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

Hello, and welcome to the Investor AB Q2 report 2021. [Operator Instructions] I'll now hand the call to Viveka Hirdman-Ryrberg, Head of Corporate Communications. Please go ahead with your meeting.

Hello, and welcome, everyone, to Investors Q2 conference call. We are hosting this conference call this late in the afternoon as we've had a Board meeting today, and then we released our report as the Board meeting was finalized. As usual, we would start out with our CEO, Johan Forssell, who will present the results; followed by our CFO, Helena Saxon, and then we will open up for a Q&A session. So please, Johan?

Thank you very much, Viveka. And once again, welcome to this conference call. If we start on Page #2, we are clearly seeing an improved economic environment and that in combination with the low rates has continued to fuel asset prices. But there are uncertainties that remain. We know about supply chain issues, geopolitics and, of course, the spread of the Delta variant. And it is worrying that the Delta variant is now spreading, not the least in Asia, in countries such as Indonesia, Thailand and Malaysia, whether it's a low vaccination level among the people. And this is clearly a risk, and we are already seeing an impact in a few places. One example being, Mölnlycke have a club plant in Malaysia where they produce labs. That is currently being affected that they need to handle. So it is something that needs to be watched how this is spreading around the world. But overall, as I started with, we are seeing an improvement in the economy. And of course, the first quarter from Investor was overall very strong. The net asset value was up 5% in the quarter, and our total share of the return was up 15%, and that can be compared with the stock market in Sweden being up 7%. Moving then to Page #3. The listed company had a total return of 5% in the quarter. Patricia Industries value was up 3%. That was driven by higher earnings but mitigated by multiple contraction. There was a strong operational performance in the companies, and the 2 companies made strategic add-on acquisitions. And then Grand Group and Grand properties were divested in the quarter. The strong development within EQT [ continued ] when it comes to value and also we had a very strong cash flow in the quarter. And actually, the cash flow for the total group was very strong in the quarter, driven by EQT distribution from [ mandate SEK 2 billion ] and then also distribution from 3 related to the divestiture of the tax infrastructure and, finally, the divestiture of Grand Group and the related property. So we have a very strong financial position that we will utilize where we see opportunities, and I will come back to that. If I then move to listed companies, the top priorities in the quarter has been to handle supply chain issues and, of course, the rapidly changing demand. At the same time, of course, many strategic investments in R&D, technology and notably, sustainability is, of course, continuing at high speed. Moving then over to Patricia Industries. The reported sales growth in the quarter was 16%. The organic growth rate was 25%. And the difference between is mainly that we have a double-digit negative currency effect in the quarter. The profit growth was very strong at more than 30%. And the divestment of grand generated SEK 1.5 billion of net proceeds. BraunAbility and Permobil made important strategic add-on acquisitions in the quarter. Permobil acquired Progeo, which is a leading Italian manufacturer of manual wheelchairs with annual sales of about SEK 100 million. BraunAbility acquired a majority in Q'STRAINT, which is actually the global leader in wheelchair securement solution, so basically constraints, with a revenue of about USD 60 million. And this company has a profitability above the level what we see in BraunAbility. It is great to see that when we look through our subsidiaries and look at the pipeline of potential add-on acquisitions, we have a very strong pipeline. And we plan to invest significant capital going forward to grow our subsidiaries through not only organic but also accelerating when it comes to M&A activity. Moving then to Slide #6. For sure, the second quarter last year was a weak quarter, as you can see from this graph. Compared to that weak second quarter last year, the organic growth was 25% and the profit was up 32%. But as mentioned before, we should remember that we also had a currency headwind in the quarter. Most companies, and this is important, I think that most companies delivered strong sales and profit also on an absolute level, so basically, disregarding the base levels. And I will come back to that on the next slide. So here, you have the different companies here. And I will run through a little bit each company and not only comment about the performance versus the second quarter last year but also to give you an indication when it comes to the organic performance where we strip out currency and add-on acquisitions, the organic development versus the second quarter '19. So you can have a little bit of a ceiling where are we now compared to pre-COVID levels. As you can see from the chart, if we exclude Sarnova, which I will come back to, all companies generated very strong growth compared to last year between 18% and 81% organic growth. If I start then with BraunAbility, the organic growth was 81% in the quarter. And you can also see that we have a good margin expansion. If we then compare BraunAbility compared to the second quarter level 2019, we can see that for BraunAbility, we are still clearly below pre-COVID-19 levels, actually double digits below. So this is 1 company while we saw a sharp recovery in the quarter, we are still below where we were before COVID-19. Laborie had an excellent performance in the quarter, up 67% organically and very strong profitability. And here, if we compare with pre-COVID levels, organically, we are now up mid- to high single digits compared to the second quarter '19. So due to the strong development this quarter, we are now above previous levels. Advanced Instruments, our related subsidiaries have continued to perform extremely well, and we are very pleased to have bought this company. It grew 47% organically in the quarter and the profit margin was 50%. And here, it's clearly record levels, whatever you do the comparison with. Also, Piab had a very strong quarter, organic up 33% compared to last year with margin expansion. And if we compare Piab's performance compared to the organic situation before COVID-19, they are up mid- to high single digits, so also here above previous levels. Mölnlycke grew 18% organically, some margin expansion. And if we do the same comparison here with second quarter '19 and exclude the PP contract, it's up just about mid-single digit compared to the second quarter '19, with Wound Care being the main driver, while Surgical is up just a little bit. Permobil grew 18% in the quarter. And also here, margins improved somewhat. And here, we can see that if we compare with pre-COVID levels, the situation is relatively stable, now almost back to pre-COVID level but actually a few percentage points below. Finally, then Sarnova. This was the company where we actually saw negative organic growth by 3% in the quarter. And there are 2 main reasons for that. First, there was a strong COVID-19 related sales last year. And secondly, we had an unusually mild flu season this year. The underlying performance is good. And if we look on the pre-COVID level, this is up a few percent compared to that level. So that is a run-through of the companies. And then let me say a few more words about Mölnlycke on the following page. As mentioned, organic sales was up 18% in the quarter. The contribution from the customer contract sales related to PPE was limited this quarter and actually slightly lower than during the second quarter last year. COVID-19 related customer agreements within PPE are not expected to add materially to, say, during the second half of this year. And please remember that the second half last year was significantly boosted by PPE contracts. So that needs to be taken in consideration. However, the underlying business is strong. Wound Care grew organically by 20% in constant currency, and we saw very good development in the U.S. and in France. Surgical grew 17%, and we saw a good development in gloves and trays. The profit margin was up 1 percentage point, driven by boost to strong sales but also a good mix, but it was negatively impacted by increased raw materials and also increased logistics costs. And the strong cash flow continues in this company, so they were able to distribute EUR 200 million. With that, moving then over to EQT. The total return for the total franchise was 9%. The listed EQT AB company was up 9% in the quarter, and the increase in the funds were up 10%. But please remember that we do the reporting in the funds with 1 quarter lag. So this is up until March 31. The cash flow, as mentioned before, was very strong, SEK 3.8 billion to investors during the quarter. One of the reasons why it was so exceptionally strong was that the mid-market U.S. fund made some significant exits and our share in the mid-market U.S. fund is very high. But overall, a good cash flow. And EQT has a very high activity doing those significant investments and the number of exits. So then to summarize, we have a proven governance model, and we stick to it. And I think we have a portfolio with high exposure to attractive long-term trends. And our focus is to continue to work relentlessly as an engaged owner with these companies, capture opportunities both geographical expansion but, of course, also through M&A and other initiatives. And then secondly, we also need to continue to make sure that we have an attractive portfolio. So with that, I'll stop and hand over to Helena.

