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

Hello. I would like to welcome you, everybody, to today's investor presentation, to AddLife. It's 10:00, so I think it's time to open up presentation for some 20 minutes. And then of course, we are open to do any Q&As. I am the speaker today, Kristina Willgard, the CEO; and in the room, will also have our new CFO, Christina Rubenhag. But I will try to do also all the financials today, but if you have any specific question, she will be available to answer those in depth. So we have today released a report with a headline, A Quarter in Change. And I think that's what we all have seen happen in this quarter, just as we have expected. The COVID sales would decrease one day because we knew that pandemic will sort of fade out, and that actually happened this year in Q2. What is -- when you compare quarter-to-quarter, we realized that the comparison quarter Q2 2021 was the strongest record quarter we have had when it comes to COVID sales. So we see a big drop, of course, in COVID sales in the quarter. It's actually 88% down. On the other hand, we see also a growth that is coming specifically from the acquisitions we have done. But also when we look at our existing companies, we see a growth due to increased -- due to increased elective surgery in the market. We also see a comeback in the home care market where we have opportunities to meet customer, do tryouts, et cetera, et cetera. We also see that we see more general research is coming back also in this quarter. So the organic growth, excluding COVID, was 4 percentage, a little bit higher in our Medtech business, and 3 percentage in our Labtech business. We have completed 2 acquisitions in the quarter, and we did a small acquisitions on the 1st of July, also in the Q3 quarter. So net sales ended at SEK 2 billion closely. It was a decline of 9 percentage. And our EBIT (sic) [ EBITA ] came out on SEK 240 million, which gives us an EBITA margin of 11.6%. If we go specifically again into the COVID, because I think the COVID -- what's happening, the COVID market is really what gives the big change in this quarter. I think we have tried to be as transparent as possible during the last 2 years, and you really see in this graph that the big volumes we had during Q4 2020, Q1 '21 and Q2 '21 we are not even close, if you look at the quarters right now. So that is actually what happened. We have, of course, less testing in our diagnostics companies from the COVID during the quarter. And I think more or less all countries has decided to decrease the testings. But if we look at the market as a whole, I would say what happened in the market in the quarter is that it has normalized. We see that we have been able to meet with the customers again. We have been able to have meetings. We have been able to be at different fairs, so we actually see an increased activity in all our subsidiaries during the quarter. But since infection rates hasn't really sort of come down to 0, we also see in the end of the quarter that the infection rates in the COVID has actually made that a recovery in surgical field hasn't been as sharp as we would expected. So it has been a slower pace in the recovery. On the other hand, of course, it has increased a lot compared to last quarter. But still, it's a bit hesitant. Coming back to sales in the quarter, we see that the net sales came out, as I said, on SEK 2 billion, and you see the bridge on the right hand. The upper side is the quarter bridge, and the down, you have the year-to-date figure. I mean this quarter, you see that we have organic growth of SEK 63 million. We have SEK 300 million from acquisitions, but a drop of SEK 600 in the COVID. It was, of course, very difficult to compensate for in one quarter. Long term, though, I think if you look at the year-to-date figures, we really see that acquisitions we have done during the last years and the acquisitions we have done this year really compensates the drop in the COVID sales. And that has actually been the strategic idea we have had throughout the last 2 years. That has been one of the main reasons why we have dedicated a lot of effort to do strategically right acquisitions to compensate for the expected drop in COVID sales, which happened right now. Looking into our EBITA in the market. Of course, it was a hit in this quarter due to the factors I tried to describe. We come out with an EBITA margin of 11.6 percentage. And year-to-date, we are coming out on the margin of 14.5 percentage. If we just talk a little about the global economy, we all know that we have the awful war continuously in Ukraine. We see increased inflation, we see increased prices. There are still a lot of difficulties in sourcing and supply chains. But what I would like to emphasize is, really, that our subsidiaries have been extremely successful in transferring the price increases towards our customers. So actually in both business areas, we see an increased gross margin in the business. Coming mainly, as I said, from price increases, but also from a change in the product mix. This quarter, we have more of sales of instruments to elective surgery, which have higher margin than other medical disposables or medical products that we have been able to sell during the last 2 years. So that's why we have a better gross margin, which I'm very pleased to see. And I would say, looking ahead, I think really, we have good chances to increase the margins even further. Even though it will be challenge, of course, which is really dependent on what's happening in the world economy and the inflation rates. But coming back to our model, I think we have shown year-over-year the strengths we have in being very able to take on changes in our market environment. A few words, though, in our Labtech business. Yes, the significant drop of COVID sales was, of course, here where we had the big drop in the diagnostics field, close to SEK 500 million drop in sales. On the other hand, we saw also organic growth coming back. We could always argue if it was possible to get more organic sales already in the first quarter, I think we have to realize it takes a little bit time for our customers to change from the COVID testing to other testing. But we are working really hard with all customers to make sure that they use the installed base of instruments to do other tests going forward, which will hopefully see a higher growth rate in next coming quarters. We have done one acquisition in the quarter, it was BioCat, a research company. And after the quarter, we did JK Lab in Nordic, which will be a small add-on to an existing Swedish company. So all in all, we had sales of SEK 786 million, and the EBITA margin came out close to 15% compared to the very strong margin