ADDvise Group AB (publ) (ADDVA) Earnings Call Transcript & Summary

Welcome to ADDvise Group Q4 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Staffan Torstensson; and Acting CFO, Johan Irwe. Please go ahead.

Thank you, and once again welcome to ADDvise Group Q4 2024 Earnings Call. As usual, we will take you through a business update and then financial performance and a Q&A session. Q4 was a solid quarter. Our net sales came in at SEK 442 million, which takes us to a year-on-year growth of 11%. However, we continue to see challenging pharma and clinical trials comparables following 2023 stellar performance, but we saw a clear trend shift in the quarter. That took us to a negative organic growth isolated in the quarter of minus 3% compared to last quarter where we came in at minus 25%. EBITDA came in at SEK 89 million, which takes us to a 20% EBITDA margin. To give you some color on the underlying business and if we strip out pharma and clinical trials, we saw an organic growth of 7% for the year 2024. EBITDA came in at SEK 76 million versus SEK 103 million, a decrease of SEK 26 million, mainly due to normalized level of earn-out revaluation. Looking at the cash flow from operations, it came in at SEK 64 million, mainly affected by growth-related CapEx investments in production capacity in our South American business. Cash on hand, approximately SEK 356 million. And on the M&A side, we cautiously monitor net leverage and have that in mind on every deal that we evaluate. Coming into the commercial and operational highlights of the quarter. We saw good business momentum in both Healthcare and Lab during the quarter. Our acquired businesses late '23 and early '24 are performing according to plan or slightly above. We still saw some effects from the exceptional performance from the pharma and clinical trial business during Q4, but coming into Q1, we see a normalized level. In terms of geography, approximately 45% of our sales in the quarter isolated came from North America. And our second largest market is Europe, excluding Sweden, and the third one is South America. Looking at our sales by product category. The top 3 for the year are medical consumables, followed by laboratory equipment and then medical equipment. As you can see in this pie chart, pharma is now stabilizing around 7% of our sales for the year compared to last year when pharma was approximately around 20%, 25%. We see a stable demand in the U.S. during the quarter. Our sales have been growing over the last 3 years. As you can see now, we are close to SEK 1.7 billion in sales. And if you look at the quarter isolated, we came in at SEK 442 million, an organic drop by 3%, a significant lower level compared to previous quarter as we see the comparables effects from pharma and clinical trials Europe fading away. We measure our revenues also in own products, products that we develop and manufacture and products that we distribute. For last year, own products came in at 54% of our sales. And that is a level we are satisfied with going forward. Splitting ADDvise Group into Healthcare and Lab and looking at Healthcare, our sales came in at SEK 275 million in the quarter, an organic drop of minus 1%. The Lab segment reported sales of SEK 167 million for the quarter and organic sales came in at minus 10%. Margin-wise, Healthcare came in at 14% EBITDA margin and Lab at 30% in the quarter isolated. Healthcare came in on the lower side, mostly affected by the product mix. We are not satisfied at all and we are pushing hard for increasing the margins. On the other hand, Lab delivered margin on the high end due to strong performance in clinical trials U.S. and clean rooms. Looking at the net sales by geography. For the Healthcare segment, North America is the key market with approximately 60% of sales, and we continue and be that for a long time. Having said that, South America is a very fast-growing market compared to the other markets that are slightly more mature, and our operations in that region is performing according to plan. During the quarter, we saw some headwinds when it comes to FX, SEK versus the Brazilian real. The Lab segment is very well diversified when it comes to sales by region. The largest market is now Europe, excluding Sweden. With updated long-term financial goals, we are now taking the next step in the company's development, continuing focus on profitable growth, stable returns and well-balanced debt levels, all based on a continued delivery on our M&A strategy, strong focus on EBITA growth and return on capital employed. Compared to earlier targets that was focused on high top line growth coupled with equity raisings, we are now focused on continuing our M&A agenda driven by own generated cash flow and debt. EBITA growth will be driven by organic and M&A-related growth. This implies that our target is to double our EBITA every fifth year. Debt level remains at max 3x. And dividend is part of our framework, but it will be coming into play when the debt level and profitability is on a satisfying level. As announced in the beginning of February, we are strengthening our capital structure, a rights issue of SEK 457 million, combined with a warrant structure that additionally can give us up to SEK 172 million next year. Of the SEK 457 million, SEK 326 million is committed by existing shareholders, Board members and management. The transaction is scheduled to close in beginning of April. In short, we will open for shareholders to take a larger share of the cash flow by lowering the financial cost. Clear target will be to replace some of the outstanding debt with bank debt over time. I'm now handing over to Johan Irwe to take you through the group's financial performance.

