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

Welcome to ADDvise Group Q1 2025 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 good afternoon, everyone. Our first quarter performance met expectations across revenue, earnings and cash flow. We saw continued strong momentum in our diabetics business while the lab segment faced a challenging comparison due to large orders in Q1 last year. Our team executed well, driving efficiencies through disciplined use of internal processes. The macro event has become increasingly uncertain, influenced by rising geopolitical and trade tensions. That said, we are navigating this landscape from a position of strength, supported by our talented team and our presence in resilient, nondiscretionary end markets with strong secular growth drivers. We also expect the recent strengthening of the Swedish krona to impact our top line and earnings primarily through translation effects. At the same time, we are taking proactive steps to protect our financial position, including structural cost initiatives. Our focus remains clear, continue our active M&A agenda, delivering for customers, supporting our teams and creating long-term shareholder value. We have successfully managed through uncertainty before and are confident in our ability to do so again. With that said, let's take a closer look at our Q1 performance. Our net sales came in at SEK 424 million, which took us to a year-on-year growth of 3%. The Healthcare segment reported a strong organic growth of mainly due to strong performance of our diabetics operations. The lab segment reported negative growth due to tough comparison with a couple of big orders in Q1 2024. EBITA came in at SEK 75 million which take us to an 18% margin. Looking at the cash flow from operation, it came in at SEK 37 million compared to SEK 33 million last year. In April, we finalized the rights issue and received SEK 457 million gross. Cash on hand SEK 277 million, excluding the rights issue. And we had a pro forma leverage of 2.5. Coming into commercial and operational highlights of Q1. We saw a good business momentum in both healthcare and lab during the quarter. We continue to focus on efficiency initiatives to make sure that we are maximizing our potential to create shareholder value. Managing working capital is one of our top priorities. During the quarter, we saw cash flow increase of about 10% year-on-year, mainly driven by working capital improvements. In terms of geography, approximately 42% 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 quarter are laboratory equipment, followed by medical consumables and medical equipment. As you can see from this pie chart, pharma is now stabilizing around 8% of our sales for the quarter. We see stable demand in the U.S. during the quarter. Our topic of tariffs, the impact at Level 1 referring to products produced outside the U.S. and imported for sale in the U.S. is relatively limited representing approximately SEK 30 million, SEK 40 million. Nearly all of our U.S.-based companies manufacture and sell their privates within the U.S. market. That said, we do see that certain components used in our U.S. production are sourced from outside the country. It's still too early to determine the exact extent to which these parts can be replaced or at what cost. The positive aspect is that our products are essential that we are designed to extend, improve or save people lives which provides a certain level of resilience regardless of trade dynamics. 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 424 million and a growth of 3%. We measure our revenues also in our own products, products that we develop and manufacture and products that we distribute. For the last for the quarter, we came in at 55% of sales, and that's -- I mean, it's a stable level as we see going forward as well. Splitting our growth into healthcare and lab. And looking at Healthcare, our sales came in at SEK 271 million in the quarter, an organic growth of 10%. The lab segment reported sales of SEK 155 million for the quarter. Organic sales minus 9%. As I said before, it's mainly due to a couple of big clean rooms orders last year. Margin-wise, healthcare came in at 18% EBITA margin and lab at 22% in the quarter isolated. Both lab and healthcare came in on stable levels. Looking at net sales by geography. For the Healthcare segment, North America is a key market with approximately 50% of sales. And we will -- it will be -- continue to be that for a long time. Having said that, Europe has a good development. In the lab segment, Europe is the largest market followed by U.S. With our updated long-term financial targets, we are taking the next step in the company's development, maintaining a clear focus on profitable growth, stable return and well-balanced debt levels, all supported by continued execution of our M&A strategy. We are placing strong emphasis on EBITA growth and return on working -- return on capital employed. Compared to our previous targets, which centered on top line growth supported by equity raisings, we are now prioritizing a more disciplined approach, continue our M&A agenda, financed by internally generated cash flow and debt. EBITA growth will be driven by a combination of organic expansion and strategic acquisitions. Our ambition is to double EBITA every fifth year. We remain committed to maintaining a maximum net debt-to-EBITA ratio of 3. Dividend remains part of our long-term financial framework, but distributions will be considered once all other long-term financial goals are at satisfactory levels. I'm now handing over to Johan 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 numbers for the first quarter of 2025. From this year 2025, EBITA has replaced EBITDA as ADDvise main key profit metric. And EBITA is defined as operating profit before amortization, impairments, expenses and revaluations related to acquisitions as well as nonrecurring items. The purpose is to give a fair picture of how the business is performing. And the EBITA figures in this graph have been historically adjusted for the new definition. EBITA in the quarter amounted to SEK 75 million which corresponds to a margin of 18%. As we have pointed out in the earlier reports, 2024 faced tougher comparables from 2023 from previous quarter Q4 '24, we are now back to normalized levels of sales and profitability on a rolling 12-month basis. And on a rolling 12 month basis, EBITA amounted to SEK 268 million, which corresponds to a margin of 16%. Moving on to cash flow and capital efficiency. Here, when we talk about cash generation, we look at the underlying cash flow generated by our businesses with deductions from changes in working capital as well as depreciation and investments in our asset base, including lease payments. And in the first quarter, we see a working capital improvement of SEK 0.5 million. Working capital efficiency and optimization is, and will always be a key focus area for us and our group companies. Depreciation includes depreciation on fixed assets as well as right-of-use assets related to leases. And if you look at the net between depreciation, lease and investments, SEK 0.9 million, indicating higher new investments than depreciation on existing assets of just shy of SEK 1 million. Total cash generation from operations in the quarter was just below SEK 75 million and in line with EBITDA. Over to return on capital employed, which measures profitability and how efficient we use our capital. We came in at 12% in the quarter. And from 2025, this metric is one of ADDvise's long-term financial targets, where the target is 15% on return on capital employed. Moving over to our financial position. Our long-term net leverage target is 3x net debt over EBITDA. And net leverage at the end of Q1 2025 was 2.5 including the proceeds from the rights issue that was finalized in April. And the right issue included also a warrant that could potentially add an additional SEK 172 million in the first quarter of next year if fully exercised. The right issue was made to strengthen the balance sheet, reduce our finance costs, improve our cash flow and to build a solid foundation from where we will continue acquiring profitable and successful companies within the life science space. Available liquidity is good. Cash at the end of the quarter was SEK 277 million, and this is before the rights issue liquidity including this means a liquidity of around SEK 730 million. And this 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 Q1 before we open the floor for questions. Sales grew by 3% in total, profitability on a normalized level, cash flow strong for the quarter, mainly working capital related. Good liquidity, rights issue down, the pro forma net leverage below 3. On the M&A side, we are working on a couple of interesting opportunities, no stress. It must be, as I've said before, right, when it comes to type of company and also the price tag, of course, high quality to a reasonable price tag. With that said, let's open up for questions.