last year of 23.9%. We have, as you know, also a lot of details discussing the Diagnostics and the Research. I think I've mentioned most of it. But as I said, we see high activity in the market that more traditional sales is coming back, but it will probably take a few months until we really see it's up in normal pace. What I think was very positive from the Research side was that we saw a much higher demand, both for normal research reagents. Not only research reagents for sequencing of the COVID-19, but we also saw a big interest in our instrument product portfolio. Thus, we see that we have longer lead times from our suppliers when it comes to installing these instruments, but the pipeline really looks good here. We have also -- have a high interest when it comes to specific microscopes to really advanced research for many customers. A few words in our Medtech business as well. The Medtech business in the quarter, of course, we saw that operations, elective surgery coming back strong in many, many countries, both in April and May. But I would say in the last 10, 15 days of June, we saw it slowing down a little bit again. That was, of course, driven by the return of higher infection rates. But as I said in the beginning, number of surgeries really need to increase even more to take care of the normal SKUs, but we still are facing a lack of personnel resources at the hospitals in most European countries, that's why we can't really see the high pace coming back as we all want to see it. We have had one add-on acquisition in the quarter. It was O'Flynn Medical in Ireland, which are fully integrated now into Healthcare 21 in the quarter. So summarizing Medtech, it's sales up at 17%, SEK 1.3 billion. We have an EBITA of SEK 129 million, which gives us a margin of 10 percentage in the quarter. A little bit more details in Medtech. As I said, elective surgery and resumption takes a little bit longer time. What I haven't mentioned so much is actually home care. We see good opportunities in the home care right now, which have big interests and big strong growth in, I would say, more or less every company here. What we think is very interesting is, really, the high interest we have when it comes to our digital solutions. And we have also, in the quarter now, integrated Telia that we acquired last quarter into our own companies, and we have continue to develop our digital self-monitoring systems in the quarter, and that is something we will continue with for a number of quarters coming forward. So in this quarter, we have put in SEK 11 million extra in development costs in the results in the quarter. And you can see here also in the Medtech, we haven't got any COVID sales at all, neither in last quarter and not in this quarter in 2022. The acquisitions we have done so far this year is 5 acquisitions. They, together, add some SEK 855 million on the full year revenue, and we have added totally 355 new employees to the group. Talking about AddLife and the thoughts we have right now when it comes to acquisitions, we are actually working hardly with increasing our pipeline of acquisitions. We think it's not perfect timing of doing a lot of acquisitions right now, so the work for the continuous part of the year will be to grow the pipeline and to have interesting discussions with a lot of acquisitions candidates to continue late during the year or probably early 2023. So where are we when it comes to our financial goals? You know we have a goal, long-term profit growth of 15%. And if we summarize right now, after this quarter, we have had an EBITA growth of 10% for the rolling 12 months. We still have a very high profitability though. Profit over working cap is 74%, which we have a target of 45%. And the focus now is to continue up a lot with both these targets, and specifically with our profitability target. Since all of you know that profitability, as we measure it, really gives us cash flow into our business. And I think that is important to generate. And if you also look at the quarter results, we did good cash flow in this quarter. A few words also about our full result in the quarter. We have talked about EBITA, and we also see in this slide that we have increased the gross margin. It was actually 39% in the quarter, it's actually an increase of 4 percentage units compared to last quarter, which I think is very strong. And as I said, coming back to the surgeries and also the acquisitions we have done and the price discussions in -- with our customers. We have increased depreciation of intangibles due to the acquisitions we have done, and you also see that our financial net is increasing and that is dependent on increased interest rates on our debt and increased exchange rate variances in the quarter on debt in U.S. dollar and euros. Looking at the balance sheet. We have a balance sheet where we see financial net liabilities of a little bit SEK 5.5 billion, and that gives us a net debt-to-equity ratio of 1.2. And we have, as a goal in AddLife and always talked about, that we would like to have a long-term multiple, that is, not more than one. So from that point of view, you realize all that we are now looking forward to work with our cash flow to repay debt over the coming months and quarters. And if you look at the financial net liabilities over EBITDA, it's now on 3.6%. I also would like to mention that we have, after the quarter, negotiated our credit facilities. So on the credit facilities, we have prolonged SEK 2.2 billion. So now we have a mature date in Q3 2025 with an option of extension for another 24 months. So this gives us a more long-term liabilities, which I think is very sound in the world economies and the capital markets we see right now. Cash flow, I mentioned very short. So even though we see that we have had a quarter with cash flow -- sorry, with lowering our profits, we continue to have a good cash flow from our operating activities. Which means that our companies are working hard with both accounts receivable, but also a lot in inventory, of course. So we are happy to see that we are good at continuously collecting good cash flow from our operations. So to summarize, I will just like to mention, this is the big quarter for transition. It's a quarter that we have seen would come one day. We argue that the COVID pandemic would fade out, and it seems to have done it right now. But what I'm very proud of is that during the pandemic, we have really reinvested our profits from COVID sales and we have been able to build a very strong European platform in AddLife. And I'm sure that is we -- with this, we can deliver a long-term sustainable growth, more than our 15% target in the coming years. With that, I would like to open up for questions. So please unmute.

