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

Good morning, everyone, and welcome to AddLife's second quarter call. As usual, we will be providing you with an overview of the quarter and then go through the financials, and then have the Q&A. And after the Q&A, as always, a video from one of our subsidiaries this time around from Ropox, one of the companies within the Home Care area, which we are focusing on a little bit extra in this quarter. So let's move on to the numbers. In the second quarter, we are really pleased to note that we see positive development across AddLife's companies. Margins, our highest priority, are improving significantly. So 12.6% EBITA margin for the group compared to 11.9% in the corresponding quarter of last year. Margins improved in both business areas in Labtech, a full percentage point up to 13.4%; in Medtech, a strong improvement to 12.8% EBITA margin. Improvement initiatives are part of our DNA. And in many areas, we have had long-standing improvement efforts. In Home Care, we are pleased to note that we see a significant growth in the quarter and margins are clearly improving. In Eye Surgery, there's been a long effort to gradually evolve the business and now we are in a very positive margin trend, and we think this demonstrates stability and confidence in the future. Overall, sales is in a positive trend. Advanced products are driving growth and margins. We see strikes in Spain and a little bit subdued capital spend in the U.K. market that did hold back revenue growth a little bit, but strong growth in the Nordics, solid improvement in Eastern Europe and continued positive development in research, as we have talked about in the past. And then as I mentioned earlier on, very, very good growth in Home Care. So a lot of positives when it comes to growth. And then finally, we are pleased to note that our recent acquisitions are really meaningfully contributing to earnings growth. And now I hand over to Christina to take us through the detailed numbers.

Thank you, Fredrik. So organic growth in the quarter was 4%, while acquisitions contributed with additional 3%. Organic growth of 4% have been adjusted for the divestment of the endoscopy business in the U.K. end of last year. Also, the doctor strikes in Spain had a negative impact on organic growth. Profit expansion or EBITA growth was 11% in the quarter. Organic growth was 5%, and acquisition contributed with additional 6%. So revenue increased with 6%. Underlying organic growth was 4% and acquisition was 3%. Gross margin improved in the quarter with 0.5 percentage point. This is due to diligent price management within our companies and also product mix with a higher share of advanced products. OpEx increased. This is reflecting both gross investment into current companies, but of course, also the completed acquisitions and acquisition costs. And if we divide both of them, it's approximately half-half between current business and new acquisitions and acquisition costs. EBITA margin increased to 12.6% from 11.9% last year, and profit before tax was up 29%. EBITA margin has clearly established on a higher level. It was 12.6% in the quarter compared to 11.9% last year. And EBITA margin increased in both Labtech and Medtech. Labtech increased with 1 percentage point to 13.4%, while Medtech was at 12.8% from 12.4% last year. Margin expansion has been a key priority for us since 2023, and that remains going forward. Operating cash flow increased SEK 165 million compared to SEK 119 million last year and last 12 months cash conversion remained strong at around 100%. Operating cash flow was SEK 65 million. Working capital was a negative SEK 149 million compared to a negative SEK 180 million last year. Working capital includes lower accounts payables, but also slightly higher inventory driven by introduction of new products and suppliers. We had an expectation of an account receivables released in the quarter due to strong sales end of Q1. But we also had strong sales end of Q2 in June, meaning that it was approximately the same numbers. Closing cash was impacted by acquisition and dividend payments. Acquisition and dividend payments of around SEK 400 million, lowering the cash balance is the main reason for net debt to increase in the quarter. Also with majority of the loans in euro, we had a negative FX impact of SEK 58 million. The acquisition also comes with earnouts and we have booked earn-out liabilities of SEK 114 million in the quarter. Leverage increased to 2.6 in the quarter, mainly driven by acquisition and dividend payments. This is comfortable below our ambition of being at 3 or below. Also, net equity ratio was 0.8 below the internal guidance of 1. And the balance sheet now clearly supports both organic and acquisition-driven growth. And with that, I hand over to Fredrik again.