Thank you, Staffan, and good afternoon all. I'm pleased to be here today and take you through the figures for the fourth quarter of 2024. EBITDA in the quarter amounted to SEK 89 million, which corresponds to a margin of 20%. This is lower than the same period last year and is primarily driven by a change in product mix. As Staffan pointed out, we have throughout the year met exceptional comparable figures from the product segment, pharmaceuticals and equipment to clinical trials, which has brought down profitability compared with the last year, 2023. After this quarter, we are now back to normalized levels of sales and profitability. Full year 2024 EBITDA amounted to SEK 379 million, which equals a margin of 23%. Moving on to cash flow and capital efficiency. Here, as a reminder, when we talk about cash flow from operations, we look at the underlying cash flow generated by our businesses with deductions from changes in working capital as well as investments in our asset base, including lease payments and acquisition-related and nonrecurring items. In the fourth quarter, we saw a moderate working capital build of SEK 5 million, mainly driven by increased customer receivables at the end of the year. Investments include SEK 7 million in payments related to leases and SEK 11 million in new fixed asset investments. If you look at the net between depreciation on existing assets and investments in new assets, it is mainly related to production capacity increase in our facilities in South America. The positive net effect of SEK 4.8 million from acquisition-related and nonrecurring items derive mainly from nonrecurring items from the reorganization at ADDvise headquarters that was announced at the end of October last year. Total cash flow from operations sum up to SEK 64 million. This means a cash conversion of 72% when comparing to EBITDA. Return on capital employed, which measures profitability and how efficient we use our capital, was 12% for the full year 2024. From 2025, this metric is now one of our long-term financial targets, where we aim at pushing towards 15% return on capital employed. Moving on to the balance sheet. Our financial position is currently above the long-term target of 3x net debt over EBITDA. Net leverage at the end of 2024 stands at 3.8x EBITDA. To optimize our capital structure, the company plans for a rights issue of new shares that Staffan walked us through earlier. This will strengthen the balance sheet, reduce finance costs and build a solid foundation to continue our growth journey on. And for reference, the Q4 net leverage adjusted for the SEK 457 million from the planned rights issue would have reduced net leverage at the end of 2024 from 3.8 to 2.6. And even though net leverage is higher than we would like it to be, we have a good liquidity position of SEK 356 million, including cash and short-term investments, plus an undrawn credit facility. The $60 million bond issued earlier in 2024 reduces our FX exposure to USD by matching it to the asset base. The bond -- first the SEK bond matures in May of 2026 and the USD bond has the maturity date in April 2027. That was all for me. I will now hand over to Staffan for some closing remarks.

Thank you, Johan. I will summarize and give you our takeaways from the Q4 before we open up for questions. Sales growth at 11% in total, profitability on a normalized level. Cash flow affected from investment in growth. Good liquidity and too high leverage. Rights issue will be a positive thing when it comes to the capital structure and leverage. On the M&A side, we are working on a couple of interesting deals. No stress. It must be right, high quality to a reasonable price tag. Good. With that summarized, I will open up for questions.

[Operator Instructions] The next question comes from Christian Lee from Pareto Securities.

I have a couple of ones. You mentioned that you have reached more normalized levels for pharma and clinical trials. Do you expect to grow these businesses in 2025?

I mean we always target to grow our businesses. So I mean, of course, the target is to have growth. That's clearly. But on the other hand, as you can imagine, given our new updated targets, it's very important for us to defend margin as well and have growth in EBITA. But I mean we will not cut -- we will not cut costs, I mean, good costs in order to reach the target.

Sure. But given that pharma has shown very healthy margins historically, wouldn't it help growing this business to reach your new financial targets?

Yes. I mean margin-wise for Healthcare, as I said, the expectation is higher than we had in Q4. So I mean there is a potential for upside in Healthcare when it comes to margins.

Yes. Sure. You mentioned that you're not satisfied with the margins, EBITDA margin levels in Healthcare. What would be the normalized EBITDA margin level given that the margin has been volatile the last couple of years?