Karl?

Yes. I have a couple of questions. Maybe, for start, with the margin side, which I think is the most interesting part in this report maybe. And especially with the Medtech, I noticed that the margins are down sequentially, but is there any kind of seasonality that has created this effect? I know Healthcare 21 is a large quarter in Q1, but why is the margins down? Is there the freight cost? Material inflation? Or what is impacting the margins negatively from the Q1 reports?

We have, as I said, one part that is pushing the margins down is the SEK 11 million that we have invested in development cost that hits the margin in our Medtech business during this quarter. That's actually the main answer to your question.

Okay. And then maybe I have a question regarding the sales in Medtech, because I noticed they are also down somewhat sequentially. And then is that due to the Easter, or is there any other seasonal effects impacting?

Partly, we have had Easter, but that's sequentially. As you said, we know that Healthcare 21 always had a very strong quarter in Q1, so that is one of the main answers to that question. So you actually answered the question yourself.

Okay. That's good. And then just curious about the digital investments, which you mentioned now. When do you expect these solutions to be launched? And can you give some kind of indication of what it could contribute to AddLife? Because I guess SEK 11 million in development, it's quite a lot for you. I mean, you usually don't do this kind of digital solutions.

Yes, exactly. And you know, we had a lot of different discussions a long time ago in the Board if we should sort of -- when we go into the digital area, which I think is very importantly in the home care especially going forward, either we buy something extremely expensive, which these digital companies normally are, or we go in a little bit earlier and continue to invest in development. So we choose the last one of those. We bought it a little bit early, and then we continue to invest. And you will see that in a number of quarters ahead as well. But actually, we have the first deliveries here in Q3 to customers on this new platform. So -- which is very positive, and we have a number of interest from new customers also to get into the platform because it's really state-of-the-art what we deliver in the market. So we have high interest, but we don't want to go too broad with the first customer. So we start with a few pilots and then we do step by step. But you will -- we will hopefully see it coming much, much more after the summer.

