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

Good morning, everyone, and welcome to the AddLife fourth quarter and full year presentation. We start with apologizing here. We have some technical challenges, but I think we should be able to move on very shortly. I think you have sound, and I think you can see the presentation, right? Okay. So let's get started here, and the team have our work to see if we can get a video link as well to work. But let's start with the presentation here. So again, apologizing for the technical challenges and the delay. So we are going to present the fourth quarter and the full year results. And so starting with the 2022 summary. That has been a year where the team has worked diligently to position the company for a post-COVID-19 market. Indeed, we have had acquisitions compensating for the reduced COVID-19 revenue, and we have been able to achieve a 14% growth in spite of the significant decline in COVID sales. These new businesses that we have added, they are really set to benefit from the recovery in elective surgery, once we enter into the post COVID-19 environment. It's important to note that this high-margin COVID-19 sales is being replaced by acquired Medtech sales, and at this point in time at a slightly lower margin, but we're working diligently to improve the profitability of this newly acquired Medtech business. Based on these acquisitions, we have also established a very significant European footprint with a much broader and more stable portfolio. With this new European footprint, we see a lot of opportunities for cross-selling our collaborations between companies and the ability to launch new products and form new relationships with suppliers. We see a long-term positive trend in the demand driven by demographics and underlying economic growth, and of course, continued prioritization of health care systems in spite of market uncertainty. And based on this positive outlook, the board is proposing a dividend of SEK 1.20 per share, which is in line with our policy. So moving on to the fourth quarterz. So having prepared during the year for a post-COVID market, we are really now entering a post-COVID situation with increased demand in the health care systems in general, and the growing number of surgical procedures being done. Same as for the full year, acquisitions and organic growth is compensating for the reduced COVID-19 sales. And we are happy to note the increased growth -- organic growth in both of the business areas, so a 6% growth on the group level from that organic underlying growth. On a very positive note as well, we are noting that EBITA margin and cash flow is in a positive trend compared to the previous quarter. The next slide, please. So talking about COVID-19, as expected, a significant drop in COVID-19-related sales in the quarter, almost SEK 300 million reduction in sales based on that in the quarter and SEK 1.2 billion reduction in -- for the full year. But as stated before, we have been able to compensate that fully with acquired and organic growth. As the market develops, COVID-19 testing is now part of our broader respiratory test panels. So it's no longer possible to separate it from the rest of the normal business, so to speak. So indeed, the market has normalized. We have full customer access again. The teams are focusing now on normal commercial activities. So that means that you probably -- we will probably not show this slide anymore, and we will not separately report on COVID sales going forward. But, of course, when comparing to previous year, it's a significant factor in Q4 that we just reported. But also, as you can see on the graph in -- Q1 will also be significantly impacted by that. Again, going forward, we put the COVID-19 impact behind us. So next slide, please. So taking a look at the numbers, we can see that, for the full year, the drop of SEK 1.2 billion in COVID sales was more than compensated by acquisitions in Medtech of SEK 1.7 billion for the full year. And a similar picture, if you take a look at the EBITA numbers where the Labtech declined based on COVID -- reduced COVID sales, is almost fully compensated by increased EBITA in Medtech. If you take a look at the quarterly numbers -- so next slide, please -- we can see that the -- similar picture, acquisitions compensating for reduced COVID sales on the revenue line, but on the EBITA line, not fully compensated yet. But that's something that we're working on. It's important to note also that we continue to invest in digital solutions, which pulls down the margin a little bit in Medtech. So starting to talk a little bit more in detail about our Labtech business. We have had a significant drop again in COVID-19, but the organic growth is very healthy at 6%, and the EBITA margin is solid, and the focus is really now on developing the portfolio, introducing new products. Next slide, please. If we take a look at the diagnostics and the research and laboratory parts of the business, the testing is decreasing, as expected. But in diagnostics, we are seeing an underlying healthy organic growth. We see an increase in interest in our service and efficiency improvement, products and solutions that we can offer, because, of course, the staffing shortage is a main theme in health care in general, but this is also affecting the diagnostics labs. So we can help the customers to be more efficient with the resources that they have. We're driving new technologies and new products. For example, in the sepsis area as well as increased use of point-of-care testing, we have a lot of instruments sold and placed in the market that can be leveraged for other types of tests as well. In addition, there has been an initiative ongoing within the diagnostics team to offer European distribution to suppliers. And we have a strong commercial organization in 29 countries, and this is a pretty unique offering that we can provide to the suppliers, and we are having very interesting discussions along those lines. A new approach for us, but very, very promising. On the research and laboratory side, we see healthy organic growth there as well. Of course, there are some budget concerns in state-funded research, in academic research, for example. But we still see a continued strong development, and in research and drug discovery, a continued, very strong sales development. And also, in this area, a lot of emphasis on negotiating new supply agreements and launching new products in the -- in particular in the areas where we see a rapid technology development and adoption of new technologies such as gene sequencing and bioprocessing. If we move on to the Medtech business area, acquisitions is a strong growth driver, of course. But in addition to that, we have a strong organic growth in this quarter as well at 5%, and that's a significant improvement versus the previous quarter. Indeed, we see, an increase in elective surgery is happening, and that is driving the demand from any of our products. Of course, there is still a significant waiting list that has been accumulated during the COVID years, and that list will have to be managed. A lot of patients are waiting for surgical procedures. However, as many of you know, the health care system is struggling with some staffing shortages, and that's true for all the European markets where we are active. So that will slow down the handling of that waiting list, but we expect that, over time, these patients will have to be treated, and we will -- we'll be there to support the health care system to do that. So moving on to the next slide. So looking at the hospital health services business, our organic growth is there in a solid way, driven by elective -- more and more elective surgeries. The acquisitions in advanced orthopedic surgery that we have done during the past years, are indeed contributing to both gross and margin, and that's evident as you -- if you compare it to the corresponding quarter last year. And we have also seen a rebound in number of procedures after the summer months. So that has led to better sales, but also better margins in that part of the business. So some of you remember, we had a bit of a weakness in the previous quarter profit-wise and -- so that one has now recovered fully. In the eye surgery business, we are also seeing a gradual improvement driven by increased patient flow but also a number of new product launches, very promising new technologies that we're bringing to the market, and also a strengthening of the team. The home care side, we see a strong growth in the quarter. The home care portfolio is really exciting because it addresses many of the needs that the health care systems are facing right now, and we can address the need to take care of elderly patients and patients with chronic diseases, and doing so with an -- in a very efficient way using digital solutions and reducing the staff requirements, and also enabling savings and improvement in quality of life. We are continuing to invest in this area. And for the quarter, SEK 17 million investment was down to -- that impacts the profitability of the Medtech business area by roughly 1 percentage point. Next slide, please. So if we take a look at the long-term financials, we stick to our targets of growing the profit by 15% per year over time, as well as our profitability target, which we measure by profit over working capital, which -- we are above that target. So those targets remain. So with that, I want to hand over to Christina, our CFO, to talk a little bit more about some of the detailed financials.

