AddLife AB (publ) (ALIFB) Earnings Call Transcript & Summary

Welcome. My name is Kristina Willgård, and I am the CEO of AddLife.

My name is Martin Almgren. I'm CFO for AddLife.

And here comes a short information about our second quarter. If you look at the second quarter, it has been a strong quarter when it’s come both to organic and also acquired sales. And to summarize this quarter, we have had very high activity within the group, of course, when it comes to the largest 2 acquisitions that we have had. But we also see a large inflow from new ideas to do acquisitions for the future. I think that the big 2 acquisition that we did was interesting for a lot of people around. And they are, therefore, contacting us when it comes to further opportunities in our acquired growth. But still, we did a very strong organic growth as well in the quarter, but we also see that we have very strong COVID sales, mainly in our Labtech business area. The quarter ended up with a sales increase of 82%, summing up to close to SEK 2.3 billion. EBITA ended up on SEK 332 million, which is 83% up, and the margin ended up at 14.6%. Let's move further then. It seems like we have some problem here from this side, unfortunately. I hope that you can see the report as well. I think we cannot talk about our business without talking about the pandemic. As we all know, the pandemic is still here. The pandemic is spreading around the world. Even though we see still see that in most of our own market the vaccination has really made lower infection rates and we see, of course, fewer critically ill patients in the hospitals. That is very positive, of course, for all of us. But -- sorry, I get -- it seems to be some technical problem. But hopefully, you can see it right now. As I said, problem still around the COVID is not released yet in -- of course, that impacts our business a lot. We had very high volume of COVID testing mainly in April. And then when the infection rates came down gradually in the quarter, we saw, of course, a decrease on the testing. But we actually see that with the new mutations, new spreading, there will be continuously COVID tests at least throughout this year, but we don't expect the volumes to be as high as this. It seems to be some wrong with the noise in this call. I don't know. We get a chat on this. Lina, do we have a problem?

It looks fine from here. So just keep the presentation and try to ignore the messages from Teams.

Okay. Thank you.

Okay. Everything looks good.

