Investor AB (publ)

Annual Accounts 2021 presentation. We are glad that you are joining us here today and you can join us over the phone or over the web on our website, InvestorAB.com. We will soon hear our CEO, Johan Forssell, and CFO, Helena Saxon, present the annual accounts. And after that, we will have a Q&A session And you can post your questions then over the phone, as usual, or also in the chat on the web. Warm welcome. And by that, I hand over to you, Johan.

Thank you, Vivica, and welcome to this quarterly result presentation. So if we start on the first page, I think we – Despite all the challenges that we had during the past year, we did in fact see a gradual improvement of the global economy during the year. And of course, that in combination with the low interest rate environment also supported the stock market. And the strong equity market, of course, benefited investors. But even adjusting for that, I think it's fair to say that 2021 was a very strong year for investors. During the year, our net asset value grew by more than 40%, and our total share of the return was up 55%, and that can be compared with the stock market in Sweden being up 39%. And if we look on the corresponding figure for the fourth quarter, our net asset value was up 12%, and our total share of the return was up 21%, and that can be compared with the stock market being up 12%. Importantly, I think that overall that our companies are delivering good operational performance. They have been able to really manage the challenges out there, not at least the pandemic and the supply chain related challenges. On the listed companies, a number of the companies have made important strategic acquisitions and investments during the year. And within Patricia, A number of the companies have made sizable add-on acquisition, and I will come back to that later on. The investment in IKT developed strongly during the year and was up more than 100%, and the cash flow at 4.8 billion was the second best in the history. We sharpen our climate targets, and we are continuously putting high effort in sustainability, putting in our value creation plans, And especially, of course, an extra focus is on the energy transitions that affect a number of our companies. Due to the strong performance during the year and also the strong financial position that we have with the leverage of less than 2%, the board decided to increase the dividend per share from 350 to 4 kronor, which is an increase of 14%. So a few words about the listed companies. The total charity return was up 44% in 2021, and it was up 11% in the fourth quarter. The priorities areas for these companies are sustainability, including the energy transition, innovation, technology development, and then talent management and succession planning. And we are spending a lot of time, of course, on making sure we have the right people in the boards, in the management teams, in our companies. I mentioned that there has been a number of important acquisitions in the listed companies. A few examples are Ericsson's acquisition of Vonage, expanding the business into the enterprise segment. We had Electrolux Professional. that did an important acquisition in the U.S. And we also had Husqvarna that made the acquisition on orbit irrigation. And together with the Gardena division, they will be a clear leader in that area globally. We had a bid on Subic that was withdrawn. We supported the bid in line with the board of Subic. But the fact is that the bidder came up to 87% and not 90%. So it did not go through. And now our focus is just to work close with the company and really make sure that we maximize the long-term value creation of this fine company. We should not forget that Suba has a very strong position within rare diseases and we will be fully behind to develop the company. During the quarter, we invested 1 billion in Ericsson, and we basically took an opportunity after the announcement of the Vonage acquisition. The stock took a hit, and we saw good value and invested in Ericsson. Moving then over to Patricia, the total return was 3% during the year. It was down 1% in the fourth quarter, and Helena will come back to that later on. Atlas Antibody became a new subsidiary for us in connection with the acquisition of Evitria. And it's great to see that the start has been excellent, and Evitria that was acquired has delivered a very good performance after the acquisition. During the year, we divested Grand Hotel. and several of the subsidiaries made important add-on acquisitions that I will comment a little bit on the next page. We have advanced instruments that you have seen since we acquired the company roughly a year ago, have actually performed extremely well ahead of our expectations when we made the acquisition. They recently acquired Selentim, which has a very strong leading position in the niche of cell line development. And this company has had a very strong quarter. And the beauty here is that they boost the old advanced instrument with the osmolality testing instruments and Solentim. They have a significant exposure to the biopharma industry. So we see good opportunities to sell these to the same customers. In addition, we see significant potential to develop on the R&D side even stronger products for the future. Atlas Antibody, I mentioned the acquisition of Evitra, has built a very strong position within antibodies. Sarnova acquired Allied 100, which is active within AEDs or heart starters. Bronability, QIQ Strength, they have a very strong market share when it comes to securement of wheelchairs in different kind of vehicles. In total, Patricia has invested $6 billion in add-on acquisitions. And there are, of course, a couple of the other companies that have also made acquisitions, smaller ones during the year. In the fourth quarter, we announced that Piab, for example, acquired Airbest in China. And with that acquisition, they will significantly improve the market position in the Chinese market. If we then move to the operational performance of the company during the quarter, the organic sales for the subsidiaries was down 10% and the profit was down 23%. If we exclude Mönlycke that I will come back to, the major subsidiaries had a very good development with an organic sales growth of 8% and a profit growth of 24%. But saying a few words about Mönlycke, I think it's fair to say that the development in the quarter was in line with our expectations. and also in line with what we tried to communicate in connection with the third quarter report. We have a situation where on the one hand wound care, which represents a little bit more than 50% of revenues in the quarter, they continue to develop really well with an organic growth of 8% and a strong profitability. On the other hand, we have more challenges during the quarter in surgical that was down 48%. But that figure is heavily distorted by the PPE contracts that we have talked about many times. And as you can see on the chart, the PPE contracts really peaked in the fourth quarter of 2020. And in this quarter, it was basically zero. That loss