Yes. Thank you. So AddLife has delivered a stable revenue growth and EBITA growth during the past years. There has been some peaks, of course, during the COVID since our third quarters. But in general, it has been a stable revenue growth. Also, looking at the gross margin, that has also been stable over the years, and I'm very pleased to see the way that our companies have handled the quite challenging situation we have right now with cost decreases. So we have done good during this year. The COVID-19 space, that has been handled within current organization, meaning that, today, we don't have an excess in employees or other expenses related to this -- to the COVID. That means also that the COVID revenue boosted EBITA straight off on both money and percentage-wise. So next slide, please. AddLife has also proven to generate stable operating cash flow throughout the year. During this year, and especially in Q3, we did build up some inventory. This was done to make sure that we could continue to deliver to our customers, even though it was the client challenges and component shortages. Going forward, we do think that this will gradually improve, because in Q4, it was still the stable level of inventories, but we did foresee that, that will improve a little bit. That has been increased in conjunction with major acquisitions. The aim is to deleverage via self-generated cash flow, and this has also been the case looking back over the history. Next one. The bank facilities, just below SEK 5 billion, is across half of short and long-term loans, and it is traditional bank loans with our house bank. We have a good headroom to the covenants, which is interest coverage ratio and equity ratio. During the quarter, the interest expenses increased as a reflection of [indiscernible] increasing. Financial net in addition to interest expenses also include exchange rate losses relating to the debt and continuous considerations. Of course, in the current market situation, high debt means that the interest expenses increases. But except from that, we do not see a risk with the debt, and it will deleverage going forward. Yes. And with that, I hand over to you again, Fredrik.

