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Good morning, everyone. This is Magnus Dalhammar, Head of Investor Relations at Investor. Welcome, everyone, to this conference call, where we will go through our interim report for January to June 2018. As always, we will start with our CEO, Johan Forssell, followed by CFO Helena Saxon, and after that, we will open up for Q&A. With that, please, over to you, Johan.
Thank you, Magnus. Welcome everybody to this conference call. I will start on slide number two. During the second quarter, as you have seen, our adjusted net asset value reached a record level of SEK 394 billion. Adjusted for dividend, that's an increase of 5.3%. The listed core investment was up just about 4%, but the strongest performance came from our unlisted assets, with Patricia Industries estimated market values up close to 9% and EQT generating a value change in 9% in constant currency. This performance has not been reflected in the share price performance as we have seen a widening of the discount. Moving over to the slide number three. Our activity has remained high during the first part of the year. Of course, we are following the spinoff from Atlas Copco. We now have our 12th listed core investment in Epiroc.
We have now acquired two new subsidiaries with Piab and Sarnova. I'm very pleased to see that they both show strong organic growth in the quarter, with Piab growing organically by 10% and Sarnova by 8%. Overall, the operational performance was good in this quarter, with Mölnlycke growing its operating profit by 10% in Euro terms. If you look on the major subsidiaries, the organic growth was 6% and the profit grew by 9%. If we exclude Laborie, as its reported figures are not currently reflecting the underlying performance due to the large cost related to the public bid in the U.S. for Cogentix Medical and the big restructuring in Europe, the operating profits for the remaining companies on aggregate actually grew 18% in the quarter. That was driven by strong operational performance, but also helped by a weaker Swedish krona.
Finally, the balance sheet remains strong with a leverage of 5.3%. Despite the fact that we have invested SEK 11 billion during the first half of the year, we have also had a strong cash flow with SEK 2.6 billion from Mölnlycke and SEK 1.7 billion in mandatory redemption from Atlas Copco. Also a good dividend from our listed core investment. Moving to the next slide, Piab. We are very pleased to have acquired Piab. This is a high-quality company in a very attractive niche. It is a company with a strong management team and corporate culture. It provides very important products, critical products in this market, and they represent a very small part of the cost for the customer. Of course, the combination of that is very attractive. We see significant growth opportunity driven by the trend towards increased automation. The company has a strong market position.
Importantly, the company also has a large share of recurring revenues. We are talking about roughly 35%-40% of revenues. Equally important, the company is capital light. The CapEx to sales is only about 1%. The company also has a low working capital. Of course, we all know that business cycle goes up and down, but this is a company with a significant part of recurring revenues and a capital-light business model. Moving down to the next slide, you see the performance in the quarter. As I mentioned before, the organic growth was 10%. The profit margin was 26%. That was impacted by change product mix, but also inventory step-up related to the two acquisitions, SAS Automation and FEBA. They are now launching a new line for grippers for collaborative robots. They are working on integrating the two acquisitions.
All in all, a good start for Piab. Moving down over to Mölnlycke. The organic growth was 3% in the quarter, with wound care growing faster at 4%, while surgical grew 2%. Looking on the geographic regions, we can see that the U.S. grew slightly, but the emerging markets remained the key growth drivers. In the quarter, the growth was about roughly 15%-20%. In this quarter, it was mainly driven by Asia and Brazil, while the Middle East was more or less flat in this quarter. The profit margin increased, as you have seen, driven by a higher gross margin and also cost efficiency. The gross margin was supported by a mix of more wound care versus surgical. We make more money on the wound care side, as well as a positive mix within wound care.
Due to the strong profits and the strong cash flow, the company made a EUR 250 million distribution, or about SEK 2.6 billion. Finally, the company announced acquisition of a German company called SastoMed. This is not a large company, but we believe it will be important in the total offering. The offer is basically a hemoglobin spray that increases the oxygen in the wound, leading to quicker healing. The company is positioning more and more into also improving the healing effect with this acquisition. Moving down to Permobil. Bengt Thorsson has been appointed the new CEO after Jon Sintorn. He will start in September. He is currently president of the EMEA region at Dometic, but prior to that, he has spent 27 years in Scania. Permobil had good development in the quarter with an organic growth of 5%.
