Earnings Transcript for INVE-B.ST - Q4 Fiscal Year 2023

Jacob Lund: Warm welcome to Investor's Q4 and Year End Webcast. As usual, CEO, Johan Forssell and CFO, Helena Saxon will take us through the quarter in their presentations, which will be followed then by a Q&A session, where you have the opportunity to ask questions either via the operator or via the web. But without further ado, over to you, Johan.

Johan Forssell: Thank you, Jacob, and warmly welcome to this conference call. Let me see if this is working. Put it on. Okay. Here we go. 2023 was a strong year for Investor. Our adjusted net asset value reached an all new time high, and we passed the SEK800 billion mark for the first time. We had a strong total shareholder return of 26%, and this was actually the 13th consecutive year where we beat the stock market. Also listed companies outperformed the stock market during the year and we saw strong sales and profit growth within Patricia Industries. And when it comes to EQT, despite the tough fundraising market, they reached the fund size target for EQT X to EUR20 billion. And now when we enter 2024, we are doing that with a very strong financial position at the Investor. And that also gives the opportunity for us to continue our dividend policy to steadily -- with a steadily rising dividend with an increase for SEK4.40 to SEK4.80 per share. Moving then into the figures. In the fourth quarter, our net asset value was up 8%. TSR was up 12%, which can be compared with the Swedish stock market being up 14%. For the full year, our net asset value was up 24%. Our TSR was up 26% compared to the stock market being up 19%. Moving then over to the different business areas and starting with the listed companies that represent close to 7% to 8% (ph) of our net asset value. Here, you can see that the TSR in the quarter was up 9% compared to the market, 14%. And in the Swedish stock market, we saw in the fourth quarter that it was mainly the interest rate sensitive stocks that had a rather like real estate. But for the full year, the listed companies had a very strong year being up 25% compared to the stock market of '19. A couple of highlights during the quarter. Epiroc announced the acquisition of Stanley Infrastructure. This is a $760 million deal. This is a very attractive opportunity for Epiroc. It will give them a leading position within attachments. And it also gives Epiroc a very strong dealer network in the important U.S. market. And finally, the company also got a number of very strong brands globally, like, the one you see on the picture, which is Levante (3

Helena Saxon: Thank you, Johan. Then let's move to my part of the presentation and looking at growth of net asset value over a few years here, we can see that we landed the quarter at an all-time high, SEK818 billion, which is the first time we are over SEK800 billion. So that's, of course, very satisfying. And if you look at the annual growth over the last five years, it's 19% with dividend added back comparing to 15% of SIXRX. Looking into the total return by business area, we can see that in the quarter, it was a mixed picture where listed companies was up 9%, Patricia rather flat, minus 1%, and investments in EQT up 16%, which gives a total of 8% for Investor in the fourth quarter. If you look at the full year on the right-hand side here, you can see that all business areas developed better. So listed companies was up as much as 25%, Patricia 24%; investments in EQT, 17%. And for Investor as a whole, for the full year, this equals 24%. Looking more closely at the listed portfolio here by company, we can see that the total shareholder return was positive for almost all of the companies in the portfolio, Wartsila and Saab are developing the best over the full year. And looking on the right-hand side, we can see the total contribution in absolute terms. And we can see here that the largest companies, Atlas Copco and ABB, of course, contributed the most, but SEB, Saab, Sobi and Wartsila also added to -- or contributed to the net asset value in the year. Moving over to Patricia Industries market development -- market value development in the quarter, Johan also already mentioned a flat development, but it's actually a combination of two different forces. You see EBITDA and cash flow developing really well for the portfolio, while currency and multiple contraction had a negative impact ending the quarter at SEK183.6 billion. Breaking this sequential market value development down by company. We can see that Molnlycke and Piab contributed positively to the development while the other subsidiaries had headwinds from FX and multiples, and we can see that Molnlycke distributed SEK3.4 billion to Patricia in the quarter and Laborie received the capital injection of SEK2.5 billion to support the acquisition of the remaining 91% of Urotronic in the quarter. Moving over to the financials. Johan mentioned the strong balance sheet. And here, we can see that our leverage is at the lower end of our target range below 2% of 1.7%. And in addition to our strong balance sheet, we also have a very strong cash flow generation. On this slide, we have shown before, not the least at the Capital Markets Day, but now updated with 2023. We can see that since 2015 when Patricia was established, our companies and our platforms have generated as much as SEK165 billion. And a lot of that, of course, a majority comes from the listed portfolio in terms of dividends, but we've also had significant contribution to the cash flow generation from Patricia Industries and our investments in EQT. So then, what have we used this capital for? Well, we have distributed half of it to our shareholders. We have invested in six subsidiaries in Patricia Industries, and we've also invested in selected listed names. During this period, our leverage has decreased from 7% to 2%. Talking about dividends, it was today announced that the Investor Board proposes a dividend of SEK4.8 to the shareholders, and this will be paid in two installments; SEK3.6 per share in May and SEK1.2 per share in November. And this equals a 4% increase in dividend from SEK4.40 last year to SEK4.80 -- 9%. Did I say something else? Sorry. So 9% is the increase from SEK4.40 to SEK4.80, but it's also the average annual growth on this page. And the final graph here shows our return over the short and the long-term. And we can see that we have not only beaten our own internal return requirement, which is the dotted line on this page, but we've also managed to beat the stock market for all of these periods. And let me then end this presentation with our purpose. We create value for people and society by building strong and sustainable businesses. Over to you, Jacob.