Thank you. Sorry for this. A few words more about the COVID. We see very high activity, of course, within the field of research. We see high funding both from private and public actors. So we have high activity as well in our research companies. The COVID sales in this quarter ended up to SEK 710 million, which actually is double as much as in Q2 last year. I think this is the highest sales we have had so far in the quarter when it comes to COVID-related sales. For the first 6 months, COVID sales ended up on SEK 1.3 billion. Coming into the net sales quarter. Strong growth, 82%. Acquired growth was 63%, SEK 791 million. Of that, you could see that the new acquisition, Vision Ophthalmology Group and Healthcare 21, came in with close to SEK 600 million in the quarter, which is actually exactly what we expected. So they have really delivered the first 2.5 months according to the plan. We have very high organic growth of 22%, which is fantastic. Of course, a big part of that is COVID-related. But if we take away the COVID-related sales, we have still an underlying organic growth of 7%, which we are very pleased with. This is actually just in line with the organic growth that we have had more or less year-over-year since 2004. Year-to-date figures are very close. You see a big increase, of course, in the yearly sales, 74 percentage. We are negatively hit by the FX effect of some SEK 100 million in this first 6 months. And as I said, COVID sales SEK 1.3 billion, ending also up with organic growth of 6% for the first 6 months. So I would say very stable organic growth, and then we have a very good growth both on acquisition and on the COVID side. I think the interesting, when you look at AddLife right now, is that we actually have changed a lot the last 2 years. So this slide is more or less a reminder. You could see on the bottom right side, where we write 2020 pro forma, where we have the sales right now in the market. So the Nordic countries now summing up to 45% of the sales, where Sweden is the largest market with 14%. But you can also see that U.K. and Ireland are 15% and 10% of our total sales; Italy, some 6%; Germany, 4%; and the rest of the European countries, which is more or less the Central Eastern Europe and Benelux and a little part in Spain as well, ending up the 17%. So the group now is 55% outside of the Nordic countries, and then we have the rest in the Nordics. Still looking into the figures. As I said, we had a very good and stable profit level as well, increase of 83% in the quarter, which was a margin of 14.6%. But you should be aware, which we have also wrote in the report, that we have high transaction costs this quarter for the -- both large acquisitions. They were summing up to SEK 53 million, and some SEK 24 million of that was stamp duty for acquiring the shares in Ireland. So if we sort of exclude the specific transaction cost, I think we have a very strong EBITA growth, summing up to SEK 385 million. And the EBIT margin out of that was 16.9%. And for the first 6 months, we have the same pattern. You see that, excluding the transaction cost, we are ending up to SEK 711 million in EBITA and the margin 17.7%. And when we look [indiscernible] from a COVID perspective, we really expect the EBITA margins to normalize a little bit after a while, as we have informed everybody before. When and if the COVID volumes will decrease over the coming quarter, we expect it will be a little difficult to contain -- continue to have EBITA margin on around 17% in this group. Looking into the Labtech business. Labtech business, all sales in the Labtech is organic sales, so we ended up with 43% growth organic. But again, a big part is COVID-related. And I must say our companies within the area of Labtech are doing a fantastic job in the market right now. We have in this quarter included our business in Biomedica, which we acquired in 2018. 100% of that business now goes into our Labtech organization. We have previously divided it 60% to Labtech, 40% to Medtech. But after sort of an organic reorganization, we decided to put everything into the Labtech business. And all figures are therefore recalculated so that you can compare the right figures between the quarters historically. A very strong quarter, ending up with SEK 1.1 billion in sales, 43% up, as I said, and an EBITA margin of 23.9%. Extremely strong. A few words also about our Diagnostics business. I said it before, very strong testing in the quarter. Of course, it decreased somewhat in May and June. We are happy to see that our sort of normal diagnostics test has recovered in this quarter. We still have very high volumes of blood gas analysis testing. And we also see increased volume of other tests, like Alzheimer's and oncology, et cetera. Research field strong, as I said; pharma, a little bit more stable. We are very pleased with the growth we see in our business which sell own instruments in the whole of -- in all markets, actually. It has been a very strong growth in this quarter, except for China. And we have seen that to come because China actually has the new 5-year plan this year. So we expect a somewhat lower sales this year. So summarizing Labtech, we have an organic growth, excluding COVID sales, in the quarter of 10% and year-to-date 9%. So we are very pleased with what we see in the Labtech business. A few words about the Medtech business. Sales growth, 159%, but organic negative with 24%. Acquisitions is actually the part that adds the sales here. We have both Healthcare 21 and Vision Ophthalmology Group into the Medtech business this quarter. We all know that there are less elective surgery in the market. And that, of course, gives us a weaker demand in this area. And then again, in the transaction cost that we talked about is really putting a push on the margins. As you see in the Medtech business, the cost of SEK 53 million is really reported in our Medtech business. Looking into the health services. Elective surgery weak, as I said. We see that the operation queues are growing enormously. We wrote in the report that our new markets, Ireland, now have 860,000 people in queue, and U.K. actually 2.3 million waiting for surgeries. Of course, this is very challenging for the health care sector. But we don't see that it has restarted yet. I think that, in most countries, we have to realize that all people working in the hospital have worked very hard during the pandemic, and they need some sort of relief or vacation now here during the summer. So we expect the restart to be after the summer, some August, September. But I think our business, nevertheless, have done quite well to compensate this dip in elective surgery. We have been good at selling other medical devices both into intensive care and more general health care in the quarter. So if you look at the organic side, you see that we have 1% up, excluding COVID in this business area, but year-to-date, we're negative 2%. Just a few words about our home care. It has -- for the home care companies, it has been challenging the whole COVID period, but we see more positively, again, in this quarter. And it's a big difference comparing April to June figures, where we actually see that a lot of people now get the vaccination in the elderly care, and they are really opening up in the month of June. And we have an ability to get in and do installation and tryouts. And it was a really big push in the market where -- with a lot of new procurements coming up, tenders to be answered during the coming quarter. So it looks very promising for the future for home care, actually. Martin, I think I will end there, and then you can take over.