explains most of the sales loss during the quarter compared to last year. The other challenge was gloves. And that is related to the fact that we previously had to close our plants in Malaysia that produces these gloves. And that has also affected the fourth quarter of last year. This is a highly profitable product, so this also had a significant impact on the profitability in the quarter. If we then look forward, we can split the different parts, I think, and comment one by one. Wound care I mentioned, good development, and we hope and expect that it will continue to develop well in the future. When it comes to gloves, The plant is now up and running at 100 percent capacity, but there are still transportation challenges, especially when it comes to transporting these gloves from the plant in Malaysia to the important market in the U.S. So you have different kind of supply chain challenges in ports and in transportation and so forth. But overall, we expect now that gloves gradually during the year will improve. And there is a very strong Backlog, a strong demand for the products, and we have very strong products in this area. So hopefully this will gradually improve during the year. When it comes to the PPE contract, as I mentioned, the peak was clearly in the fourth quarter of 2020. We also had some PPEs in the first quarter of 2021. So that will affect the next quarter, but not to the same extent as in the fourth quarter. And then there is a very little small part remaining in the second quarter of 2021. After that, it has been zero. So gradually, this year-over-year effect should diminish. Saying then a few words about the other subsidiaries, Atlas Antibodies had a very good organic growth of 19%. Evitra grew faster than the old Atlas Antibodies. But bulls were growing in the quarter. And you can see the profitability was at a very high level and improved slightly compared to last year. Advanced Instruments had a very strong development with an organic growth of 18%. The acquisition that I mentioned previously, Solentim, they are, of course, not part of the organic growth, but they grow significantly faster than the 18%. The underlying profit margin is down about 3% year over year, and the main reason is that Solentim has a lower margin than the old advanced instruments. Roughly on an EBITDA level, you can say that the old advanced instruments were running at call it the 50 margin, while Solentim is running at roughly 30% margin. Laboree, strong development, organic growth of 14%. And as you can see, also very sharp profitability improvement. Here we did see good growth in all areas, both urology, GI, and also maternal and child business. Bronability continued to recover and grew by 14% in the quarter. Here we did see that the margin was actually slightly below last year. and that is mainly related to supply chain challenges that is affecting vulnerability. This was partly mitigated by price increases. PIA grew 8% in the quarter, and the profitability was down, as you can see, but that is mainly impacted by a write-down of a discontinued product line and the transaction cost related to the Chinese acquisition Airbest that I mentioned previously. The underlying development in PF is strong. Permobil grew 6% organically in the quarter. And in this quarter, it was mainly driven by Europe and the U.S. while Asia was flat. Here we did see that the margin was down. In Permobil, this was impacted by investment in a strategic product development project that the company is driving. And that was the key reason for the margin fall. But even if we exclude that part, the margin was actually down somewhat year over year. And that is mainly related to increased cost for supply and logistic challenges. Sarnova was flat in the quarter. And there are two key reasons for that. Number one, emergency preparedness business was very strong in the fourth quarter 2020 due to COVID-19. That was not repeated to the same level this year. And secondly, in this quarter, the AAD or hard starter business had significant supply chain challenges since they actually have chips in them. So that is the reason the revenue cycle management business and the acute business boost grows in the quarter. And you can see the profitability is solid. So Sarnova is also continuing to develop well underlying. IKT, of course, fantastic return, up more than 100% during the year and 30% in the quarter. Of course, to a large extent, driven by the strong share price increase in the listed company, equity AB. But as you can see, also the funds developed very strong returns during the year, up 70%. 4.8 billion in cash flow to investors, as I mentioned before, that's the second highest ever. And there has been a very high fund activity within equity during the year. And during the year, they made two strategic acquisitions. The biggest one was Exeter within the real estate market, adding about 9 billion euro to asset under management. And then they also did an acquisition in Europe, Life Sciences Partner, which is a healthcare venture cap business with about 2 billion euro asset under management. So looking forward, I think that we are well positioned to continue to deliver good returns. But if we try to frame it a little bit, of course, we know that the tailwind that we had in 21 with an improved economy, low interest rates, that is, of course, fading through now into the start of the year. But we are also seeing, of course, a number of challenges and uncertainties, not the least the spiraling inflation that we have seen. And it's very clear that Fed now has indicated that they will increase the interest rates. In addition to that, the supply chain challenges remain, and they will remain in the first quarter. Hopefully, they will then gradually be easing out. But let's see how it develops. But we can see that it will continue to be supply chain challenges in the first quarter. And then we are, in addition to that, of course, also seeing the geopolitical tensions increasing. We have talked about China and the U.S. before. And then, of course, we have the situation around Ukraine. So all in all – It is not unlikely, I think, that we will see some increased volatility entering 2022. But for us at Investor, I think we have a strong position. We have a portfolio of very strong companies in attractive markets with strong market shares. And we have a very strong financial position at Investor. So if there will be volatility here, there will also be opportunities. And I think that we are ready to act. Our strategy remains firm. We will have the focus on our prioritized areas that I talked about before, technology development, sustainability, people questions to mention the key areas. And then even though we have a clear strategy and clear focus areas, I think it's important to highlight that we understand that we need to work very hard every quarter on efficiency because, of course, the long term consists of many short terms. So execution, not the least with all the supply chain challenges, will be top on the mind during the year. And with that, I hand over to Helena.