Thank you, Johan. And if we move over to the net asset value development, we can see that the adjusted net asset value to continue to develop positively and landed at the end of the quarter at close to SEK 660 billion. Johan talked about the development in Patricia Industries, looking more closely at the listed companies, some SEK 450 billion. We see that the TSR was at 5% in the quarter compared to SIXRX, 7%. Year-to-date, the relative performance is stronger with 25% TSR versus listed SIXRX running 22%. The strongest share price performance was in Wartsila and Electrolux Professional, while the Ericsson and Husqvarna shares had a tougher quarter. Moving over to Patricia. The total return was 3% in Q2, excluding cash. And on the next page, the sequential change in estimated market value is described in the following growth. The value here is driven by strong operational performance across the board, and we see significant distributions related to the divestments of both brand, the infrastructure in 3 and also financial investment. And the total value of Patricia indices, including cash, amounted to almost 600 -- or SEK 162 billion at the end of Q2. Looking at the next page, I will go through the major drivers of estimated market values in the quarter. So Laborie, the Laborie estimated market value increased by SEK 2.1 billion, and earnings impacted positively while multiples contracted. For Mölnlycke, earnings impacted positively, multiples and currency impacted negatively, and SEK 2 billion was distributed in the quarter. Please be reminded that as before, the PPE-related profits are adjusted for in the last 12-month earnings. For 3, the estimated market value change was SEK 0.5 billion. And here, we see a distribution, as I commented before, related to the divestment of the passive network infrastructure. Permobil was impacted negatively in the quarter by multiples contracting, while earnings impacted positively, resulting in the contraction of the estimated market value of SEK 1 billion. And before I go to my last slide -- no, sorry, we have -- I'm jumping ahead of myself. Please go to Page 17 with a financial position as of June 30. Investors financial position remains strong with a AA rating, a minus AA and -- Aa3 credit ratings from S&P and Moody's. And the leverage ratio is just above 2% at the end of the quarter. And now before I go to my last slide, with the average annual total returns, I just want to remind everyone that during the quarter, the Annual General Meeting approved of the Board's proposal of a 4:1 share split. The first day of trading post split was May 19. Then looking at this final growth, we can see that based on a strong portfolio and delivering on our strategy, the TSR of the investor share has outperformed both fixed rates and our own return requirements over most period, in this case, 2025 and 1 year as well as year-to-date. Thank you. And with that, I hand over to Viveka who can start the Q&A second.

