ADDvise Group AB (publ)

Thank you and once again welcome to Advice Group 2024 second quarter earnings call. The second quarter this year showed mixed financial performance. Our net sales came in at 412 million SEK, which takes us to a year-on-year 20% growth. However, we saw challenging pharma and clinical trial comparables following last year's exceptional performance in two of our businesses. That took us to a negative organic growth, isolated in the quarter of minus 21%. However, just to give you some color, on the underlying businesses. Normally, I don't like to adjust for items, but just to kind of get the magnitude of the effects of these two businesses and how the rest of the 19 businesses performs, stripping out the two exceptional businesses, Pharma and European Clinical Trials. Without these two, our organic growth in the quarter isolated came in at 13%. Of course, the reported number is the reported number, but this gives you more color on the negative organic growth. And worth mentioning is also that the two businesses that outperformed last year, even though they are not at these levels during 2024, they are still in line with or above the performance that they had when we acquired the businesses. EBITDA came in at 102 million, which takes us to a 25% unadjusted EBITDA margin. We had our best quarter ever in terms of order intake. The overall order intake came in at 67%. and 13% if you measure it by organic levels. And of course, it is specifically within our laboratory segment where the drivers behind these large numbers, where you can find the drivers behind these large numbers. As you remember from last year, we had not as good conversion as we wanted from operating earnings down to net profit. And a few of these reasons was the tax inefficiencies that we had in Advice Group last year, but also the size of the depreciations we had due to large volume of clinical trial rental revenues. So we have put a lot of effort into improving or kind of minimizing the delta between operating profit down to net profit, which we have succeeded in. And if you look at the net profitability in the quarter, we are around 30 million SEC compared to 3 million last year. Earnings per share 0.15 SEC, also an improvement versus last year. Looking at the cash flow in the quarter, I'm not satisfied with the levels. We have had some networking capital or working capital build up due to the product mix, and I will come back to that later in the presentation. Liquidity, we have ample liquidity in the group right now plus 400 million in cash and cash equivalents and an undrawn credit facility on top of that. In our Nordic businesses we saw a strong momentum in the quarter but as mentioned the demand for climate and clean room solutions outperformed in the quarter. And that is in terms of geography driven by our Middle Eastern customers based on the willingness to to steer away from oil dependency and investing in more sustainable businesses in that region. And of course, research and pharma development is something that is sustainable and drives the demand in our businesses operating in climate and cleanroom solutions. And in May we also saw our largest single order to date, 11.3 million US dollars to an Omani customer building a research facility in Oman. South America is also a very strong market for us at the moment. We see high growth rates in that region and our businesses operating in Brazil have very good momentum. Unfortunately, that business is not part of the organic growth calculation yet because we haven't owned that business for 12 months. So that will come into the numbers mid fourth quarter this year. As mentioned before, the clinical trials saw some challenging comparables after the exception of 2023, but that is only in the European part of the clinical trial business. Our just recently acquired North American business within clinical trials is performing according to or slightly above the levels we were promised before the acquisition. Same thing there, not part of the organic growth calculation yet. It will come into the numbers later this year. Demand for capital goods in US remains a bit soft in the quarter. We saw some improvement late in the back end of the second quarter. And the signals we get from our customers is that interest rates still hurts investment in capital equipment. And when feds start to cut interest rates, we believe that the demand in that market will bounce back. In terms of geography, 44% of our sales in the quarter isolated came from North America or mainly US. Second largest market for us is Sweden and the third one is South America. So we have a well diversified geographical exposure in Advice Group as we stand today. Looking at the four or five product categories that we measure, the largest one year-to-date second quarter is laboratory equipment, followed by medical consumables and medical equipment. And as you can see on this pie chart, pharma is now down at 7% of advice group sales year-to-date second quarter. If you compare that to last year, we were around 20-25% of advice group sales. And as I've said several times before, the pharma revenues that we have comes with much higher margin. But at the same time, the flip side of that is that the revenues are more volatile than the rest of the advice group. But when we are down at 7-8% where we are right now, I see the volatility on the upside rather than the downside. So for us, the 7% that we see today are very robust compared to where we were last year. Sales, on this slide you see The growth trajectory over the last four years, as you can see now, we are for the first time well above 1.5 billion SEC in sales. And if you look at the quarter isolated, we came in at 412 million. Organic dropped 21% due to the things I just mentioned. If you look at the advice group on group level, we split our revenues also in own proprietary products, basically products that we develop and manufacture and products that we distribute, basically not owning the products and the IPs. And in the quarter or in second quarter year to date numbers, we have own products standing for close to 60% of our sales. And that is typically the balance that we would like to have going forward. Around 60% on products and 30%, 35% distribution and the rest as service revenues. Order intake, the strongest quarter ever, 434 million. 