Thank you. Let's have a few words about our long-term financial goals. As you all know, we have a growth -- EBITA growth goal of 15% annually. Looking at the rolling 12 months ending June, we had an EBITA growth of 158%. And since we were listed in 2016, we have had an average yearly growth of 51%. The other financial goal that we have is profit to working cap, and we ended this quarter at 115%, which is well above the 45% that we have as a financial goal. Moving on to acquisitions, a few words about that. As you all know, we did 2 acquisitions in this quarter. We bought Vision Ophthalmology Group with a headquarter in Germany, but business in Germany, Switzerland, U.K. and Poland. It belongs to the business area Medtech and had sales of some SEK 700 million. We also bought Healthcare 21 Group with a headquarter in Ireland. They have a net sales of SEK 1.7 billion and 450 employees, and also belong to the business area Medtech. So in total, we have had added SEK 2.4 billion in sales in 2021. And since beginning of 2020, we have added more than SEK 3 billion in sales rolling 12 months. Looking at the geography, as I said, U.K., Ireland for Healthcare 21 and also more European, Switzerland, Germany for VOG. Moving on to our income statement. Kristina has said about sales and EBITA levels before. And just to make sure that everyone heard, we have included SEK 53 million in sales-related costs, of which SEK 24 million is stamp duty. This has been put as a cost in the second quarter, so it will be included in the overhead expenses in this slide. We also -- if you go a little bit further down in the income statement, the tax is a little bit higher this quarter, and that's also due to the nondeductible costs related to the acquisitions. And as you all see here also, if we move up to the gross margins as well, the gross margins in the quarter and also in the rolling 12 months ending -- end of June is a little bit higher. It's now 34.9% in this quarter compared to 33.0% last year. And this is mainly due to the product mix that has changed. In last year, we had a lot of instrument sales with a very low profit. And this year, we sell more reagents. That's the main reason behind those changes in gross margins. Looking at the balance sheet. Of course, there are big changes since our last report and also the year-end report, and this mainly comes from the acquisitions. Goodwill and intangible assets amounts now to SEK 6.8 million (sic) [ SEK 6.8 billion ]. We have also in the equity this year, we have, of course, the rights issue when we paid for the 2 acquisitions. And we have also had a dividend in this quarter. But looking at the net financials -- the net financial liabilities, that amounted to SEK 4.0 billion. And the net debt-to-equity ratio is 1.0, and the equity ratio is 38%. So we still continue to have a strong balance sheet going forward. Looking at the cash flow for the quarter, it amounts to SEK 200 million in the quarter compared to SEK 128 million last year. Of course, the increase in profit has an effect. That's the main reason behind the increase in operating cash flow. And we see the same trend in the rolling 12-month figures, where we have operating cash flow of SEK 1.1 billion compared to SEK 950 million end of December. And here, you see also in the investment activities the acquisitions that we have done in the quarter, which has an impact of SEK 2.5 billion in the quarter and almost SEK 2.8 million (sic) [ SEK 2.8 billion ] in rolling 12-month figures. Some key financial indicators in the last slide before we open up for questions. And here, we have talked about everything except number of employees, actually. We are now 1,744 employees in AddLife Group, which is really, really nice. So I think this is the last slide. And then we open up for questions.

Kristina, can I -- it's Charles Weston here from RBC. Can I kick off?

Yes, please do that.

I have 2, please. First of all, could you provide a bit more color around the elective surgery trends that you described, specifically what they're running at on a sort of a year-on-year basis? What gives you confidence that things might kick off again in August, September? And are there any specific specialties that are being affected more than others?

Good question. If we can start with more of the color, what do we see. We see -- in most countries, you can see sort of a register where how many sort of surgeries are done compared to normal. And what we've seen in many markets where we are, there seems to be some 80% out of sort of the normal volumes that they did in 2019. That is the comparison that we see. But actually in Sweden, as a specific country, we saw that in June, for example, the level actually decreased to around 60% compared to what was done in June 2019. So it's a bit different from country to country. But when we look at that statistic, so I would say, 80% out of normal. We see in the countries, Central Eastern Europe, where -- with the Medtech business we have there, we see that cardio, for example, is far behind. We also see that hips and knees seems to be far behind. So it's -- but then, of course, they try to do things that are more urgent. I think hips and knees are things that people just have to wait to get these new -- fixed. So that will take some longer time. We also see, when you talk about ophthalmology actually, we see that the rate for this quarter is some 15% less compared to what we had in 2019. We had statistics from the 4 European countries where we have ophthalmology. And actually, from that statistic, it was 19% less than normal. But in our business, it was 15% less. So that's really where we see the main big differences. I don't know if that's enough color on this side. Kickoff, August, September, why do we think that? Well, hopefully, we see that the infection rates are going down. We see that people also will come back to the hospitals. We actually talk to a lot of our customers, and they have very frankly said that people working in the hospital has to get vacation now. We will not be able to kickstart that, even though we know that the needs are enormously -- I would say all regions in Sweden that we've been talking to, for example, they say we will not restart anything until end of August probably. We just -- otherwise, the people will not be able to work there. They have worked too hard during the pandemic in the ICU, so they are not sort of in shape of starting up high speed in the activity in the operation room again. I also think that in most countries, the hospitals also are thinking a lot about how can they be more efficient now when the restart comes up. Because they really need to use their operating theaters more than they've done before, so they really have to use all the rooms much more efficient and have higher turnover in the operation theaters compared to what they had before. So I think it's a lot of that sort of work happening right now before they sort of kickstart it. And I actually think that most hospitals have learned a lot during the pandemic how they can work differently compared to before, because they really have to use competencies from different parts of the hospitals to make this change. And I think they realize that it's a big demand and it's a big push that they really improve the efficiency. Let's see if that happens, but that's sort of -- that's why we think this will kick off after the summer.

