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

Hello, and welcome to Investor year-end report for 2020. [Operator Instructions] Today, I am pleased to present Johan Forssell, CEO; Helena Saxon, CFO; and Viveka Hirdman-Ryrberg, Head of Corporate Communications. Please go ahead with your meeting.

Thank you, and welcome, everyone, to Investor's year-end report and our conference call this afternoon. We will start out with our CEO, Johan Forssell, followed by our CFO, Helena Saxon. And then we will open up for questions. Please, Johan.

Thank you, Viveka. 2020 was, for sure, a special year, heavily impacted by COVID-19. And we all know that it led to severe suffering for people, but also contraction of the economies around the world. However, we also know that different industries have been hit in different ways, and that we can also see in our report today. Looking forward, of course, the rollout of the vaccine provides a big opportunity. And we also see that supply chains are working reasonably well, and manufacturing is in most places up and running. So there are clearly positive areas or positive factors entering 2021. But there are also risks. COVID-19 is still not controlled. There are questions, of course, what if the vaccines will not bite us with hope? Could there be more mutations, et cetera. That is, of course, a risk. And as we all know, there are also financial risks with central banks that have basically poured a lot of money out in the system. And I think none of us know to what extent that is for our future inflation and higher interest rates. So there are always those kind of opportunities and risks, but as always, predicting the future is difficult and that is why flexibility remains key. Being prepared, being flexible and try to seize the opportunities, but handle the risk, that remains our key focus. So with that introduction, moving then into 2020. That was a strong year for Investor. I think I can say that -- I must -- that the companies have really managed 2020 in a good way, and our subsidiaries have actually increased the profit somewhat during the year and finished the year strongly. Within Listed Companies, we invested more than SEK 3 billion during the spring at attractive levels. And, Patricia Industries, of course, highlight is the acquisition of Advanced Instruments and as you have seen, the performance was really strong in the fourth quarter, growing at 16% organically with a very high profitability. Also, EQT performed great last year, up 55% for all our investments in EQT. And despite the investments we made, both within Patricia and within Listed Companies, we end the year with very strong financials and a leverage that is below our target range. And finally, then, I think another highlight, of course, is that 2020 was the year when we launched our focus areas and targets when it comes to sustainability. And that is a high priority in our daily work. Now -- so moving to next page. Here are the figures. Our adjusted net asset value was up 14% and our total share of the return was up 19%, and that can be compared to the stock market being up 15% in Sweden. As you know, our goal is to pay a steadily rising dividend. And the Board has today proposed a dividend of SEK 14 per share. And just as a reminder last year, due to the very special circumstances, we took the decision to be more cautious and gave a dividend of SEK 9 or about 2/3 of the original expectation. I think that to put that in context, almost half of the companies on the large-cap in Sweden didn't pay dividends at all. But we're very pleased to now be more on track on the journey again. And the reason why we feel good about this dividend is that the companies have handled -- or the pandemic well. The company stands strong. And as I mentioned before, Investor's financial position is strong, so I think we feel comfortable with our recommendation. We have also proposed to split 4:1. And the reason for that is that we have, over the last few years, a strong increase in the share of the base. And today, we have about 330,000 shareholders. And Investor trades at a relatively high share price compared to most large-cap companies on the Stockholm Stock Exchange. So a split could increase liquidity by providing access to larger share of the base, and that is the main reason for the decision proposed. Moving then over to Listed Companies that now represent about 65% of the value of Investor. Key highlights 2020. The spinout of Electrolux Professional during the spring. As I mentioned before, we invested in ABB, Ericsson and Electrolux Professional in total SEK 3.4 billion during the spring. A number of our companies have also made strategic acquisition. A few examples are Ericsson's expansion into the enterprise segment with the acquisition of Cradlepoint, and then Atlas Copco doing 2 acquisitions to build machine vision division. And recently, AstraZeneca announced the acquisition of Alexion, expanding into rare disease and immunology. High focus in some companies have also been on the corporate structure, of course, ABB after divesting Power Grids, now the focus is to work in the decentralized structure to really supply better customer offerings and also increase efficiency in the cooperation. Wärtsilä also reorganized and launched a number of initiatives to improve the internal efficiency, not this when it comes to project handling. We had a number of new CEOs last year. During the spring, we had new CEOs announced and started with Björn entering in ABB; Helena in Epiroc; and Henric in Husqvarna; and now we have coming up on February 1, we have Håkan Agnevall, who will join or start as CEO of Wärtsilä. As sustainability has been a focus for us in many years when it comes to the Listed Companies, but over the last 6 to 12 months now, we have further integrated the work into our value creation plans and being more specific and better KPIs for follow-up. With that, moving over to Patricia Industries, which now is about 1/4 of the value of Investor. A couple of highlights. I mentioned before the acquisition of Advanced Instruments, which is a company that we really like. And as I mentioned before, started really well in the first quarter in our ownership now with the fourth quarter results. But we have also had other companies like Sarnova and Laborie doing significant acquisitions during the year, and we have supported also related to those. Three Scandinavia has took a very important decision when it comes to the divestment of the passive network infrastructure. That is an important deal for Investor because, first of all, it's a highly value creative deal. And secondly, it will also give a strong liquidity. In total, we will get about SEK 5 billion, of which we have received a little bit more than SEK 1 billion in the fourth quarter. And then on the people side, Zlatko joined as CEO of Mölnlycke in November and is now up and running. And also, of course, within our subsidiaries, is a high focus on the sustainability area. On the next page, you can see the broad picture of the Patricia business, focusing on the subsidiaries and also our part of the profit, our 40% part of the profit in Three. You can see that the subsidiaries total sales is about SEK 40 billion. And you can see that if you add our part of the profit in Three, the EBITDA amounts to more than SEK 10 billion, so this is a sizable part of the company. On the next page, you can see the operational performance. You see the big hit during the spring when the pandemic started. But you can also see the recovery in the third quarter and, of course, the strong quarter that we just released. Then on Page 13, you