Investor AB (publ) (INVEA) Earnings Call Transcript & Summary

Welcome to Investors Annual Accounts Presentation for 2019. I would also like to welcome those of you who are on the call with us. And also, those of you who are listening in or through the web. We will start as usual with our CFO -- CEO, Johan Forssell, presenting our results followed by our CFO, Helena Saxon. And after that, we will have questions from all of you who are participating. And of course, after that, also time for individual interviews with media. Welcome again.

Thank you, Viveka. And welcome to this presentation about our results for 2019. Let me now start to say a few words about the global economy. We saw during the last year that the economic activity in the world decreased, not only leading indicators, but also, we saw that the economic activity went down. At the same time, we also saw that the interest rates remained at very low levels, and we saw that the Fed started once again to lower the rates a couple of times during the year. The low interest rates, we all know, has, of course, spurred a very strong stock market that, to a large extent, has been driven by multiple expansion. If we look forward then, we continue to believe that we are in a softer period, and that is why we prioritize agility and also financial flexibility. I should also say, of course, that it is a clear positive that we have the Phase I agreement in place between China and the U.S. and there are also more clarification, of course, around the Brexit process. So whether we are not -- as you know, we are not [Audio Gap] the stock market or the macro economy, how it will go. But we are prepared, should it become a little bit tougher, we are prepared for that. And if not, agility goes both ways. Of course, if you are agile, you should also be able to ramp-up if we would see improvement. So we are basically, hopefully, and I believe that we are able to demonstrate that in our companies. Moving over to investor. 2019 was a very strong year. Our total shareholder return was up 40% during the year, which can be compared with the Swedish stock market that was up 35%. Importantly, we had a strong development among our subsidiaries within Patricia Industries. The sales growth during the year was 13%, of which 4% was organic growth in constant currency. And the earnings growth during the year was 18%. We also had a number of very important activities taking place during last year. Of course, having the right people at the right place is a very simple part for us being a large owner in these companies. And we have worked, of course, extensively, both when it comes to the Board and the management teams. Just to give you a few examples that you know, we have Bjorn Rosengren coming in as new CEO in ABB. We had Helena Hedblom appointed to the new CEO of Epiroc. And then Henric Andersson appointed as new CEO of Husqvarna. I think these are good examples. Bjorn, we all know, has a very deep and long experience from the engineering sector. And when it comes to Helena and Henric, they both have about 20 years of experience from their respective companies. So they really know their businesses. We had a very successful IPO of EQT last year. And we cannot be other than pleased with the development of that, not the least, the process surrounding that IPO. Last year, Electrolux announced that they will put the professional business on the stock market, and that will happen this year. We invested more than SEK 4 billion in ABB last year. And the reason for that is that we do believe that they are active and attractive industry segments. They have strong market positions in those segments and we see potential for operational improvements going forward. We announced just before Christmas, 2 significant acquisitions that were done by our 2 subsidiaries, Laborie and Piab. And these are not small add-on acquisitions. The acquisitions that was announced by Laborie, Clinical Innovation, represents about 35% of the revenues of Laborie. And the acquisition of Tobii that was announced by Piab, represents about 25% to 30%. So these are really strategic acquisitions. And this is absolutely in line with our strategy to use the strong platforms we have. We have great companies with good growth prospects and also high profitability to use these platforms, to do these add-on acquisitions that -- and these are the 2 very good examples, and I will come back to that. Then the final comment I want to make about 2019 was that we had a very strong cash flow during this year. First, the dividends from our -- ordinary dividends from the listed core investments was up 10% during the year. We got the cash flow from EQT of SEK 5 billion, and in Patricia Industries, the distribution from the subsidiaries and Three amounted to SEK 5.7 billion. In addition to that, we made a couple of exits. As you know, we did an exit of Aleris, bringing in SEK 2 billion and also a couple of companies within financial investment. In total, exit proceeds amounted to more than SEK 5 billion. So we end the year, despite the investments in ABB and despite increasing dividend, we end the year with a very strong financial position. And that also made us continue the streak of increasing