All business areas and geographies contributed to this growth. Quite an even distribution in this quarter. We also see somewhat improved margins, that was driven by the higher gross margin. Moving down to Sarnova, our second acquisition this year. They had a strong start with an organic growth of 8% in constant currency. We saw good growth in both business areas, acute care and emergency preparedness. Profit growth exceeded sales growth in the quarter. They are continuing to expand the Curaplex private label products and custom kits. That's when you make kits, especially for the emergency preparedness business. There are a number of initiatives going on to really make sure we get the good growth going forward and of course also efficiency.
Investment in Salesforce, couple of new products on the way out, warehouse optimization, the digital part of the business. Moving to BraunAbility. Here it was a very strong quarter, as you can see, with an organic sales growth of 22%. The growth was mainly driven by the consumer segment. Within the commercial segment, lifts performed well, while the taxi business is still weak. We saw a strong profit margin expansion. I think profit was actually up more than 80% in the quarter. The reason for that is, of course, a combination of leverage on the rapid sales, also that we are now seeing more efficiency in our factory. Moving down to Laborie. The picture to the right does not look that nice, that is related to the fact that we are not adjusting, as you know, for extraordinary cost.
We are putting it all in. If I start with the top line, the organic sales growth was 11% in constant currency. Here I should say that this growth is boosted by shipments that were delayed in the first quarter and shipped in the second quarter. You can say that this organic growth is above, call it, normal level. The growth was, however, strong in the urology business. When it comes to the profitability, it was impacted by this restructuring in Europe. We are restructuring the European operation and significant expenses related to the public bid in the U.S. for Cogentix Medical. This was a company on the New York Stock Exchange, quite a substantial cost for that. We expect a more normal profitability level in the second half of this year. Moving over to Aleris. Growth was 3% during the quarter.
Profitability improved in care, slightly lower margins in healthcare. Healthcare was weaker due to investments in the digital platform, Doktor24, the restructuring initiatives that we are taking in the business. There will be new contracts within Stockholm Radiology at lower prices starting in the first quarter next year. This makes it even more important with continuous focus on operational improvement and restructuring initiatives to sustainably improve performance. That is our top priority and focus in the company at the moment. Moving over to 3 Scandinavia. The subscription-based growth in the quarter. The service revenue declined by 2%, that was mainly reflecting lower revenue due to the Danish VAT ruling that we have discussed before. If I adjust that, the service revenue would have been more or less flat. The profit margin or the EBITDA, I should say, improved if you look in our quarterly report.
That is actually boosted by IFRS 15, where we capitalize certain costs, or we have to capitalize certain costs. That is why we show you that the underlying profitability adjusted for IFRS was actually down 8%. That decline was partly driven by this Danish VAT ruling. You can say that about half of that decline is related to that. All in all, apples to apples, it is a rather flat quarter. Moving down to EQT, you see very strong performance with a value change of 9% in the quarter. This quarter, we had a negative cash flow, and that is mainly due to the fact that we have drawdowns from previous acquisitions, and they have made a number of exits. Some of these exits, we have not yet received the money, so it is a little bit of a timing question.
The underlying performance is very strong, and the cash flow guidance we have given to you before over the longer period, of course, remains. The fact that we have invested more money into EQT and the fact that the value change was so strong means that we now have almost SEK 20 billion on our balance sheet in EQT, SEK 19.4 billion. The strategic priorities moving to my left side remains the same. If I should do one caveat here, it would be that in the near term, we will focus on driving operational improvements. Focus will be on really make sure we deliver in our companies. Over the medium term our strong cash flow generation, both on the listed and on the unlisted side, will give us good opportunity to continue to make investments and give a good dividend to our shareholders.
For the next coming quarters, we will have a strong focus on make sure we really deliver on our plans. With that, I hand over to Helena.
Thank you, Johan. Moving over to page 16, financial highlights. Adjusted net asset value reached SEK 394 billion at the end of Q2, an increase of 5%. On the next page, looking at listed core investments representing some 70% of total adjusted assets, we see that overall total shareholder return was 4.2% in the quarter compared to SIXRX 4.6%. The biggest contributors in the quarter were Sobi and Ericsson with total shareholder returns of around 30%, while Electrolux weighed on performance in the quarter. On June 18, it was the first day of trading for Epiroc, and we now have 12 listed core investments. Moving to the next page, looking at Patricia Industries, we see that estimated market values developed well in the quarter and that Mölnlycke was the main value driver. We also see in this graph that Mölnlycke distributed SEK 2.6 billion to Patricia.