67% total growth on order intake. Organically, 13% up. And the main driver, as mentioned, several companies contributed to the growth. But the main driver that sticks out was the laboratory clean room and climate room solutions that kind of boosted the order intake in the quarter. So going into the second half of this year, we have a solid order backlog to convert into sales in the upcoming quarters. Splitting advice group into healthcare and lab and looking at healthcare, our sales came in at 256 millions in the quarter, organic drop of 12%. If you take out the pharma, revenues from this segment, the organic growth would have come in on 9% or comes in at 9% in the quarter. So basically the two businesses that skews the numbers, one is in the healthcare segment and the other one is the laboratory segment. Total sales grew with 28% in the quarter. And we closed the quarter at 19% EBTA margin. Looking at the laboratory segment, slightly smaller as part of our advice group, 157 million in sales. Organic growth came in at minus 33% reported. Doing the same calculation here, stripping out the European clinical trial business. organic growth would have been 24% in the quarter isolated. Margin wise operating margin 25% in the quarter isolated. Geography you can see on the pie charts that we have slightly different geographical exposures in the two segments. North America is the key market for the healthcare segment and will continue and be that for a long time. However, South America is a very fast growing market compared to the other markets that are slightly more mature. South America is a very fast growing market. In the laboratory segment, the rest of the world is now the largest market for us. And that is driven by, as I mentioned in the presentation earlier, the Middle Eastern customers investing heavily in sustainable businesses, most of all in research and pharma businesses. and we supply them with clean room facilities and climate rooms and equipment used in these facilities. Europe, excluding Sweden, second largest market and 25% or a quarter of the sales comes still from Sweden. And that is of course where it all started in Advice Group many years ago in Sweden. Financial performance. We are now on a rolling 12 basis at around 420 million in EBITDA and on a margin level we came in rolling 12 at 27%. isolated in the quarter, 25%. And the margin drop is mainly affected by the product mix. As mentioned before, Pharma, which is a much smaller portion of our advice group today compared to last year, comes with a much higher margin versus the project business for clean rooms and climate rooms, which carries a lower margin. And that of course affects the group margin. Weaker operating earnings, but improved net profitability. Our EBITDA came down from 122 millions to 102 millions in the quarter. And if you look at earnings before interest and tax, you saw a drop of 8% from 87 to 80. On the other hand, net profitability increased significantly from 3 millions to 30 millions. And the drivers for the increased net profitability are several. It's more tax efficient structure, improving the or lowering the tax rate, lower amount of depreciations in the quarter based on less volume of clinical trial rental business. We also had in the second quarter last year the cost for refinancing our SEC denominated bond and we also have positive effects in the second quarter this year from from the net effect of write-ups and write-downs of earn-ups in the quarter. Not happy with the cash flow in the quarter. We had a huge working capital build-up in the quarter, which is something that we are taking seriously, and we are working hard now to improve that in the upcoming quarters to finalize the year in strong fashion on cash conversion and cash flow. So that also means that return on capital employed was lower, isolated in the second quarter compared to the first quarter. And hopefully by late this year, we will be back on track again on return on capital employed. Our financial position remains solid. We are below our long-term leverage target. We are now at 2.9 times in net leverage. We have a strong financial position, 430 million SEC in liquidity. That is cash on the bank and cash equivalents. And we also have an undrawn credit facility. Net leverage 2.9 pro forma and leverage is of course a big focus area for us and that goes into our M&A strategy. We are cautiously evaluating potential M&A deals with our net leverage in mind and we of course prioritize deals where we can see immediate or fast deleveraging on the deals we can finalize. And we have a few of them in the pipeline that we are evaluating right now. And hopefully we can finalize one or two before the end of year, but no promises on that yet. And our first material depth maturity is not until May 2026. So this is my final and 55th interim report as CEO for Advise. So I would like to give you a few takeaways from the second quarter and a small recap and historical expose before I open up the floor for questions and in a few weeks hand over the CEO chair to my successor Staffan Torstensson. So key takeaways from the quarter, sales growth 20% in total, very strong order intake growth 67% and double digit organic. Profitability product mix resulted in weaker but still robust profitability. We have done improvements on converting operating profitability into net profitability. Especially on the tax efficiency in group and also when it comes to depreciation. Cash flow not in line with my expectations. Working capital build up. We are on that and I believe that the second half we will see improvements during the second half of this year. Ample liquidity and on the M&A side we cautiously monitor net leverage and have that in mind on every deal that we evaluate and hopefully we will finalize something before the end of this year. So this is as said my 55th and last interim report for Advice Group. I just want to give you a small historical expose in the columns that you have in the chart on the right hand side. The first quarter I reported in 2010, the fourth quarter, Advice Group had 11 million SEK in sales. So it was a very small local laboratory equipment supplier focusing on i would say that the swedish market but more or less the the stockholm region market and the second quarter this year 14 a little bit more than 14 years later we came in at 412 millions in sales my first quarter we didn't do any profit was zero basically and and this year in the second quarter we came in at above 102 or above 100 million in operating profit or EBITDA profitability. So it has been quite a journey. And I would like to take the opportunity to thank all the team members of Advice Group that has stood by my side during these 14 or more than 14 years. I would like to take the opportunity to thank the board members, the investors, And all the stakeholders that has been part of or believed in this journey, because it has been a fantastic journey for me and for most of the people or many people in the organization and in the businesses. And last but not least, also for our customers with the products and services that we put on the market. So with that said, I'm handing over the CEO chair to my successor, Mr. Staffan Torstensson, and I'm 100% sure that he will take Advice Group to new heights. So with that, I open up the floor for questions.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Philip Ekengren from ABG Sundal Collier. Please go ahead.