Okay. And is this only in Sweden, right? The...

Right now, yes, only Sweden.

Okay. And then I just have 2 more questions. And first, if you could give some kind of indication of how much, let's say, freight costs and material costs? Because I noticed that the gross margins are quite stable or even up sequentially, so they are quite strong. But the OpEx is quite relatively flattish as well. But I'm just curious, would you say that freight cost and material, et cetera, has impacted in the quarter a lot? Or is it a smaller part?

No, it has -- I mean, the freight cost and all the cost from sourcing raw material on overall in AddLife, it doesn't impact that much. But of course, in a few companies, it's a bit more complicated. So on the total gross margin, we have been able to actually price negotiate with customers so it doesn't hit our gross margin in the quarter.

Okay. That's very clear. It's the last one then on COVID testing, maybe. I think we all noticed that COVID is starting to become an issue again in Europe. What are you seeing right now? Are you seeing increased testing in your companies? Or what is -- what is going on?

I would say we think it will probably come back a little bit now in the third quarter, but this is very, very difficult to predict. I mean, it's really up to the different countries. If they decide to go for more PCR testing or if they think that, even though we see that infection rates coming up, it's like a normal flu right now, and they don't do the testing. So I think it's a bit about how much do they want to pay for having the control of a coming pandemic or not. So it's a bit too early. But just as you say, it's spreading. And I think where we will see it hits most is actually on the Medtech side where sort of we don't see that all operations can be done. So we will probably see that surgeries will be canceled a little bit now into Q3 as well because patients are infectioned, and people -- health care workers are infected. But to say how much it's ups and downs, extremely difficult.

Yes, I agree. But that's very clear. I also think that we should see some increase in the COVID testing probably in the upcoming quarter. Kristina. Good answers to my questions.

Thank you, Karl. Do we have any more questions?

Yes. [ Eileen ] here. I have one question. So a lot of my questions already been answered, but I have one follow-up on the development costs. You said that the development cost will stay going forward in a couple of quarters. And I just wonder, should we expect it to be the same amount going forward?

I would say close to that amount in the coming quarters, yes. Anybody else? I see a raised hand, but I can't see who it is.

[ Paulo ] [indiscernible]. I have a couple of questions, if I may. One is regarding inflation. You mentioned a bit about you've been able to do price increase. Could you perhaps maybe elaborate a bit more regarding this topic? I mean, in Q2, now the organic growth is around 4%, how much is due to price increase? And how much also you have in terms of inflation cost over the 2022? I mean, much has been increasing the cost due to inflation?

If we talk about inflation overall, I would say on the cost side, I don't think we see that much increases in the Q2 or year-to-date June actually. Because more than 60% of our cost platform is salaries to employees. During the spring, we haven't had any new renegotiation of salaries. So I would -- I don't see any high increases, inflation increases on that side. But of course, we see that our suppliers try to as much as possible to increase their prices due to sort of increased raw material costs and all of that. But we have, as I said before, being able to push that further to a big extent to our customers in the quarter. So the inflation hasn't so far impacted us so much.

Okay. So we are talking about a very small price increase at the moment, [indiscernible] like in terms of pricing? Like very low, low single-digit in terms of price increase there?

Yes, yes. That's where we are.

Okay. And in terms of EBITA margin, I mean, then you still have some COVID sales. But although they are minimal, you wouldn't have been this COVID sales, EBITA margin would have stayed something around 10%, 11%, without this COVID sale in the quarter?

Do you mean in our Labtech business?

No, on the group level.

On the group level. I would say the margins we have on COVID, so COVID reagents, is the same margins that we have in other reagents. So it hadn't -- probably actually wouldn't change, it's actually the volume that hits the margin. We couldn't compensate this high volume in such a short notice. But margin-wise, we have more or less the same gross margin on the sale -- on reagents.

Okay. So basically, without COVID, the -- you think that you can keep this kind of level of EBITA margin of 11%, low-teens marginality going forward, I mean?