Can I just ask a clarification point just on the U.K. and Ireland, given Lab21? Are the trends you're seeing similar there? I mean, obviously, I'm based in the U.K., we're certainly seeing an increase in cases, not decrease. Does that have a different dynamic perhaps to the rest of Europe?

It's -- I would say, it's more or less the same picture we have in U.K. and Ireland. I think, though, that Ireland will be a slower start than the U.K. because Ireland is quite closed, as you probably know right now. I mean they opened up for a few weeks, I don't know, was it a month ago? It was, I guess, too many people in the pubs. So they got a second wave or third wave or whatever. So they closed down society. And what we realized is that the restart of Ireland will take longer time than the restart of U.K. I think U.K. actually tries to open up as much as possible right now. The positive is that we don't have so many really ill people in the ICU. So hopefully, U.K. can restart a little bit quicker on the elective side. But it's very early to say what is actually happening. But that's the best indications I have right now.

And my -- the second topic and last, you'll be pleased to know, is relating just to scale. The business has grown so fast over the last few years through acquisition, number of employees, obviously revenues as well. What are the key challenges that you've experienced in terms of scaling your organization to be able to deal with and manage all these new employees and new organizations and new territories?

I mean the challenge is, of course, a lot when it comes to the integration. But again, I think we have such a strong foundation when it comes to -- where -- the culture, our vision, the core philosophy. And what takes time is really to start training everybody, get everybody on board, you could say, to have sort of the AddLife thinking. We are very pleased that we already, after having these 2 big companies on board, could restart the training courses for vision and corporate philosophy. That, of course, for this first 2 courses we have had was only for the management teams or some 30, 40 people. But to have this for all new employees, that will take some time. But that, again, is very important because that really -- that's really where we can set the foundation for having this same thinking, this same way of driving and the understanding why we want to do changes in different ways or another. So I think that takes a lot of time. So from a resource perspective, yes, we have hired one more person that would work more with AddLife Academy. He starts here in August because we really need to have this sort of higher speed to get that in line. Otherwise, the integration from a financial perspective with these 2 larger acquisitions and the acquisition we did in Q4 has worked fantastically from a financial reporting side. So our finance team, both here and in the companies, have done a really good job. And we don't really see that is so much challenging. But again, I think we -- for the future, we will probably put in 1 or 2 more people in business control just to help all these new companies work accordingly with our expectations, using our toolbox, understand how they can do changes in the companies to really be more profitable over time. So it's a lot of work happening on the backside of all of this, which will put in a few more people, but less than a handful.

Kristina, this is Vahaj Ahmed from Shukr Investments. Overall, a decent set of results. I was particularly not very happy with the Medtech performance, and I'll tell you why. Even after making the adjustments for Biomedica going into Labtech and also adding back the one-off costs with respect to transaction and stamp duty, I was expecting the EBITA margin to be around 11.4% for this quarter, especially given the fact that previous quarter you were around 9.8%. But then you added Vision and Healthcare 21, which were around 12.5% to 13% EBITA margin. I mean that was the indication I had. So blended, I was expecting this margin to be 11.4%. And what you've reported, I mean, obviously, accounting for the one-offs, it's about 9.9%. So I just want to know which one did bad, I mean, the existing business? Or these guys like Vision and Healthcare 21, they will take time to get up to the mark? So I'm just trying to get a sense of -- yes.