Thank you very much. So in summary, we can conclude the year in a good way, and the team has done a fantastic job continuously adapting to the changing environment, yet another example of the strength of our business model with a decentralized responsibility and very entrepreneurial and agile companies. So in summary, we have replaced the COVID-19 revenues with acquired Medtech revenue. We have positioned the company to be able to benefit from the market condition post-COVID, and we think we are now in that phase. The health care system is indeed entering a phase where elective surgery procedures are increasing, and they will continue to work on this waiting list of patients needing surgery. So we see a significant long-term growing demand in that area. We are happy to see a significant improvement in organic growth in both of our business areas. And as I mentioned earlier, we see a positive trend in profitability and cash flow compared to previous quarter. And of course, we're working on these parameters, improving profitability and make sure we are efficient in our operations and generate more cash, is going to be a high priority going forward. And of course, in the market that we're facing -- there are price and cost increases that we're facing. We are increasing our prices to our customers as well, that will remain seen during the year. But in general, we feel that there is a good willingness to accept price increases. But, of course, some of these agreements are long term and the negotiations may take some time. As Christina just said, our ambition is to reduce the debt. And as you can see from the graph that she showed, we have at times taken on a higher debt to finance acquisitions in the past as well. But in those scenarios, we have always been able to relatively quickly reduce the debt again, based on the cash flow that's generated from our business. So while we work on improving the efficiency of the business, growing organically, generating higher profits and cash flow, we will also continue to proactively develop our acquisition pipeline for acquisitions in the area and the selected segments that we like. And again, as previously stated, main focus on smaller acquisitions that are natural add-ons to the companies that we have recently acquired and leveraging our European platform. So with that, we can conclude the presentation of the fourth quarter and the 2022 full year report. And we now open up for questions.

So I think we have -- Karl asked -- you have question in mind, perhaps?

Yes. I have a couple of questions here. So maybe just starting off on the cash flow side. Quite good capital -- or working capital release now here in Q4. Just a question regarding how you think that could play out during 2023. Do you expect to get that release for the full year? Or how should we think regarding working capital in 2023?

But yes, indeed, we did see an improvement in cash flow, and that is certainly an area of focus for all of our companies. We have been building inventory to act as a buffer and to make sure that we are a really reliable partner to our customers. And so that is an important strategy. So in general, one could expect for us to reduce some of that buffer going forward. But I will also comment saying that we are, as we speak, adding new products to the portfolio, taking in new supply agreements, and sometimes that also entails building up some inventory to start with. So that's the effect we also have to take into account. But in general, our aim is to improve cash flow during the year.

And then a question on -- like the one -- there are some one-offs in the quarter, I would say, but from the reversal of the contingent consideration and -- et cetera, could you please provide us the figure ballpark, how much do you think is like a positive one-off in the fourth quarter?

Yes. So that's a good observation. There are some smaller ones, a few smaller that are kind of on the size that -- we haven't commented on them specifically. So some smaller positive effects like you just mentioned, but also some smaller negative ones. So in general, they're kind of evening out. But may be you want to give some more detail to that, Christina.

There was such a continued consideration related to a couple of companies, and in total is SEK 16 million [ past ]...

And then I have some questions regarding the margins here going forward. I think that's quite interesting. And, I mean, if you look on the Labtech side, the margins were still quite strong and at pre-COVID -- above pre-COVID levels in Q4. What can you say regarding the margin development there going forward? Because I know it's been some discussions regarding where the margins will land in Labtech after COVID.

Yes. I think our general comment is that, for the business as a whole, we're going back to a pre-COVID situation, and there is still some positive impact in this quarter as well from COVID. So that's the general starting point, so to speak. So our work now is to launch new products so that we can indeed grow the volume in Labtech, because that's the main reason why we saw such a positive margin during COVID, the fact that we were able to handle the larger volume in the system without [ paying ] any extra cost. And now that COVID is gone, now we want to replace it with new business. And so I think in the short term, we should expect something along the lines of something more similar to pre-COVID in the Labtech business. And then, over time, as we add new -- more products, it should improve. And while we speak about margins, I should also say, the similar logic applies to Medtech, but with the exception that indeed, we have acquired some high-margin businesses in Medtech, and most of them are performing according to plan at the level that we're seeing at the time of acquisition. We've talked about the eye surgery business where [ it ] has been below and kind of pulling down the average. But that is improving, but it's not going to be back to the starting point quickly, but it's moving in the right direction. And finally, the impact of the investment in our digital solutions, that's sort of around 1 percentage point on the Medtech margin. So I think that's the summary we can provide.

Yes. That was also my last question related to the Medtech side, but I'm just more -- because I think, historically, Q4 has been the strongest quarter for the margins. I don't know if that will be the case going forward. But in most Medtech companies, Q4 is relatively strong, both volume and margins. And now you did 9% or 8.9% here in Q4. So I'm just curious about, is it possible -- do you think that margins will be above 9% for 2023? Or is that some kind of a reasonable level to assume, or what do you think?