Thank you, Johan. Okay, so let's first have a look at the adjusted net asset value. And this graph shows the development for the last five years. And we can see that the year ended at 761 billion in adjusted net asset value. And we can also see that the average annual growth with dividend added back for this five-year period amounts to 20%. And looking at the total return by business area, we can also see that it's quite a mixed picture. The smallest business area, EQT, delivered a total return of 30% in the fourth quarter, as much as 111% in the year, as Johan already mentioned. And the listed companies, which is two-thirds of the portfolio, had a strong year as well, with 11% in the quarter and 44% for the full year. While at the same time, Patricia had a tougher quarter, the value development minus 1%, and for the But here the total return was 3%. So looking a little closer at listed companies, we can see that the total amount of listed companies amounted to 515 billion at the end of the quarter. And while Q4 TSR was Just below 6 Rx, the return for the year, the total sharehold return of 44% beat 6 Rx of 39%. And of course, there was a mix of performances in that portfolio as well. And while the Ericsson and Saab share prices development was flat, we saw several companies, not the least Nasdaq, SEB, ABB, Atlas Copco and Epiroc performing over 50% or more in the year. And then going over to Patricia Industries and the sequential development of the estimated market values in the quarter. Well, we already said that here was more of a flat development, but still there were several companies values that developed well and increased. while Permobil and Mönlycke weighed on performance in this quarter. And on the next slide, we can see the major drivers. So Mönlycke's estimated market value declined by 2.2 billion in the quarter. This was due to lower multiples, lower earnings, partly mitigated by cash flow. And there was also a distribution in the quarter of 50 million euros to Patricia Industries. Hermobil's value declined 1.7 billion due to lower multiples and earnings. Laboree, on the other hand, was up half a billion due to higher earnings and currency effects that were also positive, but also here multiples contracted. And Vectura's value increased by 0.7 billion, and this was due to an increase of the value of the property portfolio. Our financial position at the end of the year was very strong and the leverage declined to below 2%. And on the next slide, I will show that we are also maintaining our financial flexibility. And I know you've seen these graphs before, but they are now updated with a six year. And you can see that the sources of cash flow are several or actually all business areas contribute to the cash flow. And together they delivered 122 billion for the last six years. And then you might wonder, what do we use this cash flow for? Well, half of it is distributed to shareholders through dividends. A third, almost a third, has been used to develop the Patricia portfolio. And during this period, six new subsidiaries have been acquired. We've also invested in the listed companies. And during this period, we've also reduced net debt by 6 billion. And leverage is down from in the beginning of the period to just below 2%, as I mentioned earlier, from 7% to 2%. As you know, our goal is to pay a steadily rising dividend and the investor board has decided based on an overall strong 2021 and our financial position to propose a dividend of four krona per share to the AGM in May. And this dividend will be paid out in two installments, three plus one. during the year May and November. So we will end on my favorite slide, which shows the average annual total return to shareholders. And you can see that in all these periods, we have managed to achieve our internal return requirement, but we have also managed to outperform six Rx, both in the short and the long term. And that concludes my part of the presentation.