the dividend from SEK 13 to SEK 14, and that's an increase of 8%. Moving then over to the fourth quarter. In the fourth quarter, our adjusted net asset value increased by 6%, and our total shareholder return was 7%, a few percentage below the Swedish stock market. We invested another SEK 1 billion in ABB in the quarter and the adjusted profit growth in the subsidiaries was 6% and the adjustment here is only for these -- 2, the transaction costs related to these 2 strategic acquisitions in Laborie and Piab. And I will come back to those acquisitions later in my presentation. So Patricia Industries. You saw that in the fourth quarter, the value change was minus 3%. And I think it merits a few words here. We had profit growth in the quarter, and we had a good cash flow. That was clearly a positive and increased the value of our holdings. But in this quarter, we have multiple contraction and also the Swedish -- the stronger Swedish krona versus the euro and the U.S. dollar also had a negative impact. So you can say that the profit growth and cash flow was mitigated by even bigger multiple contraction and some negative currency effect. If we look on Patricia Industries, the value change for the full year 2019, I think this is an important picture, the value change was 23%. But if you look what drives that value change, more than 2/3 of the value change is profit and cash flow in the underlying companies, while less than 1/3 is multiple expansion. If you compare that to most of the stock market, in most of the stock markets, multiple expansion corresponds to something like 80%, 85% of the increase. So I think we have a lot of substance behind the value change within Patricia during the year. Moving then back to the fourth quarter. The organic sales growth was 2%. The reported sales growth was 9%, and adjusted profit growth was 6%. We have continued good growth in a number of the companies like Laborie, BraunAbility, Permobil, all growing between 4% and 8% organically. The slightly lower organic growth in this quarter compared to the earlier periods is related in Mölnlycke and Piab and I will comment on those specifically because there are a couple of reasons for it. Starting then with Mölnlycke. Organic growth amounted to 1%. Wound Care grew 1% and Surgical grew 2%. We expected, as you know, that we would see a lower growth rate in the fourth quarter and that I also mentioned when I presented the third quarter. And the reason for that, if you look on the blue bars, is that we knew that the fourth quarter 2018 was a record level. So it was a tough comparison. So we expected to see a lower growth in this quarter. There was the second thing also to mention that the growth in the emerging markets was -- while it was above the group average, it was clearly lower than what we have seen in the preceding quarters. And there are 2 specific reasons why the emerging market growth was lower in this quarter. Number one, we saw destocking in China. And number two, the company made a change of distributor in the Middle East. So we expect, when it comes to emerging markets that we will come back to better growth going forward. The profit margin was essentially flat and the company continued to deliver a strong cash flow, which made it possible to distribute SEK 2.6 billion to Patricia in the quarter. Permobil, organic growth of 4%, both power and manual growth, Seating & Positioning declined slightly in the quarter. And if I look on the geographical mix, North America and Asia grew, while Europe was more or less flat. The profit margin was down compared to last year, and that is not related to the gross margin, it's related to OpEx. And within OpEx, there are 2 key reasons. One is that we are continuing to develop and expand within sales and marketing, but the other is also that we have an additional impact from initiatives to reduce the cost base. And also Permobil could distribute SEK 500 million during the quarter. Laborie had a very strong development during the fourth quarter. The organic growth amounted to 8% and that was driven both by strong development within urology and gastrointestinal. If you look on the profit development, it looks good, even on reported basis. But if we adjust for the USD 6 million in transaction costs related to Clinical Innovation acquisition, the underlying profit margin was actually 37%, which is a record level since we bought the company. And that is driven by that we are now seeing full good effects of the Cogentix synergies. The synergies related to the Cogentix acquisition and also the successful restructuring of the European operation. One thing for you to know here, we are saying that we are -- the price for this company, Clinical Innovation is about SEK 5 billion or USD 525 million. Out of the SEK 5 billion, we will inject roughly SEK 4 billion in equity. And the remaining SEK 1 billion will be new debt. So we will have a cash outflow of about SEK 4 billion going forward. And we expect this transaction to close during the first quarter. So what is then Clinical Innovation. It's a provider of single-use products for delivery and also in intensive care units for the babies and it's mainly related to complicated high-risk births. And to give you