Thank you, Johan and Helena. We will now have a Q&A session. Our facilitator will just go through some instructions before we kick off the Q&A.

[Operator Instructions] Our first question is from Joachim Gunell of DNB Markets.

So I mean, as highlighted in this quarter with the strong cash flows providing installation, to say the least, I mean, would it be fair to be, I mean, more aggressive with the balance sheet since that? I mean you don't only have the listed portfolio dividends to rely upon anymore.

Okay. And I can only say that we recently have a Board meeting in Patricia Industries, and we went through the pipeline of the different subsidiaries. And we are really stepping up and have a number of great opportunities I do believe in our subsidiaries. So my expectation is that we will allocate more capital for significant add-on acquisition, including our sales putting in equity to finance the somewhat larger add-on acquisitions. So that is a top priority for us. In addition to that, we are, of course, always looking at other opportunities, both on the listed and unlisted side. But what I really see in the pipe right now is the larger than normal opportunities within the add-on acquisition pipeline.

Thank you, Johan. And Helena, can you perhaps elaborate a bit on when it will be relevant to take away this discount that you attribute to Mölnlycke driven by the PPE pandemic-related boost here as, I mean, we have seen a broader peer universe, I mean, expand their multiples quite substantially over the past 1 -- yes, call it last year. And I think I mean your valuation multiple is not even up 10% during that time frame.

Thank you, Joachim. It's a very relevant question. I think it's not up to us to decide when PPE sales stops. It's something that is driven by external factors and, in particular, due to the Delta variant of the virus, for example, that Johan mentioned before. But as we do not believe that the PPE sales is something that will go on forever, but it's likely to be related to this extreme situation, we do not want to value it like the rest of many. But I will not give you a prognosis of when and how much. But currently, we see that it has impacted, and we will see during the fall what happened.

Maybe I can add to that, that, if you look on the PPE profit, because basically the profit related to the PPE sales we know is more of a one-off nature. And we use last 12 months earnings when we put the multiple in. And we also know that during the third quarter, as I mentioned, operationally, of course, we all need to think about that in the third quarter and fourth quarter last year, there was significant sales of PPE. So that will make it, call it, a tougher comparison in terms of earnings. On the other hand, we have already reflected that in the valuation. So when we pass basically move into 2022, the multiple will more gradually reflect the true higher multiple because then we will gradually sort of get out of the PPE contracts.

At least that's what we expect, currently.

So you -- yes.

That's very comprehensive. And just a final one for me. I mean, with the decentralization initiatives here launched in Mölnlycke, can you provide some more color on what the accelerated long-term growth ambitions really mean, I mean, and where that stemmed from and perhaps how that relates to the historical, call it, the mid-single digit, 5% organic growth that Mölnlycke has delivered in the past years?