I don't want to comment on a specific margin number like that, but I think -- let's take the starting point, as I stated before in pre-COVID and with the adjustments of the acquisitions made. I think it's a good question, though, about the fourth quarter, because the dynamic has changed a little bit. In our significant health care '21 business, we see end of year effects in Q1, because some main customers are having a different fiscal year. And also, in the orthopedic surgery business, there is an effect of holidays. Some of these surgical procedures, which are indeed elective, they might not be scheduled around Christmas and New Year. So there's a little bit of a negative effect in December on the orthopedics business. So that -- so the dynamic has changed a little bit.

Yes. That's what I asked, because last year, I think Q1 was better margin in Medtech than in Q4. So we'll be testing to see how it will turn out here.

So we had some more questions. So Anna had a question, I see.

So maybe going to the organic growth after you have adjusted for the COVID-19 effect. Do you have any sense of how much of that is volume and how much would be sort of price effect? Because I guess, you have raised prices quite a lot against customers, as you've mentioned.

We have indeed raised prices. Some of it has come in effect, some will come in effect as we enter into 2023, and some of it is still to come into effect. So it's a gradual process, and some of it will take even longer because they are long-term contracts. It's a little bit hard to give an estimate of that mix. But it is indeed a mix. I think we're not able to give a hard number to which is which, to be frank.

But we shouldn't assume that there's a high tilt towards any of them?

No. I would say it's a mix, yes.

And the development cost in Medtech, it seems like it grew this quarter to SEK 70 million. Could you explain maybe why and what we should expect ahead?

Well, I think there's no dramatic change there really. It's a little bit higher, that's right, [ SEK 3 billion ] higher, something like that. But I think we should expect something along the lines of, say, around [ SEK 15 million ] a quarter or something like that. So I think there's no trend shift. It's -- it should be averaging out around that somewhere.

And my last question is, if we maybe could get some more details and updates on AddVision, like how it's going and what are the strategies ahead?

Absolutely. So this initial fantastic company taking many of the boxes that we are looking for a strong position in a niche market, supported by demographic trends such as aging population and so on. AddVision has a very strong European position, and quite unique European position actually in the segment that they are active. We have had some challenges relating to suppliers primarily and some products that we no longer carry, and some that we are still carrying, but there has been some delivery problems. So overall, that development in that company is quite positive here in the quarter. We see that we have strengthened the sales team. Some of the new products that we're launching are starting to have a positive impact. And we have indeed a lot of products in the launch right now, and it takes a while to introduce them to each country, to train our sales team. Butt also very importantly, training surgeons are actually using the technologies. That takes a while, but we see good traction there. So we're cautiously optimistic about the future here, and we're investing in that area. It will take a while to get to the levels of profitability that were communicated at the time of acquisition. But there's this clear improvement in the fourth quarter compared to the -- so we're optimistic about development. But not to expect an extremely quick shift, but rather gradually improve. And so we have [ Allene] as well with some questions.

I have a question regarding the covenants. You say that you have quite good margins on covenants, but as net financials are increasing, we're seeing that you're getting closer to the 4, which is on the interest coverage ratio. So when I calculate the interest coverage ratio, I get 3.9, then I used the EBITDA. Could you just please describe how you calculate the interest coverage ratio?

The EBITDA in the bank convenance is not straight off what you see in the profit and loss. So there are some adjustments to that. So when we calculate it, it's around 20 actually. So it's a good coverage.

Is this something that we can calculate on ourselves?

No, unfortunately not. That's why we haven't added it either into report. So there are some differences in how we calculate it towards the bank, actually. So unfortunately, you cannot take it right off the report. But currently they are in the range of 20.

And also the question...

So I guess the message there is that we are very, very far from any of those limits. So we're very comfortable with that financing solution and with the relationships we have with our banks. And so for us, that's not a concern, but we are committed, of course, to over time reducing the debt by the cash flow that we're generating.

And also, a quick question. As we're seeing that AddVision is not contributing to the group as initially thought, would it be likely that there will be a goodwill write-down in the company? So I'm also thinking about on the covenants here, if it would -- if you would reach out the covenant?

No. We're comfortable with the AddVision business. We're comfortable with how it's developing and we're strengthening team and resources and launching new products. So we don't see a risk of that at all.

And do you know approximately how long it would take to -- for AddVision to get back on the same level or more profitable levels as before?

Well, they made a solid improvement in the fourth quarter. We expect that trend to continue. We're going to have to monitor it closely. So we hope that in the coming quarters, they will stop being an entity that pulls down the average margin, and they will be -- and over time, they should be a company that actually contributes positively to the average margin of the Medtech. But that will take some time, but we're moving certainly in the right direction. So it's not months, it's quarters, for sure, to get it to where we want it to be. So do we have more questions. And Karl, maybe another one or...