a few examples on what the products are. The biggest product is this one called Kiwi and that's a vacuum-assisted delivery device that is used when you basically bring the child out. And the second biggest product is the Koala, and that is a product that measures the contraction during birth. So then you have a pretty good picture. Single-use products related to high-risk births. We believe this is -- has a good growth dynamics. First of all, high-risk births go up and they do that because the ones -- having children in certain countries have more obesity. And secondly, people are getting older when they have the children. And that leads to more complications. The second part, of course, is there is an under-penetration in emerging markets. And with the business within urology and GI that Laborie has, and also, with this business, it gets a -- the company gets a better critical mass to really go after certain emerging markets. So that is, of course, a potential, and we know how to do that because we have done it in many other subsidiaries. This is a company that has had a good organic growth, it's very profitable. The profitability is actually somewhat above the level in Laborie and the company has an excellent cash flow conversion. It's a capital-light business. So we like this business and this is a company that fits very well in Laborie. Moving down to BraunAbility. Good development in the quarter, 5% organic growth, profitability improved quite a lot compared to last year. And in this quarter, we saw a very strong growth on the commercial side, also the Consumer Brands grew nicely, while Lifts was down slightly in the quarter. And also here, we saw a very good cash flow, here, they were very successful on the working capital side. Moving down to Piab, where I need probably to do some explanations. The organic growth was minus 9% during the quarter. If we look on the geographical split, Americas actually grew slightly in the quarter. So the fall from a geographical perspective is related to Europe and Asia. If you then look at the different divisions, you know that the biggest division within Piab is Vacuum Automation. That's the classic suction caps. That business actually grew slightly in the quarter. But all other divisions were actually down. And the biggest fall continued to be within Robotic Gripping. And you know we have a plan or the company has a plan to address the problems that we have within Robotic Gripping and they are doing that right now, but that is the biggest. The other reason that we didn't put in the report is within Ergonomic Handling, but that is not related to poor performance because Ergonomic Handling was also down quite a lot in the quarter. The reason here is just the comparison, last year in the fourth quarter, there was a big deal to Heathrow airport that did not repeat this year. So that is basically the key explanations for the weaker growth. Then if you look on the profitability, adjusted for the transaction costs, the margin was 24%, which is down, and that is mainly related to the sales drop. So moving down to TAWI. What is this? You have a nice picture, where you can see the product. The revenue is SEK 350 million, which can be compared with Piab's revenue of about SEK 1.3 billion. So it's a sizable acquisition. We see strong sales growth potential for this company due to e-commerce logistics. And if you look on the profitability of TAWI, I can say it's -- they have a very good profitability, but it's slightly lower than the profitability we have in Piab, but it's a good profitability. Sarnova reported an organic growth of minus 2%, but adjusted for the Ambu transition that I discussed last quarter, the underlying growth was 3%. And adjusted for that, the profit was more or less flat. You saw in the third quarter, we had a big extra positive effect. And in this quarter, we have a negative effect. Three had a strong development. The net subscriber base grew by more than 50,000 in the quarter. The underlying service revenue grew by 5% and the underlying profit growth was 8%, so strong performance in the quarter. Moving down to EQT. The value change in constant currency in the quarter was 11%. And that consists of 24% stock price increase in EQT AB on the stock market. And 1% change in our funds. But here I should stress, the 1% development is not the fourth quarter, it's the third quarter. Because after the IPO of EQT, we will have to report the fund performance with 1 quarter lag. So the fourth quarter, you will see when we report our first quarter results this year. And then you saw the extraordinary strong cash flow, SEK 2.7 billion in the quarter that took the full year to SEK 5 billion. More than half of this SEK 2.7 billion is related to very successful divestment in China, LBX is a company, and that is an older fund, Greater China II, where we had a large part of that fund. So that is one of the key reasons. But the underlying cash flow, as you understand, was also very good. To summarize, 2020 -- 2019. As you can see was an extremely strong year also from a historical perspective, but we will continue to do whatever we can to let these drops continue in the right direction. And with that, I hand over to you, Helena.

