Investor AB (publ) (OTCPK:IVSXF) Q2 2020 Earnings Conference Call July 17, 2020 4:00 AM ET
Viveka Hirdman-Ryrberg – Head of Corporate Communication and Sustainability
Magnus Dalhammar – Head of IR
Johan Forssell – CEO
Helena Saxon – CFO
Conference Call Participants
Joachim Gunell – DNB Markets
Derek Laliberte – ABG Sundal Collier Holding ASA
Good morning to our Q2 presentation. Investor’s CEO, Johan Forssell and our CFO, Helena Saxon would start out and go through the results. And then we will have a Q&A session. Welcome everyone.
Okay, Johan here. Welcome everybody to this call and also from my side. If I don’t start on the first page or page number two in the deck, as you will know COVID-19 has had a significant impact on people and society and governments and companies have in many ways tried to handle the situation. And it has for sure been a balancing act.
For governments balancing the need to contain the virus would need to keep the economy going not to create
social unrest as a consequence of lockdown. And of course, the increase in unemployment companies has on the other hand had the top priority to safeguard their employees and also support the customer through these difficult times. The customers are in fact the ones that will be key for them of this crisis.
But for many companies, there has also been a need increase the focus on cost, cash flow and liquidity. If we look on the more economic development, we have seen a rebound in leading indicators and economic activity and you must undo was for sure, strong amounts than in the beginning of the quarter. Still difficult to read how much of course is catch up inventory corrections in some cases, and we should also see or we actually see that the COVID-19 development in the U.S. is developing in some states in the wrong direction, for example, in Florida, Texas and Arizona, but especially in California, given the size of that state.
In addition, we’re also seeing the spread in big areas such as Brazil and India. So while we have seen an improvement gradually during the quarter and hopefully that could continue, there is still a big uncertainty when it comes to the sustainability and the strengths of the overall recovery. In this environment in this exceptional quarter with significant face drop for many of our companies, I must say that I’m impressed by our management teams decisiveness and speed in taking actions towards that.
So with that introduction, let’s go over to Page number 3 and performance the figures, the total shared return was up sorry 9% in the quarter compared to the Swedish stock market plus 17%. Our net asset value was up 14% in the quarter, and that was mainly driven by a strong value increase in the listed companies and in equity. As you can see, the listed companies were up 19% in the quarter and equity was up 16% in the quarter. Actually in constant exchange rates, also equity was up 19% in the quarter. Patricia was down 2% in value in the quarter if we adjust for currencies, it was plus 2%. But I would talk more about the operational development later on.
Starting with the listed companies, a few highlights in the quarter. We invested SEK 0.5 billion in ABB taking our year-to-date investments to more than SEK 2 billion. And as you know right off to the end of the quarter ABB finalized the sale of power grids. And this will of course lead to the fact that they now can focus on the core remaining businesses and also it will lead to significant share buybacks. Atlas Copco closed the strategic important acquisition of Patricia which is SEK 10 plus billion acquisition and so beyond that, another licensing agreement relating to novel treatment within gout. And this is continuous work for the company and they have been very successful, I think in broadening its product portfolio.
Moving down over to Patricia in Slide number 7. As expected following strong first quarter, COVID-19 had a more negative impact in the second quarter that was challenging for some of the companies. For these companies in aggregate as you can see, the organic sales declined by 19% while operating profit fell by 25%. In total, if we also include our 40% ownership in 3 Scandinavia, EBITDA was down 18%.
And as I said initially, I think this is an impressive performance with sales being down almost 20% being able to preserve 75%, 80% of the profit is really a testament of great resilience and agility. And especially, I think considering that we for all these nine companies, we don’t report any cost to one. So it’s really all cost in. And that is not the case for all companies.
Moving down to the next page, page number 8. This is how we presented it in connection with our first quarterly report. We said that we believe that three companies were more resilient looking forward then the other four companies. And now when they have the second quarter, I think we can say that this guidance was quite well calibrated. If we start with the companies on Page 9 that we think would be more resilient in the second quarter, you can see that the organic growth and margins have been quite stable despite the very turbulent environment that we have had in the quarter. So the resilient performance we saw in the second quarter restate in margins. For all these three companies, the organic growth was posted in June and we actually expect a good performance for these three companies in the third quarter.
When it comes to Mölnlycke, we have highlighted that due to the customer agreements within personal protective equipment, we expect significant price addition for the remaining part of the year. And this means that for Mölnlycke Group, we expect a strong sales growth in the third quarter. It should be mentioned that the margins on that is below the average of the group as you know wound care have higher margins than the surgical business.
