ADDvise Group AB (publ)

Thank you. Good afternoon and once again, welcome to Advice Q1 2024 Earnings Call. I will take you through the presentation together with Oliver Hamlin, CFO of Advice Group. So, isolated the first quarter this year, 2024, was robust. However, comparing to the first quarter last year and some of the quarters during 2023, we saw pharma revenues coming in significantly softer than last year. What we also saw during the quarter was some strong tailwinds in the laboratory segment, especially in the in the product segment where we provide research facilities and the pharma industry with clean rooms and climate rooms. We still believe that we are on the trajectory as we have been on for the last couple of years and our view on our long-term financial target remain the same. So overall we saw strong sales in the quarter, up more than 30%, which is above our long-term financial targets, driven by acquired companies consolidated in the quarter, and as mentioned, tailwinds in the lab segment. On group level, we saw negative organic growth, mainly driven by the pharma segment performing softer than last year. However, some of that were offset by the stronger performance in the laboratory segment. On group level, our negative organic growth came in at 10%, minus 10%. Stripping out the pharma segment and the pharma revenues, our organic underlying growth came in just shy of 4%. And if you compare the size of the pharma segment in the first quarter this year with the first quarter last year, pharma stood for around 9% of group sales in the first quarter this year compared to 23% last year. We are at the moment broadening our drug portfolio and we are expecting a few new products to be launched in the second quarter this year on the US market. And I believe that in the back end of this year, that will offset some of the negative organic growth specifically in the pharma segment. We also saw the capital goods market in US coming in a bit soft in the quarter. And the same thing goes for that segment. We believe that the second half, we believe that we will see a pickup in the second half of 2024 when US interest rates are cut. And that will effectively unravel the market. Organic growth excluding pharma as mentioned coming in slightly below 4% and except from the laboratory equipment sales being strong in geographic terms of exposure we saw the Nordics coming in very strong. We also in the quarter worked hard to make sure to mitigate some of the FX exposure that we have had historically. And by issuing a US dollar dominated bond, we are now much more prepared for the fluctuations in the currency market, making the lumpiness much less in the upcoming quarters in terms of FX. And also, when it comes to our presence in U.S., we have established our advice group U.S. Headquarters in Fort Lauderdale. And we are now ready to accelerate our U.S. presence by having people on the ground from headquarters in our largest market. As mentioned the Nordics performed well in the quarter and we saw strong demand for climate and clean rooms in particular from from the Middle East and this is obviously a business where we carry slightly lower margins but as you can can see we had a very strong tailwind in the laboratory segment the organic growth in that segment exceeded our expectation but at the same time we saw margins in that segment coming down a bit based on the product mix. When clean rooms and climate rooms increase in size obviously that pushes back some of the very high margin revenues that comes from our clinical trial business and that kind of affects the margin in the laboratory segment. We did consolidate all of our acquired entities or newly acquired entities in the quarter and these four acquired entities performed very strong in line or above our expectations and as you can see on the the pie chart up in the right hand corner, you can see that we have today a more diversified geographical exposure. And that means basically that North America and more so US are now around 44% of our sales in the quarter. And we now have a very solid footprint in South America, which obviously is our largest acquisition up until today, Coolplast, which is part of the healthcare segment. We also strengthened our operations in US, as mentioned before. We now have three people on the ground in South Florida covering the organization and operations we have in US. And that means that we first of all, can be very close to the businesses we have in US, but at the same time, we can accelerate our M&A strategy on US soil. Looking at the product split, as you know, we split first group into lab and healthcare, but below that, we have six revenue streams that we monitor. And what you can see on this slide and the key takeaway here is the lower slice of pharma revenues standing for 9% in the first quarter this year compared to more than 20% the first quarter last year. If you look at the historical numbers, we are on path with our long-term trajectory. If you look at sales CAGR the last three years, we are at 60%. If you look at EBITDA CAGR the last three years, we are above 100%. And net sales in the quarter came in at 413 millions, which is obviously the strongest quarter ever in terms of sales. We have slightly changed the the split between own products and proprietary products. Own products today stand for 60% of our sales which is very good for us because we believe that the scalability in own products is better than distributed products. However, we want to continue and have a footprint into distribution because we believe that we can utilize the distribution companies that we own to launch products that we own into new markets. Organic growth, as mentioned, came in at minus 10% on group level. Stripping out pharma, we are just shy of 4% in terms of organic growth. Order intake is a little bit more lumpy. The outlier here is Q4 2022, when we received our largest order ever in the back end of Q4 2022. And that kind of skews the number a bit. Other than that, we have had resilient growth in order intake over the quarters. Looking isolated at the first quarter 2024, stripping out pharma, our organic growth came in just below zero and overall minus 20% heavily affected by lower order intake in the pharma segments. Taking a step into the two segments, healthcare came in at 245 million in sales in the quarter. And the organic negative growth in the quarter excluding pharma was minus 9%. Including pharma, it was around 20%. and the delta is between zero and minus nine percent is to a large extent capital goods sales in United States where we believe that we will see a pickup later this year. Gross margin slightly lower than before but at a healthy 60 percent and that is a level where we believe or slightly above that where we believe that we will see the upcoming quarters Overall growth in the quarter plus 10% driven by acquired entities consolidated in the quarter. And our EBITDA margin came in at 23%. And here you can also see the effect on our geographic exposure in the segment specifically. US was almost at 80% on the full year or in Q4 last year, and now we are down at 62%, giving us a more diversified geographic exposure specifically in the healthcare segment. Laboratory segment came in strong in the quarters. Sales came in at 168 million with an organic growth of 26%. And if you take into consideration all acquired entities, we were above 90% in terms of growth. The margin was a bit lower than last year. The main reason for that is obviously the product mix, where we had a large portion of the revenues in the laboratory segment coming from our project business. And the project business normally carries lower margins than most of all, or more compared to the clinical trial business. So EBDA margin came in at 26% in the segment. If you look at geographic exposure in the laboratory segment, we are now proud to say that we have a foothold in North America, US. And in the laboratory industry and the laboratory space, U.S. is as important as U.S. is for the healthcare space. So having a footprint in U.S. is obviously a platform for us to accelerate growth within the lab segment in the United States, which we believe we can do over the upcoming years. So I'm handing over to Oliver Hamlin to take you through the financial slides.