Yes. I just have a question. I looked through the report here, and the CapEx side, the investments seem to be up by almost -- by 100%, I think, year-over-year. Can you state any reason to that? Or what are you investing in?

That is mainly related to the acquired companies lately, where they invest in instruments, et cetera, for rental. So it's part of the business model that they have.

So that's a positive investment in many ways, right, because we tie up customers in close relationships with instruments, for example, that then are also linked to the continuous supply of our consumables. So it's money out, of course, but it's something that generates longer-term profits and cash flow.

And then, just another question on the market in the Medtech side. Are you seeing that elective surgeries, et cetera, are improving now also in general? Or what is the general trend in the market, if you look on the broader health care hospitals? Are they handling the situation in a good way, or what's going on?

I think, in general, we have seen in the third quarter, and it seems to be a continued positive trend here that in -- the more elective surgical procedures are being performed. But of course, it's important to notice that there is a staffing shortage for sure. So the waiting lines, or the backlog remains long. And some countries have been able to kind of reduce that backlog a little bit. Some are stuck with it still. Some countries are investing, adding much more resource to the health care systems to be able to handle that. For example, in U.K., there is a significant additional investment in finding new ways to handle that backlog with new technologies and new approaches. And oftentimes, we are able to contribute to that. We can provide products and services to help out in that scenario. But I think we should not expect the backlog to be quickly fixed. This will be a long, probably multiyear process to handle that backlog. So in general, a positive trend, but it's being held back significantly by that staffing shortage. We also see a little bit of a hesitancy when it comes to investment in capital items in the hospital system. For us, that's not a huge issue. It's only a smaller part of our business, but there has been a little bit of a hesitancy there at times, but again, not impacting us that much.

And then just the last one on my side. Looking at other health care companies, they are guiding for rather weak, maybe first half to the year, and then a gradual improvement in the second half. Is that something you also foresee or do you expect over the first half to be pretty good or --?

Well, we don't want to guide really. We're not going to give a guidance on how things will develop. But of course, we have a relatively positive outlook on 2023, driven by the activity in the health care system and the strong pent-up demand, if you will. And -- but of course, we have to be clear about the staffing shortages. They are there. They can be in -- particular, maybe in some Eastern European countries. There might be some pressure on budgets and with that health care spending as well. But again, that's a relatively small part. So I think we're -- we think it will be a decent year with some challenges here and there. But again, we feel well positioned for that market with the activities and businesses we have. And also, historically, we have been able to navigate challenging market and conditions based on our decentralized business model. So I think we have a fairly positive view on 2023 as a whole. So we have another question, [indiscernible] here?

Yes. I just wanted to know if you -- could you give us more details about your -- if I could say, audit around the previously acquired companies just to understand if you are expecting or if you flagged other companies or areas such as in AddVision, which could present similar risks?

So, well, I think, coming into the company, we have done a pretty thorough review of the performance of all the portfolio companies and also have had some really in-depth discussions about the plans for the coming years and the outlook. We're quite happy with the acquisitions we have made. They are all companies that fit into our portfolio, and share many of the aspects that we like. It's such as being supported by strong technology or demographic or economical trends and with strong position in their specific niches. So in general, really good. We have talked a little bit about some challenges within the eye surgery business. But again, it's moving in the right direction. So -- and we have some really positive product launches in the works. So we think, even though not everything is 100% in all companies at all times, we are confident in the plans that we have and in the trend that we see. I would also like to add that we have a history of acquiring companies, and also, over time, working closely with the management teams to find ways to evolve growth and profitability. That's been true in the previous acquisitions we have made, and that is true for the ones that we have made more recently as well. So all moving in the right direction, I think, will be the summary.

And maybe just a last question on your debt. I saw that your -- on your slide, so the average rate is at 3.6%. Is it fixed or --?

No, it consists of the margin and then it follows [indiscernible], which is the main reason then that it has increased during Q4, since the interest rates are going up.

Thank you for good questions. Are there any other questions from the group? All right. Well, thank you very much for your time. And again, we apologize for the late start here. And I also want to -- special thanks for really good questions. And again, we are happy to conclude 2022 on a positive note, and the team has done a fantastic job, handling the changes in the market, and we do feel we are well positioned for the market conditions as we move into 2023. So thank you, everyone, and by all means, feel free to contact us on the phone or on e-mail if you have any follow-up questions later on. Thank you, everyone, and have a good day.