Very good question. I would say the new acquired business have done accordingly. But Healthcare 21 also have elective surgery a big part in their portfolio, which actually Vision Ophthalmology had, but they have been able to retain the margins that we communicated before. So they have done accordingly. Healthcare 21 was a little bit hit by the sort of the weaker elective surgery in this quarter as well as the underlying business. Even though we could compensate on the total -- I mean, we had an organic side of close to 0, we didn't sell the right product portfolio to get the margins out. So when elective surgery is low, a lot -- a big part of elective surgery products is own products when it comes to our Mediplast business, for example. And we have really high margins on those. And that sale we didn't get. So we could compensate on the volume, but we couldn't compensate on the margin side because of the product mix. So that is really -- the elective surgery is what's making us having a lower margin. I think it was -- if we talk about Healthcare 21, perhaps it was 0.5 percentage or 1 percentage less than we sort of expected from a full year, but we had lower margins in our own businesses due to the weaker demand in elective surgery. That's where it comes from.

Sure. So I understand that basically existing business, excluding Vision and Healthcare 21, the big decline has come from -- in EBITA margin has come from that and mainly due to, you said, elective surgery.

Yes, exactly. Even though we could have the volumes, but we didn't get the right product mix to get out the margins. That's the reason.

Got it. And basically, just to analyze, I've seen that you've mentioned COVID-related sales. Is it possible for you to maybe now or at some point in the future or on a separate email maybe share like COVID-related EBITA? So I'm just trying to figure out, once -- I hope we'll be back to the world where we came from, where would margins kind of end up? Because, obviously, there's like new businesses that have been added, so I'm trying to get a sense of where the margin will be. But it will be very helpful if you could, I mean, maybe share COVID-related EBITA, so just to do the numbers myself.

I'm not sure we actually have that report submitted from our companies because we know more or less what suppliers are in there, but exactly the EBITA margins of those sales is extremely difficult to get out from the reporting actually. But I think, just sort of elaborate around it, coming back to what Martin said, you saw that in the quarter here in Q2 this year compared to last year, we had higher gross margins. And that -- and the main reason for that is that we, in the Diagnostics business, had a big part of COVID tests, not so much instrument sales. Last year, same quarter, of course, the customers started to buy a lot of instruments. And as you know, we have around 0 or actually negative margin on a lot of sales in Diagnostics in instruments. But then we compensate with very good margins on the COVID tests. And the margins in the COVID testing has been very strong, especially in the Nordics markets so far. But as we wrote in the report, we see that the price pressure is there, especially in the Central Eastern Europe. Because yes, now people -- I mean, that was happening in the market. So I would guess that the margins will decrease over time on these tests. And that's really why we try to sort of help you and say that the coming quarter, yes, we will still have a lot of COVID volumes, but we expect margins to decrease more to a normal level. I don't know if that's good enough, but that's really the information I can give you.

Sure. Yes. No, that's very helpful. And maybe just a follow-up question. There was like a 1.5 percentage point increase in EBITA margin in the Labtech business. And that is just maybe because some of the Biomedica business was now -- sorry, it's just -- but yes, I mean, I just want to understand, there is some strength in the -- from previous quarter in the EBITA margin of the Labtech business.

But the comparison figures are included 100% of Biomedica.

Yes. So you expect that -- well, you don't expect like an abrupt decline in these sort of margins? It will be more gradual over the rest of the year? Or what do you expect? I mean given the situation and how Europe as a whole is kind of recovering from COVID.

I mean, yes, Europe will recover from COVID, but we still see that -- I mean, we see new areas, we're getting new mutations, it's spreading around. The only tool that all governments have today is still to do tests because -- to understand where it is spreading, and that is through COVID tests. So I -- therefore, I don't expect it to be a big sort of going from 100 to 0. It will be a decline. But how steep that will be, it is more or less impossible to say. I also hear that a lot of people expect it to be a fourth wave again after the summer, who knows? I'm not an expert in this disease, even I think a lot of us have read a lot. It's too difficult to foresee actually what exact happens with the pandemic. But gradually decrease, I think, is what you should expect, at least that's what we expect when we do our internal forecasting. And therefore, I also say that we expect that EBITA margin will decrease over time because we cannot have these high volumes on the same costs for such a long time. Is there anybody else out there? If not, I expect us to close this call. We've taken 40 minutes right now. We are pleased with your questions. And if you have questions, don't hesitate to call us, and we will try to help you out to understand AddLife more in detail. Just to summarize, I think we've done a very good quarter. We are pleased with what we see in the growth here in the group. And we wish you all a great summer. Bye-bye.

Thank you.

Thank you.