Jacob Lund: Thank you very much, Helena. Thank you, Johan. I think it's now time to open up for questions through our operator. Sandra, over to you.

Operator: Thank you. [Operator Instructions] We will now take the first question -- one moment please, coming from the line of David Johansson from Nordea Markets. Please go ahead.

David Johansson: Hi and good morning. Thank you for taking my questions. I have two. I may have some problems with the line here. But starting off with a question on Molnlycke. It's good to see organic growth coming in strong here. But to me, the margin still looks a bit on the software side. So other than currency, would you say this is also a mix factor with the stronger performance in Operating Room Solutions? And also on materials and sourcing, would you say costs have stabilized now at a higher level or do you see this more as coming down as we enter 2024? That would be the first one.

Johan Forssell: f I start from the latter part, we have clearly seen the logistics cost coming down. Going forward, I can actually not comment on that because there are so many different factors that could affect that. When it comes to the profit margin in the quarter, as I said, one part, of course, is a slight negative currency impact. But more importantly is that we are investing heavily behind a number of the important products in the company. Of course, we are growing strongly with 9% and to achieve that we are investing in the company. So the biggest value creation we see is to continue to try to grow as fast as possible and the profitability is very good. Then, of course, there is a fact that ORS grew a little bit higher than Wound Care and of course, the margin is much lower in ORS compared to Wound Care. But the main reason I would say is that we are investing.

David Johansson: Thank you for that. Very clear. And then my second question then, looking at Advanced Instruments, you still mentioned flat instrument sales, but obviously, very strong delivery, looking at consumable sales. Could you comment a bit on the underlying drivers in the quarter? And would you say this is primarily driven by the B Pharma bioprocessing division or more on the clinical and food and beverage side? Thank you.

Johan Forssell: If you look on the instrument sales, that was actually quite flat also if you look on the biopharma side. So the biggest difference we see in the quarter is instrument sales versus consumables and service. And just to remind you that roughly in Advanced Instruments out of the total sales, about 30% of the revenue are instruments and about 70% of the business is consumables and services. So I think those are the comments to make on that.

David Johansson: Okay. Thank you. And then also, if I may, on the Urotronic acquisition in Laborie and maybe you mentioned this previously in the call, but if you could say a bit on the -- comment a bit on the organic growth and maybe the margin profile for this business in relation to Laborie, that would be helpful. That's all.