And with that, I hand over to you, Vivica. Thank you. Thank you, Johan. And thank you, Helena. We will now move over to our Q&A session. I know we have a few questions that have come in over the chat on the web. But I thought we would start out with if we have any questions over the phone. And by that, I would like to hand over to our operator.

Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause while questions are answered. Our first question comes from Derek Lebertier with ABG. Please go ahead.

Yes, hello and good afternoon. I was wondering on the dividend decision, if you could just provide a bit more clarity on the background of the decision. I know that you strive to pay a steadily rising dividend, but this was actually the largest percentage increase in quite some time if we adjust for the sort of pandemic situation. cost lower dividend. So I'm just wondering, could you just sort of consider the factors of the cash flows related to dividends and transactions in the portfolio, how you view the investment pipeline, and obviously the low net gearing situation? Probably everything played in, but I think you only mentioned the leverage comment in the report. So any additional favour that would be helpful? Thank you.

I think that the reasoning in the board regarding the dividend level was made on a holistic view. We had a very strong year, and we believe that even though, as I mentioned, there are a lot of challenges and uncertainty out there, but I think that our companies are generally in good shape. We have a strong year behind us. And we have a very strong financial position, both when it comes to the leverage, but we also have a very strong gross cash position of about 24 billion. So all in all, the board concluded that this is the level that we believe is justified.

Got you. And then I was wondering on null luck, if you can say something about the margin outlook here that was down quite a bit in the quarter, considering all the factors with the increased raw materials prices and supply chain related issues, etc.? ?

I mean, you know that we don't give forecasts in areas that we don't know because we don't want to guess. But if I try to say a few words about what we do believe, what we see right now, and then, of course, what will happen in the coming months and the coming year is always difficult to predict. But I think it's fair to say that if you look on the things that really put the weight on the margin in the quarter – And starting with gloves, over the year, we clearly expect to see a clear improvement on the boost on the sales level and profitability on gloves. In the first quarter, there will remain challenges because there are still, even though the factory is up and running in Malaysia, there are still challenges to get it out to the customers. And sometimes you will have to take more expensive routes to reach the customers. But after that, from the second quarter and onwards, we expect to see clear improvements, of course, as long as the demand level stays firm. But there is a good backlog when it comes to gloves. If you take away the PPE business or the contract, the big PPE contracts within surgicals, And you look on the remaining parts of what we call the ORS business, clothes, drapes, trays, and so forth. I think it's fair to say that this business has been a little bit more than average or clearly more than average hit by the logistic challenges. And that is something that the management team is working on, working with efficiency, finding new solutions. and also in a number of cases actually working on the pricing to adjust for the increased cost levels we are seeing. So there are clear plans in place to address not only the top line, but also the profitability. So that is what we see, and the management is working on all these areas.