Yes. When we have discussed the margins previously, I always tried to explain it that after the pandemic, I expect Labtech to be close to the 15-ish, which I think we saw happen already in this quarter when the COVID sales dropped directly. So they are on some 14.9%, I think. But I think still we have opportunities to increase the EBITA margins in the Medtech business going forward when we see that the surgeries really are coming back more. So I think there are opportunities to increase margins further, and I think I tried to say in a lot of calls that I expect it to be more 12-plus-ish margin. I see one hand. Anna?

Yes. Kristina. Sorry if you've already answered my questions, I got in a bit late on the call. But could you maybe tell us a bit on the sort of going back to more -- to higher activity within Medtech, which regions that may be taking the first steps and which ones are lagging? Just sort of explain the landscapes as you're experiencing it.

The landscape right now is that we see -- I mean, we see somewhat a normalization, but we don't see a recovery fully when it comes to surgeries. And the reason for that is that there are not enough health care workers, actually. It's -- I think we've heard that it's some, I don't know, how many thousands of health care workers are missing in the health care systems in Europe after the pandemic. I think we should remember that health care workers worked extremely hard for a number of months, and many of them have chosen not to continue work in this -- in the hospitals. So it's problematic for most hospitals throughout the world to actually recruit new people. And I would say it's mostly nurses that's are missing. And so this is the shortage we see, and that's why we don't see the sort of the full swing in the surgeries, and that will probably take some time. Unfortunately, that means that the queues are increasing still. So we don't -- the health care can't really decrease the queues, so we are still on that phase. But I know that most countries are working hard with this. They invest a lot of money in it like they do in U.K., for example, but it takes a longer time to come back. But as I said in the beginning of the call, we also see the infection rates coming back, as Karl said, end of June. And also right now, at least, we hear in Sweden a lot about COVID infection. And of course, people, health care workers and patients get sick, and therefore, we don't do enough surgeries. So it's a little bit mixed picture, but we all know that it will come back, but the recovery takes a little bit longer time.

Yes. And there are no specific countries that are exceptionally well or quite lagging. It's generally the same picture.

I would say that we saw Spain was extremely strong. April, May, had problems from mid-June due to infection rates. We saw more or less the same trend in Ireland and U.K. Sweden has been a little bit weaker all the time, unfortunately. And Finland has actually been struggling in the quarter with a lot of strikes from nurses. So there are a lot of different things happening in the sort of health care environment, why we can't see the recovery as fast as we all would like to see.

Yes. And my last question is on the -- as you say, you're in a phase of trying to sort of deleverage a little bit, and then the cash flow is going to be huge focus. The working capital inventory, in that aspect, are you expecting that you are currently on a stable level and might be able to release even more cash in the upcoming quarters? Or do you think that you have to have some increase in the working capital inventory some time ahead?

That -- the answer on that is -- will be very dependent on how the sourcing is looking ahead. It's still a little bit -- I mean, we haven't really, in the world, good control of sourcing and supply chain right now. So I wouldn't -- I think it's difficult to -- I think if we stay at this level on the working capital and inventory for perhaps a quarter ahead, I think that's good. But we are focusing this area a lot, and a lot of our subsidiaries do it as well. So of course, we try to decrease inventories as much as possible.

So from this level, it's -- probably it's going to correlate to how the market is developing? If it gets worse, you might have to increase it and vice versa?

I mean, yes. Like all companies, we are dependent on getting the products on the right time to deliver. And if that doesn't work as we expect, we sometimes have to have a little bit higher inventory and sometimes we can live with lower inventory. But I would say, on general, sourcing in the world is a bit complicated, still. Unfortunately.

Okay, that's all for me.

Okay. Then I think we should end the call. It's -- we have had it for 35 minutes, and the ambition was to have it for 20 minutes. So to summarize, even though it's a complicated quarter perhaps because of big changes, I think I would like to emphasize the strength we have built in AddLife the last years. And use the COVID profits to be able to have a good growth in the future. And I would like also to -- and to thank you all because this is my last report. My successor, Fredrik Dalborg, will start on 1st of September. And I'm very confident that he and our CFO, Christina Rubenhag, will continue to do an excellent job in taking AddLife further in our growth strategies. So thank you all of you. And if you have questions, come back to me, and I wish you a great summer. Bye-bye.