Johan Forssell: If you look on the quarter, we -- Laborie had an organic growth of 7%. And if we look on -- if I start, if we look on the urology business, the GI business, and the obstetrics business, they were more or less the same, very close to the 7%. So there was no big difference in that dimension. If we then digest the urology business, Optilume for urethral stricture was growing dramatically, had a very strong, of course, from a low base, but it's having a really good take-off. On the negative side, we have capital equipment within the Urodynamics that were down in the quarter. And then, you have the consumer business service within Urodynamics that was up somewhat in the quarter. So that is the mix. If you look on the profitability for Optilume, it is a product with very high gross margins, but we are investing heavily to grow it. So once we are up and running on this, this should be a highly profitable product.

David Johansson: Thank you. That was all for me.

Operator: Thank you. We will now take the next question coming from the line of Linus Sigurdson from DNB Markets. Please go ahead.

Linus Sigurdson: Okay. Thank you and good morning. So would you say that you're still more searching for a new industrial subsidiary for Patricia or more sort of inclined to do more bolt-ons? Like, has there been any change in how you view that trade-off?

Johan Forssell: No. There is no change in that. We are looking for -- we continue to have a very strong pipeline on add-on acquisitions. And hopefully, some of this will be closed this year. And in addition to that, we are looking to new platforms in industrial technology, but also in Medtech area.

Linus Sigurdson: Okay. Thank you. And then my second and last question. You raised your dividend perhaps a little bit more than the market expected, at least. And sort of in the light of your conservative leverage profile could the market expect a higher baseline for dividends going forward?

Johan Forssell: I think, we are highly committed to our dividend policy to pay a steadily rising dividend. And we have delivered on that for many years. Of course, the exception is when the pandemic broke out, but that was a very special situation, as we all know. The exact amount of the dividend will be a judgment from year-to-year. So -- but we are very committed to continue to be on a steadily rising dividend and we have the cash free generation that supports it.

Linus Sigurdson: Okay. Thank you. Those are my questions.

Operator: Thank you. We will now take the next question coming from the line of Derek Laliberte from ABG Sundal Collier. Please go ahead.

Derek Laliberte: Yes. Thank you and hello. I want to say first, apologies if my questions have already been answered in, before here, but having some fairly big problems with the telephone connection here. So first off, I'd like to ask on Laborie, excluding the transaction costs there, looking at the margin decline, would you say, is this basically only because of the commercial investments relating to Optilume or can you share some thoughts on that?

Johan Forssell: Yeah. The transaction cost affected the margin by about 7% in the quarter. And the remaining drop of 3%, 4% is mainly related to the investments we are doing behind Optilume.

Derek Laliberte: Okay. Thanks for that clarity. And I'd like to ask on Molnlycke also on a more general basis, if you could share some color on what your thoughts are on the sort of addressable market for the Advanced Wound Care products and from your view, what is Molnlycke's market share? And in addition to that, also I wonder if you could share your thoughts on the -- we saw this acquisition a while ago now by Coloplast and the -- of Kerecis and what are your thoughts around the sort of biological ingredients and how important sort of we're getting into that area more for Molnlycke will be for -- to continue to compete in the most advanced segment of the Wound Care market?

Johan Forssell: If I start from the bottom here, of course, that was a niche product and Molnlycke is continuously looking for opportunities in the areas that they believe fit with them. And more than that, of course, it should be a question for Stratco and the team. When it comes to the addressable market, I don't want to give market share figures. I can just conclude that if we look on the development over the last three year period, Molnlycke Wound Care have taken market share compared to the other players. When you talk about the addressable market, we should also recognize that it's always the case that there are different definitions of that. So I think the important part for us is to make sure that we develop the products within the company, that we are in the forefront of innovation and that we have a commercial organization that can continue to grab market share from the ones we are competing, with that is the focus.

Derek Laliberte: Okay. Great. I agree on the definition is a bit tricky and come up with different figures. And finally, on Advanced Instruments, a follow-up and that you mentioned the 70% of sales being that was at services and consumables. When I look at, there are some figures out there pointing to 4% roughly market growth. I suppose that relates to only the market for osmometers, etc. But what's your view on the growth potential for the company, what's sustainable in the coming years?