Thank you, Johan. I will start with the development of the net asset value. And you can see here on the graph that both our reported and adjusted net asset value grew and we landed the quarter at SEK 485 billion. Looking at the listed companies. Some 70% of the portfolio, SEK 345 billion. We can see that the contribution to net asset value was SEK 30 billion in the quarter. And the TSR for the listed portfolio was 9% compared to SIXRX 10%. And the performance in the portfolio was mixed. Some of the companies had great TSRs, like Atlas Copco and ABB, while other companies had a more challenging quarter like Wärtsilä and SEB. Looking at Patricia Industries. Johan already explained that the growth in the quarter was negative and this was not due to performance. You can see here at the left-hand side of the graph that performance and cash flow was actually strong while multiples contracted and we also had a negative effect of the krona strengthening versus the dollar and the euro. And you might find it strange that the multiples are contracting in a quarter when the stock market is so strong, but just to remind you that when we make the estimated market values, we use the volume weighted average of the share prices of the peers for the full period to make the estimated market values more stable and less volatile. So this is the explanation for the multiple contraction, the main explanation. Looking at the full Patricia portfolio and the consecutive development in the quarter of the market values, you can see that the companies developed differently. Some of them actually grew their market value and some of them shrunk, while we also had very strong cash flow in terms of dividend. And you can see that the Patricia cash position increased by SEK 6.5 billion in the quarter. Looking at the main drivers. Of course, the market value of Mölnlycke decreased by 7.3%, and this was mainly due to the multiple contraction that I talked about and the currency impact. But this was partly offset by cash flow and SEK 2.6 billion was distributed in the quarter to Patricia Industries. Permobil's market value also declined SEK 1.5 billion due to lower multiples, but was positively impacted by growth, the strong growth in the company. However, also here, the currency impact was negative. Laborie decreased somewhat, despite strong earnings growth and lower multiples and currency impacted negatively. Sorry, I was actually wrong here on Permobil, the earnings was impacting negatively. We will -- I will revert to that later. Well, three had a higher profit and also multiples contributed to the valuation of the company. In the quarter, both Sarnova and Piab were market valued for the first time because 18 months has passed since they were acquired. We usually value them at the acquisition cost for a period of 18 months, but now we have market values of these 2 companies. And the combined effect is an increase of SEK 700 million. And looking at financial investments. The portfolio is now SEK 4.3 billion, which is a significant decrease and as you know, the realization of this portfolio is continuing. We have, in the quarter, we said SEK 1.6 billion in cash from both NS Focus, which is our Chinese investment that is now finally fully exited, but also 2 exits of U.S. companies, HireVue and Acquia. Looking at our financial position. You can see in the graph that our leverage is now well below the target range, which is the gray area in the graph, 5% to 10%. We're now at 2.8%. Net debt is as low as SEK 12 billion, and our gross cash position is almost SEK 25 billion at the end of the quarter. Johan talked a lot about the strong cash flow in 2019. This year is especially strong. But looking at the longer period since 2015, we can see that this portfolio has generated SEK 85 billion. And you can also see from the left-hand pie that all areas are contributing to this cash generation. It has underpinned dividend policy. So we have this year then announced that we will grow the dividend by SEK 1 per share for the tenth consecutive year. And we've also been able to invest in 4 new subsidiaries. And there, of course, we will inject some SEK 4 billion in Laborie as the transaction with Clinical Innovation closes in the middle of February, but we've also been able to strengthen our positions in selected listed companies. Last year, mainly ABB and the year before that, Ericsson, for example. And all of this has been done while we have been able to deleverage and are now at the 2.8% that I just mentioned, which means that we entered 2020 with a very strong balance sheet, with an opportunity to then invest in the situations that may arise during the year. So with that, I hand over to Viveka and I click to our purpose.