Thank you, Eker. And good afternoon all. Diving into the profitability in the quarter, EBITDA amounted to 99 million kronors, which corresponds to a margin of 24%. As Eker has touched upon, this is lower than what we have seen during 2023 and is driven by a change in product mix. where we are seeing a normalization of sales of pharmaceuticals in the US, which has brought down profitability within that segment. And at the same time, very high activity within our clean rooms business in the first quarter. As Eken has already touched upon, this is a business which has somewhat lower margins and also a longer cash conversion cycle. So high sales within this category affected both margins and working capital in the quarter. As we have said before, we are going to see margin fluctuations between quarters depending on the product mix, but our long-term EBITDA margin target of 28% remains unchanged. Worth highlighting is that the four acquisitions that we completed during the back end of the quarter are now fully reflected in the figures for the first quarter and are all performing in line with or even above our expectations as regards both growth and profitability. If we take a look at our key profitability metrics, we have seen a broad improvement year over year compared with the first quarter of 2023. EBITDA is up 18%, EBIT is up 15%, and net income is up 21%. And we are delivering our highest ever earnings per share at 22 per share. You will remember that during the Q4 call, we discussed a number of initiatives which we're taking to improve conversion from operating earnings down to the bottom line. And I'm pleased to see that these initiatives have started to yield results. Our effective tax rate in the quarter was around 21%, which compares with 37% in 2023. I don't think one necessarily should expect a 25% tax rate every quarter. but I would certainly say that we're heading in the right direction and we'll see a lower overall tax rate this year compared with what we saw during 2023. During the quarter, we also took action to optimize our capital structure and currency exposure. We issued our first dollar-denominated bond, as I touched upon. Two-thirds of the proceeds from that bond were used to repurchase our existing bond in Swedish kronor, and through this, we have significantly reduced our currency risk through a better matching of assets and liabilities. This also should reduce the magnitude of currency effect in our financials going forward. Moving on to cash flow and capital efficiency. On the left hand side, you'll have our cash flow bridge for the first quarter. As a reminder, when we talk about cash flow from operations, we look at the underlying cash flow generated by our businesses. And then we deduct changes in working capital as well as investments in our asset base, including leases as well as acquisition related items. We had a bit of a soft quarter in terms of cash flow, which was primarily due to working capital built mainly in the lab segment, which saw strong growth in the quarter. Cash flow from operations came in at 55 million kroner, which corresponds to cash conversion of 56%. What is positive to see is that we're now back to normalized levels of depreciation and lease expense, as the large lease-based customer contracts, which we worked through last year, have rolled off the books. Depreciation in the quarter was around half of the levels which we saw during Q3 and Q4 of last year, and the pillar called investments, which is both traditional capex, but also lease amortization, is 60 to 70% lower. This should provide for better transparency and visibility on cash flow going forward. On the right-hand side, you have our return on capital employed, which is a KPI which we're publishing for the first time this quarter. This was 17.5% for the rolling 12-month period. Moving on to the balance sheets, our financial position remains solid. We have a net leverage standing at 2.4 times EBITDA pro forma at the end of the quarter. which is in line with our target of being below three times net leverage. At the end of the quarter, we had some 460 million kroner in cash and undrawn credit facilities, meaning that we feel very comfortable from a liquidity perspective. As I mentioned, as part of our work to optimize our balance sheet, we issued a $60 million bond after the end of the quarter. The bond is therefore not reflected in the first quarter numbers. but it does not meaningfully affect net leverage because most of the proceeds were used to repurchase existing debt. Besides reducing our FX exposure, the new bond also improves our maturity profile by pushing around a third of our gross debt maturity out by almost one year, from May 2026 to April 2027. The new bond has a $200 million framework, which gives us the financial flexibility to continue to pursue acquisitions which align with our strategic and financial criteria. That was all from me. I'll now hand over to Richard for some closing remarks.