Johan Forssell: Advanced Instruments, I can only say that our medium- and long-term expectation when it comes to growth is higher than the 4% you mentioned.

Derek Laliberte: Okay. That’s all for me. Thank you.

Johan Forssell: Thank you.

Operator: Thank you. [Operator Instructions] We will now take the next question coming from the line of Oskar Lindstrom from Danske Bank. Please go ahead.

Oskar Lindstrom: Yes. Thank you. Two questions from my side left. The first one is on Molnlycke organic growth. And I think maybe you've touched a little bit on it in your answers here earlier. It was a little bit difficult to hear. You've had quite sort of -- in general, you've had a higher organic growth since the end of the pandemic compared to what you had before the pandemic. Is this a structural shift or is there -- is it just sort of catch up to lost sales during the pandemic? That's my first question.

Johan Forssell: I think there are so many different moving pieces into this. It's a very difficult Oskar to answer your question, to be honest. And as I said before, we will try to develop these companies in the best way we can, and we are working intensively of bringing for our new products, the whole time and building the commercial organization, and we have a high focus on growth from our side, because that's the best way to create value in this company, of course, with continued efficiency. So I cannot actually give you an answer to the different pieces because it's complex, and it depends on what regions we talk about also and products.

Oskar Lindström: All right. And then my second question is on FX exposure. I mean, we can pretty much figure out what the translation exposure is, but what about the transaction exposure? Is that a number that you can give us for Patricia.

Johan Forssell: I don't have that in the whole Patricia. But of course, many of the -- if you look on the bridges in terms of value this quarter, you will see that most of the U.S. companies have done more and I think if you compare the U.S. dollar rate from the end of September to the end of December, I think the U.S. dollar was down some 7% or so and we ended the year at a SEK, U.S. dollar rate of just above 10%. So it's clear that it is a translation effect. If you look on that part, if you look on many of the medtech companies in the U.S. that we have the majority of the sales even though they are global, of course, but the majority of the sales in many of them like the Laborie's, Advanced Instruments and BraunAbility, the majority of the sales are in the U.S. So that is, of course, a transaction, but the majority is translation here. If you look on a company like Molnlycke, they have a plant in the U.S. on the Wound Care side. But the -- so that is, of course, extremely important that they have that plant in Maine, but they are also exporting from the plant in Finland in Mikkeli to the U.S. that is one example where you have the transaction effect. And then you have companies like Piab, global industrial company that also have an exposure, of course, selling around the world. So it's a mixed picture.

Oskar Lindström: All right. Thank you.

Operator: Thank you. We will now take the next question from the line of Johan Sjoberg from Kepler. Please go ahead.

Johan Sjoberg: Thank you very much. And my question is also around Molnlycke. Sorry to bore you to bet on that one. But so, I would like to hear a little bit more about the Wound Care business also, the 9%. It's -- 2022 year is a bit of a tricky year in sort of to interpret organic growth, a lot of volume, but especially a lot of price in that. I'd just like to hear I'm sure I'm not going to get a figure on how much is price, but I would like to hear a little bit about the price component in 2024. How you see that? Do you see that sort of fading now or are we still going to see some impact from that in that? My second question is also here a little bit upon the sort of the untapped possibilities for Wound Care to grow especially in Asia, which I know has been sort of the new facility in Malaysia and hear a little bit about your thoughts here and how that is going to drive business? Thank you.

Johan Forssell: Thank you for that. If you look on the price component, I will not comment on how we develop going forward because it's a competitive landscape and there are many different questions that the management team will address in the best possible way. What I can say is that if you look on the development, the growth that we are reporting within Molnlycke, the by far biggest and most important part is volume growth. There is one exception to that, and that is within ORS, where you also have a sizable price component. And when it comes to Asia, Molnlycke is at the moment, investing in a new plant outside Shanghai. And China is a very important growth market for Molnlycke and if I look in the quarter, I think I mentioned it earlier, if you look on Wound Care alone, the growth in China in the quarter was about 20%.