Permobil and BraunAbility also contributed positively to the estimated market values, while Aleris value decreased in the quarter. Patricia also added two new subsidiaries in the quarter, as Johan has already gone through, and used cash to pay for it. On the next page, major drivers of the estimated market values in Q2. Going into the specific companies, we can see that Mölnlycke's value increase of SEK 6.4 billion was driven by multiples and profits as well as cash flow and some currency. Permobil's market value was up SEK 0.7 billion, and the increase was generated by higher profits, and the company also benefited from multiple expansion. BraunAbility's estimated market value was up SEK 0.6 billion, driven by significantly higher profits, strong cash flow, and was also helped by currency while multiples contracted. Aleris estimated market value decreased in the quarter due to multiple contractions and slightly lower profits.
On the next page, financial investments, we can see that the value of the financial investment portfolio is currently SEK 8 billion, an increase of 6% in the quarter, supported by currency. Here, our strategic intent remains to gradually decrease the portfolio. On my last slide, you can see that leverage was 5.3% at the end of the quarter. Net debt amounted to approximately SEK 20 billion, and gross cash was almost SEK 13 billion at the end of the quarter. The average maturity of our debt portfolio remains long at 9.3 years. That concludes the presentation. Thanks for your attention.
Thank you, Helena and Johan. We will now open up for questions, please.
Thank you. Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad and you will enter a queue. We have a question from Magnus Råman from Handelsbanken. Please go ahead, your line is now open.
Thank you. This is Magnus Råman, Handelsbanken. On Mölnlycke and the acquisition of SastoMed, you mentioned in the presentation that it's not a large acquisition. Can you give any leads to the financials here? Then impact on Mölnlycke's numbers, please?
What I can say is that they are still in a very early phase of the development. It will take time before it make any meaningful contribution to the sales figures. I cannot give you the figures, but it is very small. It's more that what you do is that you put this spray on. Then you actually put our wound dressing over that. It's a very good complementary business because we can tack it in with our Salesforce. It's directed to the same customers that we have today. It's more of a broadening the total offering, being one of the many parts that we are trying to do to accelerate the long-term growth. In the short term, if you read the year, it will not be material.
Right. It's predominantly sales synergies rather than cost synergies that you look for in this acquisition, I guess.
That's correct.
Just for this Granulox product, the hemoglobin spray, I guess it's available today from the company in 24 countries. Is there a major expansion that you see there when you look at the footprint of your sales organization for Mölnlycke?
When our companies acquire these smaller companies, there are normally two parts that we want to tackle. First is to use the sales force for the same customers. That's an easy synergies, most of you know that I'm very skeptical to synergies because they are normally tricky to get. If you can do that, normally you can actually get good synergies because it's a very efficient way of selling more. The other, which is more medium to long term, is that we always try to expand into new geographical areas. In Mölnlycke's case, of course, there are a couple of regions in what I normally refer to as emerging markets. Of course, in these markets, we also have sales reps.
From a timing point of view, it will actually be a question for the management of Mölnlycke to decide where to pick the first effort, so to speak. Where do you see the easiest wins, and then gradually go from that? That's more of an operational question, that I should not decide upon or comment on.
All right. That was clear. On total financial performance in Mölnlycke in the quarter, you mentioned 8% EBITDA growth as a positive, I guess it's based on easy comps. EBITDA growth in Q2 2017 was negative 9%. In terms of if we look at comparing to Q2 2016, it's actually flat earnings, more or less. Just in that regard, are you satisfied with Mölnlycke's current financial performance or its margins, or do you want to see more?
I would never say that I'm satisfied with any financial figures because that could be the start of the end, so to speak. You always need to drive for improvements. What I can say is that I am satisfied with all the efforts that the company now is driving, both to drive sales, a number of important products that we have discussed before, like Mepilex Flex that's being launched, efficiency improvements that are taking place. If you look on the operating profit, whether it's 8% on EBITDA or 10% on EBITA level, of course, I believe that that is a good growth in the operating profit. You say that there was an easier comparison, but then you can, of course, look on the total level. We have an EBITDA margin of 30% and an EBITA margin of 28%. Of course, that's at a good level.
I would say that the key for value creation for us is not to squeeze one or more % on the margin going forward, but rather to make sure that we get a good organic growth. Having said that, of course, as you have seen, and I tried to explain it, the margin is impacted not only by efficiency improvements, but also by the mix of the products, because there are quite a big difference between a couple of the products in terms of profitability. There are a lot of moving parts, but I think the management are doing a good job at the moment.