Okay, thank you, and that was really helpful. And just finally on that, on the surgical business adjusted for PPE, how did that grow in the quarter? Apologies if this is mentioned somewhere.

Yeah, no, it is not. But if you take the ORS business, excluding the PPE contracts, it was down slightly in the quarter year over year. If you look on the gloves year over year, it was down significantly compared to last year in terms of revenues.

Thank you. Yeah, that was all for me at this point.

Our next question comes from Joachim Gunner with B&B Markets. Please go ahead.

Thank you. Good afternoon. So to follow up on Derek's initial question, can the raised dividend now be seen slightly in the light of the fact that you asked later in the Q3 report made a slight nuance shift to the dividend policy? Because obviously this will be not volatile, but it will shift from year to year, your upstream cash flow generation. But I mean, you're still only paying like roughly 50% of received cash flows now. So can we expect more, call it a flexible dividend policy going forward that should follow the cash flow trajectory more?

You should not read that there is any connection with the slightly higher dividend increase this year. to the change we did in the wording of the dividend policy. The changed wording on the dividend policy was mainly related to the fact that we now more and more, as you know, we focus on the adjusted net asset value, while the previous dividend policy referred to book values. So that was the key reason for the change. So the increase of 14% this year was more related to holistic judgment that I mentioned earlier that the board did based on our financial position and the overall performance.

Worth the shock. Well, okay, so now that's fair. And with regards to... I mean, obviously very well capitalized and have a solid financial position here. But in regards to the withdrawn bid for Sobi, does this in any way have any implications for your capital allocation framework or investment priorities going into this year?

Sorry, I didn't hear. You mean that the situation that the fact that Sobi was not divested, if that will affect our investments?

Yes.

No, I don't think it will materially affect that. Of course, if Sobe would have been divested over a number of years, we would have needed to step up the investment pace. But given the strong financial position we have with the gross cash of 24 billion and the leverage below 2 percent, we have ample of flexibility to act on the opportunities we see, both in Patricia listed and also opportunities within EQT.

Understood. And the final one for me, with regards to the fact that you bought Ericsson shares here in Q4, can you just talk a bit about the investment process for those decisions? I mean, looking at the historical levels where you have built your positions in core holdings, proven to be in a quite, call it, lucrative timing. So, I mean, how does that, call it, framework work? And also with regards to that, how does, I mean, how do you perceive intrinsic value of your holding shift?

Thank you. If you take, of course, we have invested in a number of companies over the last couple of years, and the we have actually been able to generate a very good return, well, about 20% on those investments. But if you take Ericsson as one example, where we have increased our ownership from 5% to 8% now over some five, six, seven years, the initial purchases we did, we did at very attractive levels, I don't have the exact figures, but it was probably in the 50-55 kronor per share a number of years back. Then the second phase was actually in March or so 2020, when we had a big setback in connection with the outburst of corona. And at that time, we probably bought at something like 65-70 kronor. And in this case, we have acquired shares for slightly below 94 kronor per share. And in this case, we did it after the announcement of the Vonage acquisition. The stock took a hit and we saw an opportunity and we saw good value. So we took it. And the reason why we see good value is that we think that management has done a good job over a number of years to improve the market position. taking a lead on 5G, also improving profitability, and now with the latest acquisition also expanding into new growth areas within the enterprise segment. So we basically saw good value, and we can be rather flexible to act on that.

Thank you.

That's all for me. Our next question comes from Oskar Lindström with Danske Bank. Please go ahead.

Hi. Thank you. A couple of questions for me. The first one is touching on, I think, what the previous two questions were about as well, and that's rising input costs and logistics troubles and costs that were evident in Q4. And following up on that, I mean, To what extent and when do you expect to compensate or have compensated for this through price increases? And in what companies do you see this taking longer time to achieve that compensation? And I'm talking about your Patricia companies.