So then moving to the next page and talking about Piab, Permobil, Laborie and BraunAbility. For these companies in line with our expectation. The second quarter was more challenging due to COVID-19 and that led to a significant decrease in elective procedures, lockdowns and related reduced customer demand. Despite the sharp revenue drops, margins held up due to successful work in adapting and taking out costs.
For these companies, June was better than in the beginning of the quarter, but June was still negative in terms of organic growth compared to last year. And for these companies that represent about 30% of the total portfolio value, we expect continued challenges also in the third quarter.
Moving down to Mölnlycke on Page number 11. As mentioned, the organic sales growth was minus 7% in the quarter, and all regions were negative except the emerging markets that was up single digit in the quarter driven by strong development in the Middle East. And I’ve mentioned previously, the new customer agreements with that will add significant sales during the remainder of 2020 and that is the key reason why we expect strong sales growth for the third quarter.
Profit margin was almost in line with last year and cash flow was strong and finally (inaudible) has been appointed the new CEO. Moving down to Permobil, the organic sales growth was minus 17%. Social distancing measure has been bit affected the ability to sell the products All regions were down except APAC that was up double-digit in the quarter. And that was mainly driven by Australia. We did for OBC and increased market activity towards the end of the quarter. The profit margin declined compared to last year, but as you can see cost reduction in each of this mitigated the margin drop and the company has done a very good job in adjusting OpEx.
Moving to Laborie, here we did see an organic sales growth that was minus 45% and the reason is a significant decline in elective procedures within both urology and GI. And that is of course related to COVID-19. We did for Laborie see a sequential sales growth during the quarter, but June was still well below last year. Clinical innovation, the new acquisitions that they did which is the Maternal and Child Health business was less impacted and the performance was actually close to last year as these procedures are no elective.
The margin, of course was affected by the fact that top line almost was capped in half organically, but it was offset by good cost containment and also good performance in the acquisition Clinical Innovation. Sarnova had an organic sales growth of minus 2%. But if we exclude the reduction in sales related to the Ambu agreement, organic growth was positive.
And as you can see, the margin expanded despite continued investment in the business. BraunAbility, here we did see a sales drop of 53% and that was very much related to lockdowns in the U.S., but also in Europe of course. The EBITDA margin was negatively impacted of course by the fact that sales drop as much as it did, but this company also was very successful in taking out OpEx in the quarter to mitigate the profit drop.
Moving to Piab, here we did see organic sales being down 16% in the quarter. Most regions were down or all regions except APEC was down. APAC here was driven by a very strong development in China. (Inaudible) container but the other divisions declined and also here we did see an increased customer demand towards the end of the quarter. I must say that I’m impressed by the profit margin performance given the 16% sales drop, it shows that the company has been really good in handling it and showing good agility.
Moving to 3, statement performance subscription base was up 2,000 in the quarter, it was up 37 in Sweden, but the overall figure was negatively affected by the fact that 41,000 SIM cards were disconnected in Denmark so the underlying performance was better. Service revenue was up 4%, profit was up 3% and the company distributed almost SEK 0.5 billion of which close to SEK 200 million was to Patricia Industries.
So then briefly on EQT on Page number 19. As mentioned previously, the total partner — the total investments in EQT was up 16% in the quarter. The stock market part or EQT AB that is listed that’s about SEK 30 billion for us and the fund investment is about SEK 20 billion. So in total, we have about SEK 50 billion in EQT now. The EQT AB listed on the stock market was up strongly last quarter 2% in the quarter, when it comes to our fund investments, as you know of the equity being listed on the stock market, we report the value of the fund investments with one quarter lag. In other words, the valuations here is as of March 31, the cash flow was minus SEK 1.6 billion and that is due to draw downs related to previous acquisitions. And of course few exits in the current market environment.
Going forward on Page 21. So where are we? Well, if I should summarize it, signs of recovery but uncertainty remains high, investor has a strong financial position despite the fact that we have invested more than SEK 4 billion in Patricia, and more than SEK 3 billion in the listed portfolio during the first half of the year. The leverage is only 5%, which is in the lower range, lower end of our target range.
We have a strong and well positioned portfolio companies. And we will of course do all we can to continue the development of these companies as an engaged owner. Moving to Slide number 22 then, what we have seen in this crisis of course is a very severe and unfortunately health crisis with a severe unfortunate effect on the social side of the world. But on the other hand, there are of course several lessons learned that can be used in business. First of all, we see acceleration of the long-term trends within digitalization, automation and integration of sustainability into the business lines.
This is clearly accelerated as many companies now have learned much faster than without COVID-19 how to handle these areas. Except the trends, I would also say that many companies are now looking into how can we use the lessons learned to really improve the efficiency and new ways of working.