Okay. You mentioned here that you will focus on performance in existing holdings. Should we expect that you then do not plan to make any new investments in the next couple of quarters?
I would never say that. Of course, we are here to make money, so if there are opportunities popping up, we will of course take a serious look at it, and we will always try to use opportunities if they arise. More generally on your question, yes. I think we have made two new, or we have acquired two new subsidiaries, and it's important to get the arms around, deliver on the plans we have for those. Also in the other companies, we need to work hard on Aleris, as I said. We need to work hard to make sure we get good growth in Mölnlycke and position the company well for the future. In the next couple of quarters, more focus on really driving efficiency and performance in the companies. We are always open to find good idea or good opportunities.
Yeah, sure. You also mentioned that you have a low gearing now at the low end of the range, and perhaps also some cash flow coming from EQT in the coming quarters for even better cash positions. Just looking a bit ahead then for new investments, should we expect more of the same? A focus on unlisted investments, or do you see potential in the listed market? Perhaps you can give us a feeling of your view of valuations in the listed versus the unlisted markets. If we look at the Sarnova acquisition, you paid trailing EBITDA of 14 times. Is this valuation levels that you're prepared to pay for the right targets also going forward?
I think that, I have said that before, that the split between the unlisted part and the listed part is impossible to give you an answer, because it will depend on where we find the value opportunities. It is for sure so that when we buy companies on the unlisted side, like with Piab and Sarnova, those are two good examples what we look for. Two companies where we see good opportunities for growth going forward, companies with good profitability, and especially good cash flow in relation to earnings. That will give us ample opportunities to create value over time, and we are willing to pay for these high-quality companies in attractive niches. They both have very strong market position in these niches that they operate in.
On the listed side, you know that if you go back a couple of years, we invested quite a lot in companies like ABB and Atlas Copco and Ericsson and so forth. Over the last one and a half, two years, the only investments we have made is that we have invested SEK 3.3 billion in Ericsson at SEK 60 per share. It will depend. In Ericsson, we saw good opportunity over the last time. In this quarter, we have not invested. On the listed side, I've said it before, frankly, it depends on what happens on the stock market, I have no idea.
All right, sir. I love that you mentioned the target or the price that you paid for the Ericsson shares. Thank you for the replies.
Thanks.
The next question comes from the line of Marie Schreyer from Nordea. Please go ahead. Your line is now open.
Hi, and thank you. We got follow-up questions on Mölnlycke. I wonder if you could be a bit more explicit on the current condition. What is the growth in the U.S. and in Europe? Also how big share is emerging markets of the total share?
If I start on the latter one, the emerging market is still a rather small part of the business if you compare with Europe and the U.S. If you look on the growth, that in growth in absolute amount, it's starting to contribute meaningful in a good way due to the rapid growth. It's still a rather small part, but Asia is becoming larger, and in Latin America, it's mainly Brazil. Then there are a couple of important market in the Middle East. When it comes to Europe and the U.S., I can say that U.S. grew slightly in the quarter, as we said in the report. Europe was a little bit weaker, and the weakest market that we see in Europe is the U.K.
In weak, then you have it's a drop in growth. It's a negative growth development then, I guess.
Europe was the weakest region, and within Europe, the U.K. was the weakest.
Okay, super. Also, you mentioned that the strong cash flow has been contributed mainly more partly by SEK 1.7 billion in mandatory redemption from Atlas Copco. Could you explain what that is?
You can see it as an extra distribution from Atlas Copco. The company had such a strong balance sheet. In addition to the ordinary dividend, they gave roughly the similar size in an extra distribution, and they do it through a mandatory redemption, because for some investors, that can be a little bit more tax efficient, and that's the way they have done it before. It's an extra distribution.
Okay, thank you. Also one last question on Sarnova. I wonder, that's the only company that you are distributing instead of a manufacturer. Could you tell us about a bit more on your plans going forward for that company?
Yeah. I would say it's a specialty distributor because they are extremely strong in their niches, and it's within, for example, in acute care, we are talking about respiratory being a big part, and in emergency preparedness is basically selling to ambulances and fire departments, et cetera. They have very strong position in those niches. In addition to being a distributor, they also have, as we say, their own private label, Curaplex, and they are also trying to add even more value by producing what we call kits, basically doing a kit of different products that fits for particular circumstances when you need to have a couple of items. In addition to that, for this company, training of the customer is a big part of the total offering.
