on that and investing heavily behind that.
But in addition to that, and we write about it in the report. We are also — or the company, I should say, is taking significant investments within sales and marketing to grow sales in this very profitable business. And that is an area, for example. And it’s also geographical expansion, where we are putting more feet on the ground in, for example, China. So significant investments is taken and was taken in the quarter within sales and marketing, and that is also one area, I think.
Oskar Lindstrom
Okay. Thank you. My second question, and maybe this is more for you, Helena, on the revaluation or the valuation of Advanced Industries. I mean, what peers are you basing your multiples on?
Helena Saxon
We normally don’t disclose peers, but we find companies that are very similar to the one we try to value, but we also use a broader index, which is health care pharma index, actually, health care medtech index in this case. So I won’t disclose the actual peers, but there are several. And we actually looked at the same ones when we went into the acquisition, and we’re sticking to the same ones.
And as Johan said, the multiples for those companies have actually come down since we acquired it, and we still have managed to show a value increase in the company. But as you know, also for Mölnlycke and the others, we never actually mentioned exactly which peers.
Johan Forssell
But I think what we can say is that if we compare the performance of Advanced Instruments when it comes to sales growth and profitability compared to the peer group. Advanced Instruments have stronger financials than the peer group that we use to compare it with.
Oskar Lindstrom
Thank you. Is that something you consider when you translate the multiples of the peer group into multiples for Advanced Instruments that you sort of say, well, this should be valued at a premium?
Johan Forssell
No.
Helena Saxon
No, we don’t.
Oskar Lindstrom
Okay. Thank you very much, anyway.
Johan Forssell
Thank you.
Oskar Lindstrom
Thanks.
Operator
There are no more questions registered at this time. I will give the floor back to Viveka. Thank you.
Viveka Hirdman-Ryrberg
Thank you, Arianna. We have a few questions from Samarth Agrawal over the web. Four questions, and I’ll take them one-by-one. The first one relates to what drove the difference in adjusted EBITDA versus sales growth within Patricia Industries portfolio? Just strong operating leverage or is there also a caution on spending?
Johan Forssell
Cautious on spending, I mean, basically, you can say that even though the profit growth was above the organic growth, but we had a currency benefit. So actually, in aggregate, there was some margin deterioration in the quarter, and that is a combination of that we have increased cost on one side that we are investing heavily in some companies — we are investing heavily in Atlas Antibody, Advanced Instruments, in Laborie with Optilume as I mentioned before.
So significant investment and some cost increases, which has been mitigated, of course, by good growth and the price management that I talked about. So that is roughly, I would say, the equation.
Viveka Hirdman-Ryrberg
Then the second question, would be great if you can quantify the impact of multiple contraction on 2022 — the 2Q net asset value and then specifically for Patricia Industries.
Johan Forssell
I mean, we report the multiples in our quarterly report. So you can easily go in and look on how that has developed. I think if you would look on the — and remember that we put the multiples on the last 12 months rolling. And I think if you would just take the average of the ones that we have reported in this quarter is about 15x earnings.
Viveka Hirdman-Ryrberg
And then there is a follow-up questions here, if you believe that multiples have bottomed out?
Johan Forssell
I don’t speculate — I don’t want to speculate in that. I think that what we should with Advanced Instruments here as one example. The key is that you — if you develop the companies well, you will create value even if you see multiple contraction. Of course, the multiple contraction, we have already seen significant multiple contraction.
So of course, that will gradually come to a level where there is too much value into it, but I will not speculate into when that will happen.
Viveka Hirdman-Ryrberg
Then there’s a third question here relating to EQT fund commitments. How much of the outstanding EQT fund commitments reflect commitments for EQT X-fund?
Johan Forssell
You mean EQT 10?
Viveka Hirdman-Ryrberg
Yes. Sorry, 10.
Johan Forssell
We have a total commitment to EQT of SEK 17.5 billion. If you look on the commitment to EQT 10, they have a target fund size of EUR 20 billion, and we have a commitment to that of about 3%. So that’s something like SEK 6 billion, SEK 7 billion out of the SEK 17 plus billion.
Viveka Hirdman-Ryrberg
And then there is a final question here related to the capital — of the capital deployment plan over the remainder of 2022. Do you expect net debt levels to increase due to higher investments?
Johan Forssell
I would say it will all depend on what opportunities arise. But I would not say that I expect higher leverage.
Viveka Hirdman-Ryrberg
Then that was the final question we had over the web. And by that, I think we have no more questions. So we, on behalf of all of the Investor, I would like to thank you for joining us today, and we will be back in October with our Q3 results. Thank you.
Johan Forssell
Thank you very much.
Helena Saxon
Thank you.
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