Finally, I would also say that we have for sure we want our companies to be cost efficient in the supply chains. But I think the COVID-19 crisis and also some geopolitical discussions also shows that there is always a balance between resilience and efficiency. And that is also a top priority for many companies. And finally, most importantly in this crisis, many companies have actually been forced to sell in a little bit different ways. And these are also important learning how this can be done after the crisis in a more structured manner.
We will support our companies in trying to capture these opportunities going forward. And with that opening, I hand over to Helena Saxon.
Thank you, Johan. Looking at the 10-year net asset value development growth on Page 24. We see that in Q2 the value of our assets rebounded strongly and adjusted net asset value ended the quarter at more than SEK 490 billion. Listed companies on Page 25, the total contribution to net asset value was SEK 55 billion in the quarter and the overall listed companies TSR was 19% compared to (inaudible). And on the graph on the right hand side, we can see that all listed companies rebounded as you have seen strongest performance were in Electrolux.
Patricia Industries development in the second quarter on Page 26 was slightly negative with the total return of minus 2% earnings and currency impacted valuations negatively, while multiples were up and had a positive impact on estimated market values.
On Page 27, looking at the sequential change in estimated market values, we see that Permobil and Piab all contributed positively in the quarter while Mölnlycke, Sarnova and Laborie and Braun were down in the quarter. Financial investments provided proceeds of more than SEK 700 million and as Johan mentioned earlier 3 Scandinavia distributed almost SEK 200 million to Patricia Industries in the quarter. Looking at the major drivers of estimated market value by company in the quarter on Page 28.
We see that the estimated market value of Permobil increased by SEK 1.8 billion Swedish Krona in the quarter due to higher multiple cash flow but impacted negatively by profit decline. The U.S. subsidiaries Laborie and BraunAbility were both down SEK 700 million, SEK 800 million in the quarter due to lower profit and currency impacting negatively while multiples have a positive impact in the quarter. 3 Scandinavia’s estimated market value was down SEK 1 million in the quarter due to lower multiples impacting negatively while higher profit were actually working the other way having a positive impact on the value. And also there was the capital distribution that we talked about earlier. The estimated market value of Mölnlycke was down SEK 1.4 billion in the quarter. This was due to currency and lower corporate while multiples and cash flow generation had a positive impact in the quarter.
Our financial position remains strong as you can see on Page 29. Our leverage at the bottom of the target range as Johan mentioned that 5.1% next is SEK 23 billion, our growth cash position is almost SEK 14 billion and the average maturity of the debt portfolio is more than 10 years. Our credit rating remains unchanged and is very strong.
And finally on our last slide year-to-date performance is negative but net and fixed but over longer-term, which is more important like one year, five years, 10 years we see that we have outperformed both the stock market and our social return requirements. So with that, summary on our performance both in the short-term and the long-term, I would like to hand over to Viveka for Q&A.
Thank you, Johan and Helena. Now we will have time for Q&A. And we will have some instructions from our operator.
[Operator Instructions] We have our first question from Joachim Gunell, DNB Markets. Please go ahead.
Thank you. Good morning. So we can start-off with the distributions to Patricia Industries. I mean, they’ve been fairly stable for the past four years, around SEK 5 billion to SEK 6 billion. So how do you think about the 2020 levels? I mean, should the year-over-year change, should it be fairly correlated to levels of the operating results for Mölnlycke, Permobil and 3 or how do you think about that?
I think that from our side, we thank you for the question. We always want our companies to have the right balance sheets. So we will always have decent continuous evaluation. If we believe that one of our companies or more than our companies have excess cash, then it will be distributed. If that is not the case, it will be kept in the company. So I cannot give you guidance, because it really depends on the development going forward. Not only the operational performance, but also the acquisition opportunities.
Clear, Johan. And perhaps on the acquisition topic, I mean could you give a bit of a flavor on what new business opportunities you see both bolt-on and new investment ideas. I mean you probably won’t commit to a timeframe on additional space but perhaps you can comment on where you believe you will deploy your strong cash flows and if perhaps the pipeline has narrowed down a bit?
We’re always looking at opportunities both on the private side and on the listed side. And as I mentioned before year-to-date, during the first six months, we have invested a little bit more than SEK 4 billion on the listed side. And with an add-on acquisition from one of our subsidiaries and then we have invested a little bit more than SEK 3 billion on the listed side in ABB, Ericsson and Electrolux professional.