So key takeaways from the first quarter. Growth came in at 33%, which is above our long-term financial target. Organic part of that excluding pharma came in just shy of 4%. Overall organic growth minus 10%. Profitability, as mentioned before during the call, our profitability was affected by the product mix. A slowdown in the pharma segment coupled with tailwinds in the laboratory segment, especially in the clean room side of that space, pushed the profitability a bit down. However, we were able to reduce the gap between EBITDA and net profit, increasing the EPS to the highest level ever in the quarter. Cash flow tailwinds in the laboratory segment project business also means working capital build up. And that put a little bit pressure on the cash flow in the quarter. And the comparable numbers were a bit skewed because the first quarter last year was extreme in terms of cash flow. Financial position, we have a strong financial position, net leverage at 2.4 times, giving us flexibility in terms of our M&A strategy. And on the M&A side, we see numerous opportunities to execute on. However, we are a bit more careful in terms of what we acquire within the life science segment. We have or are, as mentioned in the Q4 call, we are much more disciplined in terms of just focusing on businesses in already existing sub-segments to drive density in group and by doing that being able to even more find synergies between acquired entities. So these are the key takeaways from the first quarter and I would like to open up the floor for Q&A.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Christian Binder from Redeye. Please go ahead.

Good afternoon, and thanks so much for taking my question. I have one regarding the directed share issue during the quarter. Can you expand a little bit more on your reasoning? I guess the press release indicated that you see a lot of acquisition opportunities, but in general, can you elaborate on your philosophy when it comes to your own valuation, which seems rather low, and in general, how do you plan to use equity in terms of raising funds for acquisitions?

As mentioned before, we have three buckets that we use for our strategy. The first and cheapest one is obviously operational cash flow. The second one is debt. The third one is equity. The most expensive for existing shareholders is obviously the equity bucket. That being said, for us, it's extremely important to build a solid investor base, institutional investor base. And what we were able to do in the in the quarter is to bring on board a tier one Swedish institution, which is obviously something that is good for for the long term strategy in advice group. The equity instrument, as mentioned before, is something that we are extremely careful with. and our ambition is to bring advice group to the maturity where no more equity is needed and where you basically can fund the acquisition strategy with operation of cash flow and at the same time pay dividend to the shareholders that's the that's the strategy all right perfect thank you so much that was all from my side

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad.

If there are no further verbal questions, we have a number of written questions which I will read out loud. Starting with the first one, it's a similar question to the one we just received. Could you elaborate on your thoughts on pricing, timing, and the need for the equity issue in Q1? From the outside, this seemed reactionary, not a part of the long-term strategy. Maybe, Erika, if you'd like to elaborate and give a bit more color on that.