[Operator Instructions] The next question comes from Philip Ekengren from ABG SC.

I would like to start by asking if you can say anything about the order intake in April. Staffan, can you hear me?

Yes, I can hear you. I can hear you.

Can you hear me?

Yes. Yes. Yes. Order intake...

Can you hear me?

Yes, I can hear you.

Hello?

Okay. It was regarding -- a question regarding the order intake.

I can hear you. The line seems to be a bit shaky.

Okay. It's clear.

And my question was regarding... Yes, if you can say anything about the order intake in April.

Order intake in April. Given the nature of our businesses that we have several of our companies that are actually delivering immediately more or less. So the order intake is less important. Having said that, looking into my feeling for April is that it's a stable month when it comes to orders, the development. So we haven't seen any volatility for April.

Sounds great. And on margins, would you say that -- so if we look at the new EBITA in both segments, would you say that these levels on both healthcare and lab are these normalized level? Or what can we expect for the coming 3 quarters? Can you comment on that, please?

I would say, of course, we are pushing for as high margin as possible. But looking into where we are now, I would say, clearly on stable levels, but I also see that there is potential for more. But I mean that also comes when -- I mean depending on lab volatility for bigger orders. So I guess from a quarter-to-quarter, it could be difficult.

Sure, makes sense. And the impairment on goodwill in lab that you recognized in this quarter, should we kind of extrapolate any change or expectations in the segment in general? Or is it in a specific area? Can you comment anything on that, please?

The impairment of goodwill in the [indiscernible] and lab segment is related to an earn-outs write-down that we did. So the impairment of goodwill and earn-out adjustment was kind of matched let's day to say. We can say that when we write down an earn-out liability, means that we -- the purchase price allocation is lower and we want an asset within a goodwill amount.

The next question comes from Christian Lee from Pareto Securities.

Good afternoon. Hope you can hear me? Hello?

We can hear you.