can see that the organic growth was 14% for the subsidiaries in the quarter and adjusted profit growth was almost 30%. But you can also see there is a wide spread between the different companies, so let me comment on that. On Page 14, you can see that Mölnlycke grew 41% in the quarter. If we exclude the PPE business, the underlying organic growth for the group was 9%, and that consists of a growth of 5% from Wound Care and an underlying growth in Surgical of 14%. The growth in Surgical this quarter -- within that segment, we had a very high-growth in the Gloves business. You can see that the profitability also improved quite a lot. Sarnova continued to perform well and adjusted profit margin increased. Advanced Instruments, I mentioned before, excellent start under our ownership. And then Piab, here, we did see a return to growth since the company grew 12% in the fourth quarter, and also here with better profitability. So for these 4 companies, very strong performance. On the other hand, BraunAbility, Laborie and Permobil, as you can see, are still affected by COVID-19, and that is mainly related to the fact that they have high-risk groups in the customer base. It's difficult to reach the customers. And in some cases, related to Laborie, it also is due to postponement of elective procedures. However, you can see, despite the sharp falls in sales, that the profitability has remained at good levels. Saying then a few more words about the different companies. On Mölnlycke, I think I mentioned the underlying growth of 9% and the split between Wound Care and Surgical. When it comes to the PPE business and looking forward, we expect to add -- or we expect to have additional sales of PPE, also into 2021, but we expect it to be significant less than we had in 2020. And that is also the reason why we have done an adjustment when we have valid Mölnlycke basically lowered the multiple bps to account for this fact. Profitability, very strong, driven by good cost efficiency and, of course, leverage on sales. Another highlight was that the cash flow was extremely strong in the quarter and the company distributed almost EUR 350 million in the quarter. Moving then over to Permobil. As mentioned before, the organic growth was 10%. Europe and America was down roughly in line with that figure while APAC grew somewhat in the quarter, and the EBITDA margin increased. Moving to Sarnova. Organic sales amounted to 19%. And here, I can say that both Emergency Preparedness and Acute grew at strong levels in the quarter. Acute was a little bit higher, but both were 15% or higher. And also here, the underlying profit margin increased. And importantly, the expansion into the revenue cycle management business, that will now be called Digitech, closed in the quarter. Moving then over to Laborie. The organic sales growth was 14% in the quarter and we continue to see a sharp decline in elective urology and gastro, and that is related to postponement of some procedures that are elective. While the maternal and child health business, which is Clinical Innovations acquisition actually grew during the quarter. The underlying profitability -- the reported profitability increased somewhat, while the underlying profitability decreased somewhat compared to last year. Moving down to Piab. Organic growth, as I mentioned, was double-digit in the quarter. Actually, all geographical regions contributed positively, but Europe was showing the strongest growth. And also when it comes to different divisions, all divisions grew in the quarter, but Ergonomic Handling had the highest growth. The profit margin expanded quite a bit compared to last year. But we should remember that last year was negatively affected by cost for the acquisition of TAWI. So adjusting for that, the profit margin last year was 24%, so up a bit, but not as much as you can see in the P&L. And the company was to launch a number of new projects mainly related to the automotive, but also to the electronics and e-commerce businesses. Advanced Instruments. I've already mentioned the key figures, and you can see the good performance. We will continue now under our ownership and invest, both in the commercial organization to drive long-term growth and also within R&D. Those are top priorities to grow this profitable company. Moving to BraunAbility. This is a company that continues to be negatively affected by COVID-19. And you can see organic growth was down 22% in the quarter. If you start from the consumer business, it's important to remember that the customer for BraunAbility, they are different from the ones buying cars. So the recovery of BraunAbility's consumer business is lagging the recovery we see in the normal car business. And the reason, of course, is that they are more high-risk groups. When it comes to the commercial part of BraunAbility, that has been negatively affected by the fact that there is less public transportation within buses and taxis. But despite the tough times related to COVID, you can see that profitability is holding up very good due to good cost management. Three Scandinavia subscription base grew. Service revenue up 1%, adjusted for some onetime items in the quarter, profit grew 1%. And as I mentioned before, the key highlight is the divestment of the passive network infrastructure. And after the end of the quarter, Three secured 100 megahertz spectrum in the 3.5 gigahertz band in Swedish 5G auction. And that will make it possible for Three to build out 5G to give their customer a really good offering in that area. Shortly on EQT, you can see that EQT has become a sizable part of Investor, now representing 10% of our total assets. I mentioned that the total return for the total investment was 55% last year. You can see that the company EQT AB being on the stock market was up almost 100%, while the development of the funds was up 12%. In constant currency, the funds were up 17%. And once again, you should remember that we are reporting this with 1 quarter lag, so this is up until the third quarter. Our priorities then going forward, of course, make sure we sharpen our role as an engaged owner and always make sure we have an attractive portfolio. And moving to Slide 27. This is the one that is updated that we showed on our Capital Markets Day. I just want to reiterate that we truly believe we have a strong base, strong portfolio for the future with a lot of medtech, health care companies that can benefit from the demographic trends. And also for many of these companies, we see great opportunities to expand geographically around the world. Within Advanced Engineering, we have a number of companies that are in the forefront, where we see good opportunities, not the least within automation. Within technology, we have companies like Ericsson and Nasdaq with very strong offerings that can ride on the more digital world that we see. And within the financials, to give one example that EQT, of course, has a great exposure to alternative investment, which is the future growth area. So we have a portfolio with companies that have strong market position and where we see a lot of opportunities to grow going forward. So then to summarize from my side, we will continue to work with the strategy we have, that we have worked with for a long time. And, of course, we are constantly tweaking it, we are constantly trying to move a little bit faster, do it a little bit more efficient, but the basic is still the same. Based on our ownership model, based on the portfolio with strong companies and, of course, we have a good financial strength to support our companies in the years ahead. So with that, I will hand over to Helena.