I think the answer to that is the same as the previous question. We believe that equity is the most expensive tool to finance the strategy with and we want to come to the majority of the business as soon as possible where no more equity is needed and hopefully we are there already. We are working extremely hard to improve operational cash flow And by doing that, making it possible for us to take the next step in the journey where we are self-funded basically in our acquisition strategy with operational cash flow. I mean, we are still, I mean, you can't compare us with the larger peers that has been doing this for 30 or 40 years. We are still in the build-up phase. We are very... We work relentlessly to make sure that we improve shareholders' value every day here, but there will be some lumpiness over the build-up years. So I think that kind of gives you some color on the view. I'm one of the biggest shareholders in Advice Group, and obviously I hate dilution, but still, if you have the long-term view on Advice Group, At some points it is necessary. Hopefully we have that in the past now, but yeah, that's my view on equity.

Thank you, Eker. We have two questions from a listener. Are you dependent on low interest rates for your acquisition model to create shareholder value? And how long a repayment period do you generally expect for an acquisition?

I mean, obviously we are dependent on interest rates since some of the acquisitions are financed through our bond structure. And so that is obviously something that is important for us. And just to know, or obviously you never know, but to believe that there will be interest rate cuts later this year, both in Europe, Sweden and in the US. obviously is good for our strategy. It will improve our cash flow. It will improve our net profit and our profit per share. So that is obviously a good thing for us.

And there was a second question. How long a repayment period do you generally expect for an acquisition?

That is nothing that we disclose in the market, but obviously we have models that we work with in our advice group.

A question here, if there's any thoughts on moving the stock to OMX small cap instead of First North.

I think, as mentioned, it's part of the long-term journey, but it's also to choose. We only have 24 hours per day to work with here, and we do a lot of things every quarter in order to improve shareholders' value. I believe that one of the next steps is to go to main market. If that happens this year, next year, or in two years, I don't know. But still, I think it is an important step. And I believe that we will at some point take that step. Yes.

And we have a few questions on M&A. How do you find acquisition targets through your own research or through a broker? And how much capital do you have available for M&A this year? And do you expect to be able to deploy the available firepower?

If you start with deploying capital obviously for us it's very expensive to not deploy the capital. The carry cost is quite high since the interest rates are high so we want to deploy the capital as soon as possible. However we are very disciplined in terms of acquisitions. That means that we we choose carefully before we acquire a company. And since we also added one search criteria when it comes to focusing on businesses that are already in an existing sub-segment in Advice Group, it becomes a bit more tricky. So the M&A process, even though we have an ample pipeline, it takes a little bit more time And we have a little bit more pricing discussions since we become even more disciplined. Because if you really want to meet all our research criteria in terms of profitability, in terms of being in an already existing sub-segment, it kind of narrows down the flexibility in the M&A pipeline. So what more, Oliver? There was a second part of that question.

how much capital we have available for M&A this year. And maybe I can address that. And I think looking at where we are from a cash perspective and the near-term obligations that we have falling due in terms of earnouts, et cetera, I would say that depending a little bit on the size of acquisition, we should have comfortable capacity for one or two acquisitions. There is a few questions here on the pharma sales. I would try to address, maybe we can address those as one. I think maybe I can give a little bit of color on the dynamic of pharma sales. What is the reason for the current development? And whether it's inventory related correction or fundamentally weaker demand. Any specific products you'd highlight that are seeing softness?

I mean, in general, there is no softness in the pharma market as far as we can see. I mean, most of the drugs that we have in our portfolio are generic or close to generic drugs. And what happened during 2023 or basically at the back end of 2022 was that we received some large initial orders on a product that we launched on the market. And we executed these orders during the first, basically from the fourth quarter 2022 all the way into mid Q4 last year. And then we saw a significant slowdown on that specific product. And that is kind of the effect of the softer pharma sales. And that is something, I mean, in general, if you look at the pharma industry, especially on the generic side, there is a lot more lumpiness. On the other side, you see much higher margins. So that's the upside on the pharma segment. And what we are now, we are in a gap between this uh very uh high sales we had on a specific product last year and now we are back on kind of normalized levels but at the same time we have uh two three products that we hope can be blockbusters in the same way as as the uh the strong sales we had on on the uh back end of 2022 uh initial orders we had so so this is kind of There is kind of more lumpiness in sales in the pharma segment. However, it drives margins and organic growth, obviously. So it's something that we are very proud of to have had during 2023. It's not that we have no pharma sales in the quarters. I think we stabilized on a kind of base level now and I expect the sales in the second half of 2024 to increase basically based on new products launched on the market. At the same time within the pharma segment we are also exploring new sales channels to reach further basically with already existing products and we have invested in our platform for distribution of generic drugs. We basically today have licenses in most US states. I think we cover basically somewhere around 90% of the US population in terms of access with the prescription-based drugs. We have invested in that platform to even reach further. and to make the platform more accessible with the products we have. So I think the combination of new products launched on the market and exploring new sales channels will give effect in the second half of 2024.