Thank you, operator, and good afternoon, Rickard. To start, I would just like to get some more color on the healthcare segment. So you write that it's down organically mainly due to the generic pharma business, but you also, in that, is there any other business progressing negatively in the quarter? And also, regarding pharma, what type of visibility do you have for the rest of the year?

As you know, we do not report on unit level. We report on segment level. But I mean, we have a number of businesses. The majority of the businesses are performing in line or above our expectations if you strip out the generic drug business. So I'm very confident. that once the skewing numbers rolls out, which it does kind of in the back end of the fourth quarter this year, and with the four new businesses coming into our organic growth calculation, we will be back on organic growth mid to late fourth quarter this year. And we have a pipeline of products that we are putting on the market in the pharma revenue stream or pharma businesses. So I would say, and I think I mentioned that during the presentation, that the volatility is still in the pharma segment, but right now we are very low levels in terms of sales in the pharma segment in the second quarter. So the volatility is on the upside in the pharma business. So yeah, that is kind of a summary of the healthcare segment.

Okay. And if we move on to lab segment then. There was a substantial growth in orders as you talked about now. When can we expect these to start materialize? When can we see it on sales?

And you will see that gradually and of course some of it came in already in the second quarter. But I mean as you know with large projects and some of these projects runs for 12 to 24 months. So we have typically the same kind of revenue recognition as you have in a construction company. You take revenues in line with how much effort or work you put in, but that is not always aligned with cash flow. And that is the reason why you see the working capital build up in the quarter. So we have a huge, we have a very solid order backlog now in Advice Group, giving us good visibility on the upcoming quarters. So some of it, a small portion of the large order intake you already saw in the second quarter, but most of these orders runs for 12 to 24 months, the big ones.

Perfect, thank you. And if we continue on lab a bit, Q3 last year, you had some negative ground growth and Q4 some quite positive. What can we expect for the remainder of this year? Will Q3 continue to be soft or grow to pick up in Q4? How should we think about that balance considering the comps you face?

I mean, as I mentioned, we have one business or company in the lab segment and one in the healthcare segment that skews the numbers. So it will be hard to perform organic growth, at least on group level, until mid fourth quarter this year. If you look at the first quarter this year, we didn't have any skewed numbers in the laboratory segment. We only had skewed numbers in the healthcare segment. so it's extremely hard to make for me to say exactly when you will see organic growth on segment level but my view is that mid fourth quarter this year you will be back or we will be back on organic growth on group level okay but just again here to get the full picture correct here so should we kind of assume that

that both segments will perform organic growth in Q4 or will one kind of drag the other? I know this is a hard question of course.