Thank you, Johan. And let's take a look at the net asset value development on Page 30. We have seen a steady increase in the last decade, and the year ended at an adjusted net asset value of SEK 546 billion and the reported net asset value of SEK 462 billion. On the next page, looking at Listed Companies, we see that Q4 was weaker with the TSR of minus 2%, which led to a full year total shareholder return of 8% compared to SIXRX 15%. However, looking at OMX 30, CSR of 7%, Listed Companies development was more in line. The companies in the portfolio had mixed performance. And during the year, Wärtsilä and Sobi had weaker development, but ABB and AstraZeneca being larger holdings in our portfolio has a bigger effect on Investor as they did not develop in line with the stock market. On the next page, looking at Patricia Industries. The total return, excluding cash, amounted to 19% for the year and 5% in the last quarter. The subsidiaries had strong operating performance and cash flow development despite COVID, which helped a lot. But of course, multiple expansions also explains the contribution to this development. On the next page, we can see a growth showing the sequential change in estimated market values in the quarter and the total adjusted net asset value of Patricia increasing from SEK 149 billion to almost SEK 156 billion at the end of the quarter. Most of the Nordic subsidiaries' estimated market values increased while the U.S. ones, and in particular, Laborie had a tougher quarter, partly due to currency. And the new subsidiary, Advanced Instruments, that Johan already mentioned is here valued at cost. Looking at the next page, Page 34, the major drivers of the estimated market value in Q4. We can see that Mölnlycke's estimated market value grew by SEK 3.6 billion before distribution due to strong earnings and cash flow, while currency impacted negatively. And please note that we have adjusted the multiple to reflect the COVID-related personnel protective equipment profits in 2020. And then Three's estimated market value grew by SEK 2.9 billion, driven by the divestment of the passive network infrastructure. Permobil's market value grew by SEK 842 million due to strong cash flow and higher multiples impacting the value positively. And Piab's estimated market value grew by SEK 733 million due to higher multiples and earnings and cash flow also impacting positively. While the market value of Laborie decreased despite higher multiples due to earnings and -- lower earnings and currency, which impacted negatively. On the next page, let's take a step back and look at Page 35. So summarizing our cash flow generation over the last few years. We have received SEK 98 billion since 2015 from multiple sources, all business areas contributing. And how we use this cash? Well, we have paid dividends to our shareholders and we have invested in selective Listed Companies and also acquired 5 new wholly owned subsidiaries. And during this time, the net debt has approximately remained unchanged and leverage has come down from 7.3% to 4.1%. And talking about leverage on the next page, we can see that the leverage is now below the target range. And we can see that our financial position remains strong after this exceptional and challenging year. Our credit ratings are intact and the average maturity of our debt portfolio is almost 11 years. And then finally, on my last slide, the average annual total return. To summarize our performance, we can see that we have achieved a return above the stock market and above our internal requirements in the last 20, in the last 10 and in the last 5-year period. And for 2020, the total shareholder return was 19%, this comprised SIXRX 15%. And with that, I hand over to Viveka for a Q&A session.