Johan Sjoberg: That's fantastic. Also, I would like to hear a little bit also about the product innovation. I know that this is something which I have been talking a lot about not just Molnlycke, but in all companies over the years that you have been CEO, Johan. I would like to hear a little bit on especially in Molnlycke to sort of get some sort of KPI for that shadow revenues coming from products launched in the last year or two years or whatever, just to get a feeling for somehow what sort of product innovation pace you have in Molnlycke, if that's possible. Thank you.

Johan Forssell: Thank you. I think, I'm looking at Magnus here, and we will take that question with us. And in the coming year or here, we normally or normally sometimes we bring in the CEOs of our companies to participate in these quarterly calls. And next time, Stratco will participate, we will bring that question with us. I think it's more a question for him to go on to answer than me.

Johan Sjoberg: All right. Thanks a lot.

Operator: Thank you. There are no further questions on the telephone. I would like to hand back over to Jacob for any webcast questions.

Jacob Lund: Thank you very much, Sandra. We'll turn to the question that has come in online and start with one from Samarth Agrawal from Citi. He has two questions. Do you see higher deployment potentially in 2024, given your strong financial position and a more constructive macroeconomic outlook? That's the first one.

Johan Forssell: I cannot give you an answer on that because we will hit the deals that we believe are value created and as I said, we are working on capital of them at the moment, but it takes two to tango. So let's see which ones that go through.

Jacob Lund: Secondly, a follow-up on the outlook comments. It would be great to understand your thoughts around Investors' portfolio exposure in the context of the recent developments around supply chain for instance, Red Sea developments and exposure to China, which is slowing.

Johan Forssell: If we start with the logistics side and the unfortunate situation in the Red Sea, as I mentioned initially, I mean, it's clear that we have seen a significant easing of the challenges in the supply chains during '23 compared to the very tough year in 2022. What we see now in the Red Sea area, of course, means that some of the freight goes through the southern part of Africa, and that adds, of course, if it's 10 to 14 days or something and, of course, additional costs. At the moment, I will not say, it's a super big impact. But of course, if these are spreading and becoming long lasting and have wider effects, it could get, but at the moment, not.

Jacob Lund: Thank you. Then we have two questions from Michael Kilkins (ph) at Tresor. Congratulations on another excellent year. Could you perhaps provide a view on the development of the end markets for Atlas Antibodies, particularly if you have seen any recovery in the past few weeks, now that the capital market interest rates have declined?

Johan Forssell: Yeah. Thank you. If I start with Atlas Antibodies, I can give you some basic facts. It's down 18% in the quarter. The reason for the fall is related to the weaker (ph) business where the Atlas Antibody is held that much better. When it comes to the customer groups, what we see is that the sale to pharma companies, which are more mature is more stable. While on the other hand, if you talk of small biotech companies that in very early phases, we see a clear slowdown in the market. And finally, if you look on these customer groups in Europe, it's more -- funding is looking different. It's more public funding and so forth. If you compare on these biotech companies, the situation is toughest in the U.S. So that's what we see in the market.

Jacob Lund: Thank you. And another one for Michael as well. Do you see M&A activity picking up in your portfolio and within the boards you're active? Blackstone CEO, Schwarzman, mentioned in Davos that he saw deal activity pick up again on the back of lower interest rates.

Johan Forssell: I mean, we have just reported. If you look on the fourth quarter, we have a number of our companies that have conducted important strategic deals. I mentioned it in my presentation with Epiroc almost an SEK8 billion deal for Stanley Infrastructure, we have Electrolux Professional requiring to say, in Japan and so forth. So there is clearly a number of actions going on.

Jacob Lund: Then we have a question from Karan Pathak, Canada Life Asset Management, and it goes as follows

Helena Saxon: No, it's not accounted for in the cash position, but I know the rating agencies sometimes added both as an asset and the liability, but it's outside the balance sheet for us.

Jacob Lund: Thank you. And I can't see any more questions. So with that, I think it's good to wrap up the call. Many thanks to you, Helena. Many thanks to you Johan, and thanks to all of you on the call for joining us here today. Our next scheduled call will be Q1 on April 18 and until then, thank you, and goodbye.