So Labtech had a strong second quarter. Currency adjusted growth was 7%, and EBITA margin improved a full percentage point to 13.4%. The positive demand trend that we have talked about for a few quarters now in research that really did continue and strengthened further during the quarter. So that's a positive sign. And then also customers in Eastern European countries are investing significantly in research and diagnostics. So we see a positive development in multiple countries, including, for example, Poland. Recently completed acquisitions really are making a significant contribution to the positive development both in sales and margins. Moving on to MedTech. The acquired growth was 2% and organic growth, 5%. So solid growth there and EBITA margin also improved to 12.8%. Growth and profitability was quite strong in the Nordic region. Advanced products is really driving this growth and the margin improvement as well. In Spain, we had a good underlying growth. Our strong companies there are really delivering. However, there was a doctor strike in the country that affected each month of the quarter in a significant way. So that certainly held back revenues a bit. And in the U.K., the subdued market for capital investment in the health care system was still ongoing. So it was a bit slow. But the order book for capital goods for us is strong. So we are confident in the future. In Eye Surgery and Home Care, as I mentioned earlier, we have been driving long-term significant improvement programs, and we are really pleased to see that in both of those areas we are making strong improvements. And I will talk a little bit about -- more about Home Care, that's an important area for us and also where we will be focusing with the video after the call. So moving to Home Care. Here, we have a quite comprehensive product offering. Our products include home adaptation to update and adapt homes for people to be able to live at home for longer. We have technical aids that are portable and fixed. We have welfare technology, various digital solutions such as fall detectors, safety alarms and so on and also construction supporting the work to create adapted homes for elderly and the people with various disabilities. So all in all, a very comprehensive product portfolio, and this is indeed important because just one product cannot achieve the goal of having a higher quality life in your home for longer, you need a range of products, which we are pleased to be able to provide. So the product portfolio that we have really corresponds well with the macro trends that we see in Home Care. We all know that the population in Europe and in other parts of the world is aging. And so with that comes the requirement for allowing people to age at home for longer. So that is a -- call it, a life topic, but also a way for the societies to handle that potential burden. Fortunately, there are a lot of new things coming, new technologies. So the digital products, for example, are a big piece of the puzzle, allowing for a safer environment at home, and we have those products in our portfolio. Well, taking care of all these elderly people is, of course, a challenge to society in particular, in light of the fact that we see health care staffing shortage across Europe. So these technologies that we are able to provide from Home Care can really help address these things in an efficient way taking care of more people with fewer staff. So all in all, we have a portfolio that fits really well with the market trends. So the AddLife Home Care offering then to summarize. It's a comprehensive combined product portfolio, which we're quite proud of. We have a large share of proprietary products much more than the rest of the company, actually around 50% of the products we make ourselves. So that's clearly a strength. We are well established in the Nordic region and the Nordic region is leading in many areas of Home Care. We have a growing export business and we certainly have the ambition to expand this business outside of the Nordics. The business unit consists of 6 well-established companies. A turnover of around SEK 700 million and with improving margins. So to summarize the second quarter, we see consistent positive development across the board, sales, earnings, operating cash flow, all developing quite well. We have been driving for quite some time the initiatives to increase the share of advanced products in our product portfolio, and we're certainly seeing that in this quarter that it is generating both growth and improved margins. We are also consistently and diligently driving improvement efforts in our companies, and sometimes these are long-term efforts. In Home Care and Eye Surgery, we have really seen this quarter strong improvements and stability that gives us good confidence for the future. We see strong growth in the Nordics, in Eastern Europe in research, in Home Care and we are really pleased to note that the recently acquired companies are making a significant and important contribution to our earnings growth. And also, of course, we are actively pursuing a number of new acquisitions. We are developing our processes, and we are developing the resources to further pick up the pace when it comes to acquisition. So with that, we can sum up the quarter and open up for Q&A.

Okay. So we got a bit of an echo here, but let's open up for questions, maybe we start with Zino.

Zino from Handelsbanken here. I'd like to start off on the U.K. capital products you talked about. So a bit lower on the sales side, but a strong order book. Can you talk a bit about the conversion assumptions you have for H2 related to that?