Thank you, Johan and Helena. We are -- we'll now have a Q&A session and the facilitator will help you out if you want to raise a question and we'll also have questions from the web.

[Operator Instructions] Our first question comes from the line of Joachim Gunell from DNB Markets.

So Johan, while this is in line with your communication throughout the past years. Can you perhaps talk a bit about the rationale to highlight in the CEO letter that you are evaluating if Investor is the best home for all of your holdings? I mean what are the factors than your clearly defined investment criteria could, say, come into play in a conclusion, if you are the right owner, so to say? And then to follow-up on that, should you come to the conclusion that you are not the right owner, what transaction options would you elaborate with exiting a holding?

Thank you. As you know, we are continuously looking for new investments. And we are continuously -- we also need to continuously look if we are the right owner and if we see the right potential in the companies, that we have done historically for a long time and that we will do also in the future. So -- and when we look on whether we are the right owner, of course, we look on the fit with us, our knowledge, our network that we can drive it in the way we want. But of course, we also look on the potential to share the return in the long term. So we would always do a full analysis in that area. But this is very much in line with what we said at Capital Markets Day during the autumn.

No, that's fair. And coming back to the TS -- or the dividend you talked about, Johan. I mean, as an active owner representative on the Boards of your core holdings, one could argue that this is obviously a signal what to expect in terms of received upstream dividends going into 2021. Is there anything else here? Or are there other trade-offs that I missed in excess of your already strong financial position?

I think to be fair -- thanks for the question. And I will, of course, not comment on the companies that we report in coming weeks. But I can tell you that we have a discussion today in the Board about the dividend. And the reason for our dividend decision is just taking one step back, as I mentioned before. Last year, it was a special circumstances with COVID-19. We took a very cautious decision there. And that was not an easy decision for us, that I can tell you because we have a goal of steadily rising dividend. But we truly believe now, based on the fact that the companies have performed, they have really showed the agility, flexibility and performed well. So we have a portfolio of strong performance. That, in combination with a strong cash flow that we have and yield that is only 4.1%. Also, a leverage of only 4.1%. Those two, in combination, makes us -- that -- those are the 2 key reasons for proposing SEK 14 per share in dividend.

Roger that. And just a final one for me then. I mean it ties into the last question. But with, say, a financial muscle of almost SEK 30 billion, if -- I mean, within your gearing target, after the dividend you are proposed to pay now, would you be comfortable with adding, say, a larger subsidiary to Patricia Industries? I mean, larger than the ones we have seen in the past years, Piab, Sarnova, Advanced Instruments? Or I mean are you preferring to build from the already existing platform?

That's a great question. We are always looking, of course, to find fantastic companies. If we would find a company that we truly like, like we did with Advanced Instruments, but it's clearly bigger than that one, we will, for sure, try to go for it. There is, of course, a limitation but it's clearly above the level that, for example, Advanced Instruments, given our strong financial position.

Our next question comes from the line of Derek Laliberte from ABG.

I just had a question on Swedish Orphan, Biovitrum here, and sort of thinking if you could elaborate on what you think of the recent development here and how you view the new strategy by the company ahead? And I'm just a bit surprised here if you still have confidence in this, why you haven't sort of increased your holding in this company, given what you typically do in the other listed core assets?