You can say, these are nice words, but I can tell you, if we look on the gross margin of Sarnova and compare to the gross margin of a normal distributor, the gross margin is much higher. You can see also on the profit margin and EBITDA level of about 12%, that that is much higher than a normal distributor. That's a little bit what kind of a business is it. For us now, the focus will be to make sure we can use this strong platform, really make sure we deliver on the plans within the current key segments. Of course, we will also look for tack on acquisitions and see if there are adjacencies that could be attractive to grow the business even further.
Okay. Thank you very much for the answers.
Thank you.
The next question comes from the line of Joachim Gunell from DNB Markets. Please go ahead. Your line is open.
Thank you. Just two follow-up questions on Mölnlycke here. You have previously mentioned in previous quarters that we have launched new product launches in, for instance, Mepilex Flex in the wound care segment, et cetera. You also mentioned in this quarter that we have a positive mix effect in wound care, driving the gross margin as well. Can you tell us a little bit more about how much new product launches have contributed to the growth within this quarter?
We should say that it has had a positive contribution, but I will not say it's that particular product that have been the major driver to one extent. If I would look on the big figures, I would rather say that emerging market has been a key driver to the growth figures. If you look on some of the products like Mepilex Flex, it has been launched in certain regions but not in all regions, and during the second half of the year, it will be launched in more markets. There is more to come on that.
All right, Johan. Also regarding the emerging markets, is there any general theme there where your margin levels, are they in line with the developed markets for Mölnlycke, or are they slightly below?
In general, the margins are good in those markets. I will not go into the details about it, but they are good margins. It's not very low margins in those regions.
That's clear. Thank you. Lastly, having seen a quite high activity level here in the first half of 2018 to increase your net assets value, both in terms of the active ownership and capital allocations, we've seen your adjusted NAV perform basically in line here with the benchmark index. You have already mentioned some of the holdings in the unlisted space, which will receive some extra focus here to improve the underlying performance. In the listed space, what strategic priorities and which holdings will receive the most focus, or is there anything there you want to highlight?
I will actually be a little bit cautious on the listed side. The reason is that we have the SHB and Husqvarna out this morning, we will have every company out this week except AstraZeneca and Aspect that will come a little bit later. I will not comment on those.
Right. I hope you have a very nice summer.
Thank you.
The next question comes from the line of Andreas Lindberg from DNB. Please go ahead. Your line is now open.
Yes, I have a few wider questions. In the CEO comments, you say that we might be at the end of a cycle of a very strong economy, konjunkturcykel as you say in Swedish. What do you think about that?
I think from an overall level, if we look on the business right now, most regions are doing well. The level of activity around the world is generally good. Of course, it differs between different regions, but in general, we have a good demand level. We are seeing that some leading indicators, if you take, for example, Ifo index in Germany, those kind of leading indicators for the business activity, they have come down, though from very high levels. I think we have a strong activity. We will see how long it lasts, and that will, of course, partly be related to what will happen on the discussions between different tariffs around the world, et cetera, that could have an implication on the overall business cycle in the world.
As I mentioned in my CEO letter, I believe that the biggest risks that we are facing right now is that we will have an escalating trade war around the world. That will not be good for the business cycle. Let's hope that will not take place, and let's hope the business will remain at a good level. Other than that, we have already started to see normalizing interest rates in the U.S. In Europe and especially here in Sweden, of course, that remains.
That's the indicators. How far away do you think we are of some kind of turning point? Are we there now, or do you see it in the future?
Actually, we are not speculating on that. What we are trying to do is to make sure our company is prepared so they are ready if it happens, so they can adapt to different demand environments. That's why we always prioritize agility as a keyword.
How do you make them prepare?
It is of course different parts of the business. It could be that if you add, for example, you need to add employees, you can of course in some cases add temporary employees because then you're more flexible on the cost side. It's also about more long-term structural initiatives like growing the recurring business to growing the aftermarket because that will create stability in a downturn. It's both long-term structural actions and you can say more tactical short-term actions.
Okay. Thank you.
Of course, I should say also those differs a lot between different companies because we have companies in many different industries.
Yeah, of course. Thank you.
Thank you.
Just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad, and there will just be a brief pause while any other questions are being registered. As there are no further questions, I hand back to you, speaker.
Okay, if we don't have any additional questions, thank you for listening in, and if you come to think of anything else, please let us know. Otherwise, we wish you all a great summer, and we will be back with the Q3 numbers in October. Thanks, everyone.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.