Yes, sure. And to answer, I mean, going into this year, 2025, we will start to target and measure on an EBITA level. And it's clear that we are pushing for the 20% margin target. But I mean that's not -- I mean, that is over time, of course.

Okay. And you announced in November that you're exploring a potential divestment of Germa. What is the status here? And are you still exploring this possibility?

Yes, we are. However -- I mean, it's clear that the Board has a decision that it's nonstrategic given that there is a significant part -- close to more than half of the sales is related to defense. But having said that, it's clear that we are not forced to sell, and this is a very well performing company. And we also see a very significant increase of demand on their products. And having said that, we're expecting to have a rich price tag that we haven't received yet.

Okay. Clear. You mentioned that half of the turnover of Germa is within the defense sector. What is the other half? Is it within healthcare?

Yes.

So how does the divestment of Germa resonate with your buy-and-build strategy?

No, but the thing is -- it's clear -- we are focusing -- we are buying and building within life science. That's clear. I mean when the company develops and it starts to become a defense company instead of a life science, we have to reevaluate if we should be the owner of that. I mean we are -- I mean our overall target is to extend and prolong and save people's lives. I don't know if that goes hand in hand with the producing of combat suits.

The next question comes from Philip Ekengren from ABGSC.

I have a few questions, and let's start with the Healthcare segment. So both orders and sales are down organically in the quarter. Could we get some more color on what's driving that more specifically, excluding the weaker generic pharmaceuticals?

I think we -- as you see, we still see some effects from the -- as you said, the pharma. But on the other hand, we also see clinical trials effects in the organic, especially, in the -- of course, in the Lab segment, where we were down 10%.

But in Healthcare, is it only generic and pharma that's performing bad? Or is it other parts of that business.?

Yes.

Okay. So as we enter '25 now, if I remember correctly, the generic pharma comp would be gone, right? So should we then expect a pickup in organic sales already in Q1 '25 in Healthcare specifically?

Yes, we are set for that. And as you saw in our preliminary when we talked about December isolated, we clearly saw a big pickup.

Perfect. And just coming back to the EBITDA margin, I know you said you're wanting to start focusing on EBITA, but we have kind of history on EBITDA. So should we -- what's the best representation again for Healthcare as we enter '25? Is it the margin now in Q4? Is it the full year '24 margin? Or is it somewhere in between full year '24 and full year '23? How should we think about that? Kind of what should we extrapolate going forward?

What I can say, of course -- I mean, having 2024 as a year could maybe be a representative level where we are now. Having said that, of course, we are doing our best in order to push that and run different initiatives in different -- in all the companies in order to increase the margins. But for now, I would say the full year margin will be more representative.

Perfect. And if we then move on to Lab, orders look good in Q4 again. If I remember correctly, it was good order intake in Q3. But then the weak sales also remain. If I look at Q1 '24, the comp continues to look relatively tough. How should we think about kind of Q1 and also kind of longer in '25 in terms of organic growth in the Lab segment, also with kind of this very strong order intake for some quarters now?

Yes. It's clear that the Lab segment is affected much more when it comes to bigger project-related orders, especially within clean rooms. And if you remember -- I mean, Q2 last year, we had our -- close to -- if not the biggest ever, it was a really big one on this Oman order where we -- on $11 million or something. So it's clear that they will -- the bigger orders will have an effect on the sales quarter-to-quarter.

But should we then expect growth as we enter '25 now? Did I understand you correctly?

Of course. Of course. Of course.

Okay. Yes. Good to hear. And also if we look at margins in Lab, it seems to be strong quarter-over-quarter. Again walk us through just what we should expect in terms of -- because this -- as we talked about earlier, this is quite volatile and, of course, that depends on the orders you get. But how should we model it for '25 in terms of comparing it maybe to full year '24 and '23 again?

I mean it's, of course, tricky given -- as I said, the larger orders, projects will impact the quarter isolated. I mean for Q2 comparables is, of course, tough when it comes to Lab segment. But on the other hand, we have very well-performing companies. I mean U.S. clinical trials is performing very well, and that can compensate. But for me to say that it will compensate full or not, I mean, it's a very tricky one for me to comment on because it's very affected on orders received. And mainly to give you some -- I mean, we have a good pipeline within the clean room. So it's a growing business. So that's good for the Lab segment. But to give you guidance on it, it's very tricky, I would say. So it's a tough one. So I will -- I can't do that.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you all, and thank you for listening. Have a continuously great day. Thank you. Bye-bye.