So on the listed side, it’s very clear that we will, the stock market will go up and down and when we see that, we see good value. We are ready to use our financial resources to jump in and buy in selected companies. On the unlisted side, we’re continuously even if it’s COVID-19 times, we’re right now looking into opportunities for some of our subsidiaries to do add-on acquisitions. And that is as I mentioned before, a strategic priority for us because we have strong platform companies with strong market positions and if they can continue to develop their businesses through add-on acquisition that is a high priority area for us. So we’re looking into that opportunities all the time.
Understood. And finally, a question for perhaps for Helena. So on the back of the strong financial position, we’ve touched upon the topic before. But regarding the postponed decision on the second installment here, can you talk a bit just about the moving parts and what scenarios we could see. I mean, I assume it’s pretty tied to potential dividend from SEB?
As you have seen, our board has decided to pay the nine krona per share. As you’ve all seen already and there has been no change in their communication regarding coming back during the autumn, I think we will have to evaluate everything that’s happening around us not the least what’s happening with the Pandemic and its impact on economy. And ultimately, it’s the decision for the board to recommend then an extra general meeting potentially in the autumn. We have no more communication on that.
Great, thank you. That’s all for me. Have a great summer.
[Operator Instructions] Our next question comes from Derek Laliberte, ABG. Please go ahead.
Yes, hello and thank you. I’m looking at Patricia Industries. And excuse me if you’ve answered this already but which of your companies within Patricia have received the government subsidies, is there something you could quantify please.
I think that the government subsidies has been given around the world in many areas and of course the companies are continuously has been evaluating whether there are opportunities to use that. So I cannot comment on the specific companies because those are more operational questions. My view is that overall it is not a significant impact in the total portfolio given that we have some companies that are quite resilient.
All right, thank you. And with regards to Mölnlycke just to make sure I got the drivers this year right. Clearly, Q1 growth was pretty strong. Some of the elective care procedures were still ongoing as to simultaneously got this boost from selling protective equipment whereas now in Q2 there are very few elective procedures. And with regarding to your forward statement here on Q3 and the rest of the year, is it true that you are both expecting a boost from this new contracts plus also elective procedures starting to gradually come back? Thank you.
Thank you for the question. It’s a good but very difficult question to answer because if you take for example, wound care, you see some areas that are related to elective surgeries, which has had a tougher time, but you also have some chronic parts that have been more stable. If you look on the surgical part, you see that for example, if we exclude this, you can see that we have certain parts of the business relating to close for example that is drawn while if you look on procedure and also drapes is weak and that is very much related to elective surgeries.
So there are pros and cons in the business, to what extent the different parts will move in the third quarter will of course depend on the developments on the Pandemic and the economy et cetera. But if we take the base business what we see right now both on the wound care and on the surgical side and then also consider the new contracts that I talked about, our best judgment today is that we will see a strong growth, demand growth in the third quarter.
Okay, thank you. That’s very clear. And finally just on a general note, they’re looking back at the first half of the year. What’s been sort of the focus of the investment organization during the first half year compared to normal and also looking back, how would you sort of grade yourself regarding how everything was handled from the industry beside your investment activity that you’ve carried out et cetera. Thank you.
Thank you. I think that you should grade us and we should not grade ourselves. So I will leave that to you. But I must say that if I look on the subsidiaries, we have done two significant add-on acquisitions one Tobii in Piab and that company has developed well since we bought it and I see good prospects for that business not really because we see significant synergies with the existing business within Piab in that area.
So I’m very pleased with that acquisition. And then the Clinical Innovation acquisition from Laborie has also developed very good since we bought it. And of course, here we can say that we were a little bit lucky because since their products is related to complicated childbirth, that is very difficult to postpone. And so we bought the business that we really, really like. It’s a good profitable business with good growth prospects. But it’s also of course very resilient in this kind of Pandemic that we have. So I must say that these two companies have really identified attractive acquisitions that I’m very pleased with.
And as I mentioned before, we’re continuously in the Investment organization supporting of course, through our boards work here to continue to find add-on acquisition. And you never know when these things because it takes time. But my hope and ambition is that also this year will close add-on acquisitions in our subsidiaries and we’re evaluating a number of opportunities, when it comes to the listed part of the portfolio, we’re more opportunistic as you have seen. We have a capital companies that we truly believe in. And we have used the swings in the stock market to invest in this and during the first half of the year, if we look on the investments with the Professional Electrolux professionally Ericsson and ABB, we are pleased with those investments. But you should do that.
Okay, I will. Thank you very much.
[Operator Instructions] We have no further questions, speaker back to you for the conclusion.
Then we would like to thank you for joining us today and we wish you all happy and healthy summer and thank you, Johan and Helena. Thank you all.