I mean in the third quarter obviously as since I say that group will be back mid fourth quarter. My view on the third quarter is that we will not have organic growth on group level and I would like to I don't want to go into the kind of the segments and give you numbers on segment level on my expectation on organic growth. I just want to keep that on a group level because I don't have 100% visibility on that. It's much harder to see that on segment level. But what I can say is that that when we come into the fourth quarter this year, the skewing numbers or the exceptional levels that we saw last year will roll out from the numbers starting maybe, if I remember correctly, mid-November-ish.

Thank you. And if we move on to gross margins here, down across the board this quarter, of course, top line was down, but what can we expect for H2 here? Do you have any visibility on that?

I think that if you look at the third quarter, I believe that we will be pretty much in line where we are now or slightly better. And then, of course, working on pricing and the initiatives that we always work with, hopefully gradual improvement.

Perfect, thank you. And lastly from me.

One more comment on that and just to clarify, I mean we finalized four large acquisitions by the end of last year. And we obviously have a playbook to improve businesses and work together with the local management to improve pricing, gross margin, etc. But we can't do that day one. It's a gradual improvement before we start seeing the effects of the initiatives that we take.

Perfect. That sounds reasonable. And lastly, is there anything else we should be mindful about for the rest of the year? Anything we missed? Anything we're not covered here?

No, I think the most important thing is the clarification. And as I said, I hate stripping things out just to show you good numbers. That's not my intention. But in order to give you color, since we had such an incredible performance in two businesses last year. And just kind of lifting the bonnet and showing you how it would have looked like if we kind of stripped these out. That is kind of the key takeaway here. We will be back with solid organic growth, but it will not happen in the third quarter, but it will happen late this year. And then we are back on normalized levels. That is kind of the key takeaway here. We have solid businesses that perform organic growth. Not 100% of the businesses do that every year, but the majority of the businesses perform in line with our expectations or above our expectations. But they are skewed now because of the exception of performance in two businesses last year.

Perfect. Thank you, Erika. I'll get back into the line.

The next question comes from Christian Binder from Red Eye. Please go ahead.

Hi, and thanks so much for taking my question. Most of them have already been answered, but one additional question around M&A. You said that you hope to maybe finalize something this year, but given the slightly elevated net leverage towards the upper end of your target and then leadership transition, should we still expect it to be more likely for M&A to resume next year?

I mean, if one of the criteria in the M&A strategy is to delever, then of course you narrow down the pipeline and you don't get as many you don't get as many kind of prospects as you had when you were able to pay more in line with historical multiples. So of course it takes a little bit more time, but we have a few businesses where we see that we can deliver immediately or very close to acquisition date. And that is something that we would like to do because for us to have 430 million sitting on the bank, that is a huge cost for us and the shareholders. At the same time, we are extremely cautious on that leverage. So that's kind of the balancing act for us. It takes a little bit more time to find the exactly right acquisition when you have deleveraging as one of the kind of search criterias.

Okay, got it. And just to clarify, so you don't think that leadership transition will slow down the pace of M&A in any way?

No, I mean, my view on M&A is that I haven't, I mean, for the last, for the first 10 years, I was actually M&A in Advice Group, but for the last four years, we have had a solid team working on M&A independently of me. Of course, I've been part of the team I've been part of the team that approves or disapproves potential M&A deals but the M&A team is still in play. We have the same people and it's not part of the leadership and even more so when bringing Staffan on board. He has 20 years of experience from capital markets of which I guess probably 15 or 16, 17 of these years are within M&A corporate finance. So I think that bringing Staffan on board makes it even more, I mean, it even improves the M&A team. But still, the M&A team is run by our head of legal and head of M&A, Hanna, with her team members. So that is kind of... That is kind of... That is kind of my answer to that. I think we will be at the same level in M&A capacity or even better with staff on board.

Perfect. Got it. That was all from my side. Thank you so much.

Thanks. As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad.

seems to be no more questions for today so thank you everyone for listening and have a nice day