Okay. Thank you. Given what I said before, since the quarterly reports are coming up, I will, unfortunately, need to be quite brief here. But our strategy, as is known, we are a long-term owner, we own 36% of the company, all the Riyadh based, that one should, of course, stress. So we have a very sizable ownership and 36% of the capital. But our strategy as being an owner is very clear. Number one, try to capitalize as much as possible within the hemophilia franchise. Really rolling that out, take as much customer and business as possible. And secondly, diversify the business, and they have done a number of acquisitions, but some have turned out well and some have had some challenges in the clinical development, but that is always the case, if you talk about pharma. So that is basically our view on the company.

[Operator Instructions] Our next question comes from the line of Johan Sjöberg from Danske Bank.

Can I ask you, starting off with Mölnlycke, I appreciate that you specify what is sort of the underlying growth and also what is kind of the impact from the pandemic. And I would like to know really about now in Q4, you reported plus 9%, could you -- was there something special happening in the quarter which was impacted the organic growth positively because it's a quite a big number compared to what we are used to here?

Thank you, Johan. I think if you split the question, Wound Care grew by 5%, so that is very clear. And then you have an underlying growth within Surgical of 14%. So why did that grew 14%? The best guidance I can give you is that we saw a very good growth in Gloves this quarter, while we did actually see some challenges in drapes and Procedure Pak and some other products were also doing well. So that is how it developed in the quarter.

Okay. And when you look at the market for Mölnlycke, without giving any forecast on Mölnlycke as such, I just want to get a feeling for over like the next 3 years or you can name a specific time period, if you want. How do you see the underlying market growing? And I'm not looking for any forecast for Mölnlycke, how that will -- I just want to get a feeling for how you assess the underlying market growth to be in Mölnlycke, given all your regions and where you are currently active.

Thank you. I mean, there is, of course, an underlying growth related to basically demographics, underlying growth in the economy and so forth. In some markets, that's more a steady growth. While in other markets, we see faster growth. In addition to that, of course, we have geographic expansion that I mentioned a number of times that we are putting high emphasis on growing faster outside Europe and the U.S. But in addition to that, of course, Mölnlycke also have specific growth actions or specific tasks, specific areas where they see opportunity to grow, and those they are tackling both from an R&D side and both from a commercial side. So it's very much, I would say, a good market to be in. But then, of course, we need to make sure through commercialization, entering new regions, entering new segments and, of course, bringing continuous new face lifts that we can grow faster than the market.

And if I were to press you on the actual underlying market growth, without taking any geographical expansion, I just want to get a feeling for how you see the underlying markets developing? How -- what sort of growth rates would you look for? Is that something which you dare to provide us without any -- it's not going to be in forecast or anything like that?

Johan, even if I feel the pressure from you, I can just say that pressure, Wound Care is a good market.

Okay. Good. That's fine. When I read all the reports here, I think all companies are talking about growth right now. I mean, it seems like we have tackled the pandemic quite well and it's quite obvious in your numbers as well here. And now everyone is in a growth phase without any exemption almost. How -- and how -- are you also now accelerating? Do you feel that we are leaving the pandemic behind us? Sure there are still -- or companies, which are heavily exposed to that, you mentioned them yourself. But just your focus upon growth versus profitability or stability in 2021? How do you view it?

Yes. Thank you, Johan. To be honest, I don't have a crystal ball. And what we see right now, of course, is in certain areas, we see the spreading of COVID-19 still, and it will take some time for the vaccines to be rolled out. So in the beginning of the year here, of course, there are uncertainties out there. Hopefully, the vaccines will bite. Hopefully, we will come to a more stable situation on the second half of the year. So that is the base plan. But as I said before, we know that forecasting is difficult. We try to do shorter and shorter plannings, make sure we are close to the market, close to the companies. Having said all that, what makes your question a little bit more complicated is also the changes in buying patterns. So it's very clear, for example, that services are losing out in a number of areas, but people are using that money also to buy goods in some areas. So they make the puzzle, in terms of the demand is also quite complicated, to the truth. But we don't have the crystal ball. We can say that the jury is still out on the pandemic as of now. But we are close in the market and the fourth quarter was overall good, as you said.

There are no further audio questions registered, so I hand back to the speakers.

Okay. Thank you. And we don't have any questions over the web. So by that, we would like to thank you all for participating, and thank you, Johan and Helena as well. Thank you.