Yeah, it of course depends on both the lengths of the contracts in and out, and it depends on the customers and the competitive situation, how much you can act when it comes to pricing. But I think it's fair to say that all our companies are working on this at the moment. And in some cases, of course, it's easier to raise prices, and in some cases it's more tough. In some cases, you might have stronger, bigger buyers, and it might also be the fact that you have longer time horizon on existing contracts. And if you have that, of course, you will have to eat the cost increases in the short term while it will take some time to get the price increases filtered through. In other cases, you can act very quickly and you can raise prices to do the compensation for it. So it differs between companies based on these two aspects. But I do not want to comment on the pricing initiatives in the individual companies. But price management is high on our agenda and the company's agendas.

Just a follow-up and see if – I mean, are we going to see that you and Q1 have raised prices so that there's sort of a – a couple of the companies in your portfolio where we'll see this sort of step change in pricing or price mix, if you will, in Q1 versus Q4?

For sure, there will be a number of our companies that will raise prices in the first quarter. But if I should guess how it will play out, I would rather say that supply chain challenges will for sure exist during the first quarter, and some of the price increases will not filter through as early as first quarter. So I think from a timing perspective, first quarter, we still need to work very hard on these issues, but gradually over the year, we should hopefully see an improvement when it comes to pricing out and the cost side.

All right. Thank you. A second question for me is on acquisitions. And you've signaled when we listened to you last year or end of last year that you were very interested in making acquisitions as the COVID pandemic was nearing its end and you have a greater ability to visit potential targets, et cetera. Has that interest in making acquisitions shifted in any way given what we've seen since then with more worries about higher interest rates, increased geopolitical risk? Has that shifted or impacted in any way your appetite for acquisitions?

Of course, we need to follow the macro environment and how that can affect the overall situation. But I would say basically no, because we have a very strong pipeline when it comes to the potential add-on acquisitions in our subsidiaries. And we have a continued strong pipeline, as I mentioned, in this quarter. We have executed on the Airbest acquisition and they have also executed just the other day a smaller company in lifting automation in France. We have a Permobil that have acquired Pantera with Emanuel wheelchairs, which are the world leader on light Emanuel wheelchairs. Those kind of opportunities, we have a rather big pipeline for many of our companies and also some larger ones. And we will continue to work. If we believe they work in attractive niches, that they are a leading player in these niches, or can strengthen the position of our companies, and that we can acquire the company at a reasonable price, then we will hit it.

All right. Thank you. Good to hear. Those were my questions.

As a reminder... If you do wish to ask a question, please press 01 on your telephone keypad. Our next question comes from Daniel Svärd with Svård Invest. Please go ahead.

Yes, I would like to congratulate you on a great year, and I only have one question. Can you count on a dividend increase of half a krona as the new normal for the years to come, or will you go back to raising the dividend by a quarter of a krona like in previous years. So there was a lost crown, so to say, during Corona in 2020. Is that related to this increase now, or is it the new normal this rise? Thank you.

Thank you, Daniel. And I cannot answer the question, because what will happen, of course, is that when we are here a year from now, the board will once again make a holistic view and determine what they believe is the right level on the dividend. Our policy is to have a steadily rising dividend over time. Exact how many percentage that corresponds to, that might vary over time. But I do believe that we have a strong underlying portfolio, both on the listed side and on the private side, that generate significant cash flow because normally we have capitalized or we actually have very capitalized companies. And that's, of course, is a strategic benefit that we have that should support our dividend policy. But exactly as we will have to see where we are in a year from now. Thank you. Thank you.

At this time, there's no further questions. I hand back over to our speakers.

Thank you. I know we have a few questions over the web, and Magnus, why don't you come and you read them out?

Thank you. Sorry. And the first one is from Samarth Agrawal of Citi. Thanks for taking my questions. Two for me. How much flexibility do you have to pass on input costs to customers if inflation and supply chain challenges persist? That one is already answered, I think. So there were several add-on investments with Patricia portfolio this year. You expect the same pace during 2022 or any step change or anything in that aspect?

I can only say that we have a good pipeline when it comes to potential add-on acquisitions. And then it is, as always, it takes two to tang and the price needs to be the right one. So it's actually impossible to give an answer on that one.

Thank you. No more questions? No. Okay. Thank you. By that, we would like to thank you for joining us here today. And we will report our Q1 results on the 21st of April. So see you then, if not before. Thank you so much.