Thank you. There's a few questions on pharmaceuticals, the strategic rationale for the investment and also whether there is a target to buy more companies in the pharma market near term or more focus on medtech?

I mean, the whole structure of advice in terms of risk profile is to have a broad geographic exposure, have a split between lab and health care and not to be dependent on one single sub segment. And obviously, pharma is a fairly new and small segment in advice group. However, it comes with very high margins. So my view or our view is to continue and build the pharma segment in parallel to the laboratory equipment and to the medical device equipment to even more give us a good risk profile of advice group. I mean we mitigate risk in many different ways. We do it in terms of geography, we do it in terms of different sub-segments and we do it in terms of two main segments, lab and healthcare. And that combined with a non-cyclical market, we believe gives a very nice risk profile of advice group. So even a drop that we have seen in the pharma segment still leaves us with a EBITDA margin of 24% or adjusted above 20%. or EBITDA margin of 21%. So that's my view. And as mentioned on several calls before, both on the Q4 call and the Q3 call, there is no, we will not see linear development of advice group quarter on quarter. There will be some lumpiness between quarters. Obviously, if we were 10 times bigger, we wouldn't probably see the lumpiness, but that is kind of an effect of of us being in a buildup stage still.

The next question here, elaborate on the outlook for order intake within the lab segment.

My view, I mean, this is obviously no official forecast or projection. I mean, this is my view is that the sentiment in the laboratory segment is very strong. It's stronger in general than the healthcare segment. The expectations on organic growth, not in advice group, but in general in the laboratory equipment segment is probably twice as high as the healthcare segment. I believe that the expected CAGR in the laboratory industry is almost 10%, the upcoming five, six years. So I think my expectations on the laboratory segment is high.

Next question. Could you comment on your visibility of demand for launching new drugs in the pharmaceuticals vertical? What makes you confident that this will drive growth going forward?

I mean, we have experience of launching new products before in the acquired entities and we have seen these launches playing out well. So I think my view and my comment to that is that based on historical data points, we feel, I wouldn't say comfortable because always launching a new product always takes more time than you expect. But I mean, I think I have factored that into my expectations on seeing some result during the second half of 2024.

The next question here being going forward, should we expect the mix of clean room versus clinical trial in the lab segment to be similar to what is seen in Q1?

I mean, to be honest, if I had a crystal ball, I would answer that question. I mean, it's demand on a quarterly basis. I think the demand for clinical trials remains high, especially in our US operations, where we see a lot of potential in that platform. But at the same time, the demand for clinical trials Critical business, critical clean rooms is also very high, especially in the Middle East, where we see, I mean, huge investments into research and pharma infrastructure.

And then I think the last question that we have today, annualizing Q1 EBITDA brings full year 24 slightly below last year. Is that a fair expectation? And when do you expect the earn outs on recent acquisitions to be paid? I think I can address both of those questions. We obviously haven't released any guidance for the full year 24. we are working with our long-term financial targets, which is growth of 30% and an EBITDA margin of 28%. And as I think we mentioned previously, if we see that we are in a position to provide any guidance on the full year, then we will do so. And regarding the earnouts on recent acquisitions, typically these acquisitions have Earnings running two years for the two financial years after closing and the details of those can be found in the respective press releases pertaining to the acquisitions. Then we have one last question here. Do you see the Middle East exposure in terms of growth to be impacted by the current geopolitical status?

I mean, the main impact on the Middle East where basically we are active is oil price. So to some extent, the oil prices have an impact on the demand in the Middle East. But we are supplying and installing clean rooms basically worldwide. So it's not the fact that we only have demand in the Middle East, we have a broad geographical exposure in terms of, or when it comes to clean rooms. But specifically in the Middle East, I guess it's most of all the oil price, not the geopolitical situation, unless that affects the oil price significantly. I mean, basically the higher oil price, the better for the demand, because the countries investing in clean rooms are in many cases oil dependent countries.

That was all the questions that we have received. Unless there is any further questions from the audience, I think we can conclude today's call. So thank you all for dialing in and thanks for taking time. Thank you.