I mean basically, the company is now putting for business areas with clear responsibility and terms when it comes to manufacturing customer and R&D development. And by doing that with both Wound Care, antiseptics, gloves and also the OR Solutions business, that our strong belief is that this will create even stronger focus. And of course, this business ahead will get an assignment to really develop that business. I cannot give you a specific figure for it, but I think it will be even clearer than before when it comes to the focus and when it comes to the accountability and the related incentives to it. And that, as you know, is something that we believe, as you know, is normally the right way forward. So we are enthusiastic both about the strong position the company has, the development of the company and also, we think and hope that this will further accelerate the opportunities going forward. But I don't know to what extent that will boost the future growth. But of course, our ambition is to grow this company as much as possible given the high profitability and cash flow.

Our next question is from Derek Laliberte of ABG.

So I was wondering how you -- I think this question has been up before, but how do you view your current portfolio in terms of resource allocation? I mean you have quite a big number of holdings and many of them are really quite small in relation to the total NAV or portfolio value. So does this mean that you're focusing more on bolt-on acquisitions in the current companies rather than new investments? And does it also mean that you sort of have a bigger minimum size requirement for completely new investments?

It's a good comment. I think that the smaller the companies are, all else equal, we would demand a higher growth opportunity going forward. And secondly, our clear ambition is, as you say, to grow some of our, what you call, a little bit smaller companies through add-on acquisitions to use the strong platforms to boost them by doing add-on acquisition. And that is normally the way we want to do it. Some companies that we have owned for a little bit longer time, we have done currently, we have done a number of add-on acquisitions, broadening the company. It started out with only electric wheelchairs. We have broadened it to manual. We have broadened seating and cushioning and so forth. We have also expanded it internationally in, for example, Australia in quite good way. When we now acquire a company like Advanced Instruments, we try to acquire a company that is a really strong leading player in its niche with high profitability, good cash flow and especially the best products in the market. From that, of course, our plan is now to grow advanced instruments and the other subsidiaries through add-on acquisitions because then we can not only grow the size of them but also create synergies in some cases and develop the platforms.

That's really helpful. And I had a follow-up on Mölnlycke as well. I think -- I guess it's quite clear, but just to understand, I mean, it is new 4 business areas. That's because -- is that primarily what's new here or the decentralization and that focus and P&L responsibility? Wasn't that the case before as well? And then I just wondering generally as well if you want to highlight any other important improvement or focus area that the new CEO, Zlatko Rihter, is focusing on in the company.

I think it's not saying that it has not been a good focus in the company before. But I do believe that this reorganization will further sharpen the focus in the company. So that's why we are very supportive of the changes that the Board of Mölnlycke and Zlatko is doing. In addition to that, historically, that this company has had a fantastic development growing mainly organically. Of course, it's up now too with Zlatko coming in as CEO, so also we can find a little bit more of M&A activity in that area. That is something that I know they are looking into. And not saying that it will accelerate but, of course, we are trying to find all avenues to grow this great company.

[Operator Instructions] We have a question from Andreas Lundberg of SEB.

Andreas Lundberg -- I wasn't sure it was me, but [ it operate ] itself. So yes, just a short question. You talked about the larger normal pipeline. Why is that the case? Or why has it grown larger now? And also what do you say about the current price levels in the market?

When it comes to the size of the pipeline, I think it's a combination of -- it's always a combination. It takes too to tango. So of course, there needs to be opportunity. But clearly, we have had a conscious focus now for some time to really work through and build out that pipeline in the companies. The Board and the management team and the company has really focused on that. So I think that is 1 reason. Then, of course, if you strike the deal or not, it's always a question if it becomes available and the price level. We try to have an attitude or a, call it, framework in our companies that we really met the target in terms of the potential for and the attractiveness of the segment and also the fit with our companies. And based on that, of course, then trying to dance with the counterparties, we take a proactive approach rather than look what comes available. So that's the approach we do when we look into the opportunities. And the second question was?

Pricing.

Pricing.

Lower level -- yes.

Yes. I mean it differs a lot, to be very honest. In some cases, pricing can be so steep that we have to walk away. But in other cases, we also have a strong starting point, and we also have companies that actually want to be acquired by us. And in those cases, if you get an exclusive discussion, we can actually get opportunities, quite reasonable prices, especially considering the cost of capital in these markets. So I would say, sometimes, yes, it can be tough, but there are also opportunities where we actually can find it at reasonable levels. Our key -- I would not say that we see it as a huge problem, to be very honest. It's more finding the right company that fits with our companies and where we see that we can develop them. If we do that, normally, we will grow into the multiples.

There are no further questions at this time. So I'll hand back over to our speakers.

Okay. Thank you. Do we have any questions on the web? No. By that, we conclude this conference call, and we wish you all a great summer. Thank you so much for today.