I have some follow-up questions regarding normalized EBITA margins. You had 22% in the Lab segment, which seems to be in line. Yes. The 22% EBITA margin in lab seems to be in line with what you had in the previous year, while the margin of 18% in the Healthcare segment is much lower than what you had in Q1 last year. So how should we think about the margin level in healthcare? Is 18% a normalized level? Or should we expect some improvements going forward?

We're always fighting for improvements. However, you could see given the product mix that we deliver in the quarter it's clearly on a normalized level. Having said that, as I said before, we are always pushing for higher margins.

Okay. And another question regarding your OpEx. Since you have a clear focus on cost control and operational efficiency, how should we think about OpEx going forward? Is this what you had in Q1? Is that the level we should expect going forward?

Yes, I guess it's on a normalized level. And I guess that goes also the same for when we -- I mean, resonate when it comes to the margin, of course, we are pushing for optimizing for OpEx as well throughout the group. But you should be clear that -- I mean, we are -- there is not much flesh just lying around in the group. So I mean, we are -- it's clearly target to be efficient throughout the group and our teams are clearly chasing efficiency from within their operations.

I think that the OpEx will be maintained at a similar level going forward. So what will be the main driver of growing EBITA by 15% per year, if it grows on top line? And how much should we expect to be driven by organic growth?

Nothing has changed. I mean, how we view growth it's clearly that we should be at least growing in the same pace as the market, I would say, roughly around 5%. And the remaining 10% should be driven by M&A.

Okay. One last question, please. Of the remaining contingent purchase consideration of SEK 255 million, how much of it do you plan to pay this year?

Sorry. Can you say that again? I would say around half of it.

The next question comes from [ Jonas Astrom ] from Private Investor.

I have a couple of questions regarding the rights issue. Do you -- have you disclosed what the right issue cost was? And connected to that, when you do the net debt to EBITDA according to the bond-term sheet, you actually account for cash from rights issues as gross and not as net. Could you explain this, please?

Cost for rights issue was about SEK 7 million, so the net figure would be roughly SEK 450 million. And when it comes to -- can you repeat the second question there.

I have noticed that the -- in your calculations on Note 8, you have SEK 457.3 million as cash from the rights issue when you calculate the net debt relation to the EBITDA. So that should actually be SEK 7 million less then.

After transaction costs, it will be -- once paid, it would be SEK 7 million less.

And to be clear when..

Thanks for confirming that and also, there was a delay. So please continue. I'm sorry, I interrupted you.

To be clear, the cost, when I say SEK 7 million, that's cash out related cost. Then I have to remind you that we also paid underwriting fees that was paid in new issued shares.

Correct. So next topic, could you provide some more insight in where you see the pharma business going forward. You had a very, very amazing growth initially when I guess they were building up the stock supply in the distributor chains. Are you expecting this has bottomed up now, and it's going to start growing from here? Or what are your expectations on the pharma?

The pharma has -- as you probably everyone that's on this call can remember that we had an extraordinary performance in 2023. We are back on normalized levels, and the segment is performing good. And I would say volatility -- or at least my expectation is that volatility is on the upside.

The next question comes from Peter [indiscernible] from Private Investor.

Peter here. I have a question regarding your cash position, how prioritized as I can see that you have the possibility to repay part of your bonds fairly quickly and looks more attractive to go down your interest rate costs. How you look at that versus keeping ammunition for M&A going ahead?

I think we would like or at the plan is to attack it from both sides meaning that make sure that we have a sustainable and efficient capital structure hand-in-hand with continuing target to deliver on our M&A strategy.

Okay. Could you then -- I have to say, do you dare to say anything how much capital you could allocate to M&A coming 12 months?

No. I guess that would be -- it all depends on what kind of opportunities that we have in terms of M&A, I would say. So it would be wrong for me to put a figure here.

Good understanding of that. Maybe I go over to my second question. In November here, you sent out a press release saying that you are looking into divesting Germa. Do you have -- is it still up for sale? Or like I understand you have had a lot of internal focus now getting in the cash, but -- how, is it still for sale?

The reason for that we put out that for sale, was that as you -- if you recall in the press release, is that the lion part of that operations is actually selling towards the defense industries. And we were then having a process and we received indicative bids. And I would say we were not happy with the price tags that we saw at that moment. All in, I would say, in perspective of the demand that we see in that business. And it's clear that the buyer is not willing to pay based on the results that we expect in the coming period. So I guess it's -- it's strategically still for sale, but I would say, the gap between the seller and buyer is hard to fill at the moment.

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 a big excuse of the delay that we have had here during the Q&A session and hope you all have continuing -- good Friday. Thank you.