Thank you, Johan, and thank you, Helena. Now it's time for some Q&As. And I want to start with any questions if we have any here in the auditorium, followed by any possible questions from the call and then on the web. So -- and if you raise a question, please also state your name and company.

Derek Laliberte from ABG. I had a question because in a relatively short period of time, you made or Patricia has made 2 investments from EQT funds where they've acquired companies from EQT funds. So I was wondering if like anything's changed and how you collaborate with EQT? Or if the company is being sold by the funds are more on your radar, I was thinking about Piab and now Clinical Innovation by Laborie.

Thank you for the question. And there is no change in the way how we work. It just happens to be that we like the company, Clinical Innovation, and they happen to own it.

Joachim Gunell from DNB Markets. So a question for you, Johan. On the Wärtsilä, how well do you believe they are prepared for the, let's say, energy disruption? Is the performance as of lately market related? Or is it on their own hand? And how do you see them improve operationally going forward?

Thank you for that question. Here, I have to say that I am in a silent period because they will actually release the results on January 30. So I have to be very brief. But if I should say a few words what the situation was up until the third quarter. I would describe it as follows, that on the one hand, the performance that we have seen with the weaker profit and also, of course, a weak share price is partly related to weak demand. As you know, Wärtsilä is active in 2 segments, the marine segment and the Energy segment. On the marine side, normally, the contracting of ships, the normal level might be around, let's say, 2,000 ships per year. I think it peaked roughly 4,000 ships. And now we are running at about 1,000. So it is a weak demand situation, has been a weak demand situation on the shipping side. On the energy side that you say, we all know that we are in a transition. We are moving to more solar and more wind. That will, for sure, take place in the coming decades. But that also means that sometimes the sun is not shining. And sometimes, the wind is not blowing. And we also know that there will be a lot of decommissioning of coal during this period, which means that there will need to be a lot of balancing, for example. That is a big debate and discussions out there? How will this play out? What technologies will be used? And that has also led to some customers being a little bit uncertain and postponed. So we have basically seen weak demand on the 2 main segments. So that is one explanation. The other explanation, unfortunately, is that there has also been some internal projects that have not performed in line with what we want. And that is unfortunate, but that is the fact. So I would say, weak demand and also some internal things that we need to adjust. The focus from the Board and the management right now is very clear, make sure we have the right cost base for the demand situation, make sure we improve the situation, how we run, how we follow-up the projects. And, of course, develop the company and try to improve the situation. So that is the focus.

That's clear. And on Piab, perhaps for robotics or Robotic Gripping. Can you elaborate a bit further on what you see, I mean, on the ground or on the floor that's really driving the weakness? So to say, and what signs do you see of that momentum shifting in, say, 2020?

Yes. It's -- Robotic Gripping came into Piab through 2 acquisitions before we acquired it, Sarnova and Piab. And then the plan was to integrate that in the distribution out to the customers. And we can conclude that that transition, the way we handled has not been handled in a perfect way. Now Clas coming in as the new CEO. And also, of course, with the support of Ronnie Leten as the Chair, they are working heavily with the management team to try to find the right way forward for that business. So it's -- I think it's a product group that fits with the company. We just need to improve the performance.

And just finally for me then. On the split of Electrolux as we approach that. For the RemainCo, could you please remind us just how exactly it fits your investment criteria, so to say, in terms of market positioning, EBIT stability, et cetera?

I mean I think that if you start from it, if you look on a historical perspective, you can say, number one, the margin is lower than we normally desire. But on the other hand, Electrolux also has a very strong cash flow generation over a period. Also, I think the company are continuously working to improving the positioning in the market. Improving the mix, and that has been a very successful job in Europe and that we have also seen in the performance in Europe. Now the challenge and that they need to tackle is the other side of the Atlantic is to fix the U.S. operations. And they are working on it. Unfortunately, there was some disruption in that transformation, as you know, they announced that previously when it comes to moving 2 plants into 1. But we believe as the lead -- owner here, that the Board and the management are doing the right things, improving their production footprint in the U.S. So we get the productivity and adapt to cost base so that improving the price points, the development with innovation in the products and they're also taking a big grip on sustainability, which is important for this business as for other businesses. So we believe that with the actions going on, even though, for sure, it's a tough market out there, we believe that they are doing the right thing.

Alexandra Barganowski, Nordea Markets. Could you just give us a little bit of an update and maybe elaborate a little on the remaining companies and the financial investment portfolio, as you've now done some exits in it and sort of what your plan is for the remaining companies in that portfolio as well?

Thank you for that question. It's an area which we don't normally go into a lot of detail. But as you see, the strategy to reduce the size of the portfolio has been very successful. In '19, we have sold off several holdings and especially the Chinese holding, which -- there were some administrative hurdles to get through and also to repatriate the cash to the U.S. has taken some time. We're now down to a portfolio where half is the 5 biggest and then there is a tail end of companies that are maybe not as easy to sell, but there are also companies like Atlas Antibodies and ActivBody where we believe there might be a future, and we want to keep them. And as you know, Dr. [indiscernible] is also a part of that portfolio that we're working on to develop further.

I think that's a good answer. And also maybe as to add that during 2019, we divested about SEK 3.7 billion in that portfolio. And now you saw the remaining part is just SEK 4 plus billion. And out of that, we actually have a couple of companies that we are working actively with Atlas Antibodies then ActivBody and so forth. So you should, for sure, expect the strategic direction is still there. The companies that we do not decide to be -- sort of have the potential to be a golden egg, we will continue to work on it, but the size, of course, will be smaller going forward than it was in the last year. It's just mathematics.

Any more questions here from the auditorium? No? Then let's see if we have any questions from the participants on the call.

[Operator Instructions] And at the moment, there are no audio questions.

Thank you. No questions. And let's hear from Magnus, if we have any questions from the web participants. No questions. So by that, we say thank you, and thank you for attending our presentation today.

Thank you.

Thank you very much.