Yes, I will answer that. So the question was around the U.K. capital investments. So you are correct. We had a quarter where we continue to see a bit of hesitation around the capital investment as we have seen in previous quarters also. This continued in the second quarter, but I would also say that we are fairly confident in a positive development there because we do have a good order book. We have instruments in stock, and we have orders. So we will be delivering those as it suits the customer. So a little bit of still a slow moving activity there, but the orders are coming in and we are ready to ship.

Understood. I don't -- I know you don't report...

Does that answer to your question?

Yes, very much. I know you don't report it, but is it possible to share and talk about book-to-bill on the segment.

Yes, we have a little trouble hearing the question. Could you please repeat?

Yes, of course. I know you don't report it, but is it possible to talk about the book-to-bill in the second half. I'm sorry, I can't hear you. Can you hear me?

Yes, we can hear you.

Perfect. Is it possible to comment on the book-to-bill in the segment. Can you hear me?

No, I wouldn't want to comment on the detailed level like that. But I think, as I mentioned, there is a bit of [Technical Difficulty]

Could not hear the last part, but I heard that you could not comment on it at least.

You guys are muted. [Technical Difficulty]

Did you have another question, Zino.

Just lastly on that same topic. If there are any new dynamics to it which just the same as we've seen in the first quarter.

We're working on the sound [Technical Difficulty] Okay, so is it working now? Can you hear us?

Yes. [indiscernible] It's working.

Okay. Sorry about that. So let's give it another try. Sorry about that, Zino. So please give us your final question again.

Yes. So the final question on the same topic. I'm wondering if this the hesitation that you're seeing, if you could talk a bit more about the underlying drivers behind that. But since you have an increased order intake or it sounds like that if there are any concrete shifts, you can talk about that happened during the quarter.

Okay. That's a great question. I think the challenge that we've seen for quite some time now in the U.K. has been a little -- there's been a knowledge that there's going to be changes in how things are done in the NHS. I think that change is continuing. We have been seeing, for example, new guidance for procurement that was issued in June. So this changed to more, for example, more value-based procurement is continuing. So that's a positive. I think the slow sales of capital has been there for a while, but we all know that cannot go on forever. Equipment needs to be changed and updated and so on. So I think what we're seeing is a decent development after all, but in this quarter, we know that some of the customers prefer to wait a little bit with deliveries, for what reason, we don't know. But -- so I think we shouldn't expect a massive change in this short term, but I think what we've seen in the past is that gradual -- slow but gradual improvement, and I think that's the case this time around as well, the number of procedures seems to be growing, the waiting list is coming down not drastically, but a little bit. So I think what we can conclude is gradual improvements. not a dramatic shift. Okay. Let's move on. So we have, let's see, Alvin here. Are you ready.

Maybe beginning a little bit looking at the acquisition breakdown in the report from what I can gather since you've consolidated the business and the kind of pro forma first half of the year, the margins in these companies seem really, really strong. Is there anything we should kind of have any respect for in that regard that has affected kind of these companies' performances so far during the year? Or is this kind of the level where you kind of expect these companies to operate at given that it's more or less twice the margins of AddLife as a whole.

Yes. That's correct. I mean a good analysis there. The acquisitions we have made in the past 2 quarters are quite solid when it comes to growth and margins. So -- and there's nothing out of the ordinary in the margin levels. So we do expect continuing roughly at the same level. Is it something you have to add to that, Christina.

No, I think that that's a fair assumption. So that -- I think those are high-margin companies. So we could expect this to continue. .

Okay. Great. And maybe a little bit on Eye Surgery as well and Home Care, it's obviously positive to see that Home Care, I meant that the initiatives are yielding such good results in Home Care and that in Eye Surgery that your gradual improvements there. Can you perhaps give us a color on kind of how far you've progressed within Eye Surgery? And how much do you -- like how much improvement potential do you still have left in that area of your businesses and how far away in time do you feel that, that is until you're "done" with those improvements, so to say? I think your sound went away.

You're muted guys.