Nolato AB (publ) (NOLAB) Earnings Call Transcript & Summary

Hello, and welcome to the Nolato AB Q4 Report 2020. [Operator Instructions] Today, I am pleased to present the Christer Wahlquist, CEO; and Per-Ola Holmstrom, CFO. Please begin your meeting.

Good afternoon, and welcome to the presentation of Nolato's Fourth quarter 2020. This is Christer Wahlquist talking. I suppose you all have the presentation in front of you. And I would like you to turn to Page 2. And on Page 2, we have a short introduction to the fourth quarter for the group. And in the fourth quarter, sales totaled to just below SEK 2.5 billion. And that is -- if we adjust that for currency and acquisition, it was a decrease of 2%. The GW Plastics acquisition was consolidated from the 1st of September, and the integration is proceeding according to plan. Our operating profit, EBITA rose to SEK 283 million in comparison to SEK 249 million for Q4 2019. That created a margin of 11.4%, and that's the strong margin for the group. During the fourth quarter, we had cash flow after investments of SEK 211 million. And it should be compared to the exceptional strong comparison in Q4 2019 of SEK 601 million. If you look on the graph on the right-hand side of the page, you see our development over the last 20 years. And during this period of time, we have been able to create a global solution provider, established on 3 continents, with the emphasis now on our latest acquisition, creating that position. If we turn to Page 3. Summarizing up 2020 as a total. This is our best year so far in our history. Our earnings per share was just above SEK 30 per share. We have a strong financial position after the acquisition of GW with net financial liabilities of SEK 298 million, creating an equity/asset ratio of 43%. The Board of Directors have proposed a dividend of SEK 16, and that is according to our policy, a little bit more than 50% of net profit, adding up to 53% of the profit. The Board also proposes a split of the share. So 1 Nolato share will turn into 10. If we then turn to Page 4, sort of creating the total group consisting of 3 business areas with strong synergies between them. And in the base of all 3 business areas, we have the same responsible business ethic, same kind of material technology and working as a solution-oriented development partner. And that creates a lot of synergies for the group. Jumping into Page 5 on the medical business area. The sales in the quarter was SEK 950 million. And during the 20-year period, we have been on a journey, a global expansion journey and an offering journey. And we have had a good growth year-by-year, both organic and inorganic growth in this business area. So it's been growing from rather small to a substantial part of the business. If we turn to Page 6. We are here highlighting our focused product areas within the medical. And it's 6 areas that we are mainly focusing on, drug delivery, in vitro diagnostics, endoscopy and general surgery, cardiology, continence care and pharma. During the pandemic, we have seen strong business within the in vitro diagnostic but somewhat slower in endoscopy and general surgery due to the postponed surgeries in these areas. The other areas has been less affected by the pandemic. If we turn to Page 7, jumping into the details of the Medical Solutions Business area. And during the fourth quarter, we have 52% increase in sales. But if we adjust that for currency and acquisitions, this was a 5% increase. We have had good integration of GW Plastic, and we see that it will result in significant market synergies over time due to the -- this being medical, everything takes a long time. We have seen high demands in segments such as diagnostics and respiratory aids, of course, increased as a result of the pandemic. On the other hand, we have seen weak demand in the surgical segment especially in the U.S. business as a result of the postponed operations due to the pandemic. The EBITA margin ended up at 11.8%. And it's high capacity utilization and favorable sales mix had a positive impact. But on the other hand, we have a dilutive effect from the acquired business affecting the margin negative. We are expanding production capacity in Switzerland, Hungary and Sweden. And as I mentioned, the sales was SEK 951 million in the quarter. And the operating profit was SEK 112 million. Turning to Page 8 and looking into the Medical -- or sorry, the Integrated Solutions Business area. Here, we have, over a period of time, expanded our business into new market segments very successfully, and we ended up in this quarter with sales of SEK 907 million. If we turn to Page 9. We see 2 parts to this business area. We have what we call consumer electronics, consisting of VHP, connected WiFi systems, wearables and mobile phones. Then the other part of the business area is electromagnetic shielding and thermal solutions. So it's a different type of shielding solutions for handling influences between different electronic components and handling heat distribution away from electronics. Please turn to Page 10. Jumping into details of Integrated Solution. During the fourth quarter, we saw a decrease of sales, adjusted for currency and acquisitions, of 10%. We have together with our customers made cost reductions in the supply chain. We have seen slightly lower VHP volumes during the quarter. And we expect this business area to exceed SEK 1 billion in sales of the first quarter 2021. For the EMC business, we saw solid sales and continued low mobile phone volumes. The margin ended up at 12.2% in comparison to a high comparison number of 13.4% for 2019, Q4. Last year was boosted by the VHP product mix and high capacity utilization within the mobile phones. So operating profit to EBITA was SEK 111 million during the quarter. If we then turn to Page 11, focusing on Industrial Solution. For the business area Industrial Solutions, we are on the technology and geographical expansion journey. And during this quarter, we saw sales of SEK 629 million. If we turn to Page 12. Industrial Solutions also have 2 parts to the business area. The larger portion is general industry, which is components and systems for large industrial players. And the second part is automotive where we do system solutions for mainly the Scandinavian automotive industry, both the large vehicles, such as trucks and buses, but also personal vehicles. Turning to Page 13. During the fourth quarter for Industrial Solutions, we saw an increase of 4%, if we adjust the sales for currency and acquisition. We saw an increased demand both in general industry and the automotive sector. The margin ended up at 9.9% in comparison to 8.2% in Q4 2019. And that is due to high volumes and greater efficiency within our factories. So the sales for the quarter ended up at SEK 629 million, with an operating profit of SEK 62 million, creating the 9.9% EBITA margin.

Good afternoon, Per-Ola Holmstrom speaking. On Page 14, some group financial highlights. You see the quarterly numbers in the left column, and then you have some full year numbers on the right-hand side. The quarter ended up with almost SEK 2.5 billion in sales and operating profit EBITA of SEK 283 million, which ended up in a margin of 11.4%. And sales, profit and margin was higher than the comparison quarter 2019. We had a tax rate this year or 2020 of 20.5%. That was more than 2019 when we did have 18%. The increase is mainly because of the acquired GW business. We have a higher tax rate in that part. For 2021, we expect a tax rate around 22%. The cash flow, after investments, when we exclude acquisitions and disposals, ended up with SEK 211 million in this quarter. It was a much higher number last year. It was mainly because of working capital, which decreased a lot during that quarter. I think it's more accurate to look at the full year number. We ended up with SEK 905 million this year, 2020 compared to the SEK 800 million 2019. The net investments affecting cash flow, if we exclude the acquisition, was SEK 347 million for the full year. That is a bit less than the previously expected number, which was about SEK 400 million. Mainly because of some payments have been delayed into 2021. If I look into 2021, we expect higher investments. Of course, we include investments in the newly acquired GW business. We have some postponements from 2020. And we expect investments in the range of SEK 600 million to SEK 650 million during 2021. Earnings per share SEK 36.24, and we ended up with a solid financial situation of having an equity/asset ratio of 43%. And we have net financial liabilities of SEK 298 million. If we include the pension liabilities and lease liabilities, that number is SEK 930 million. The cash flow of SEK 905 million. If we compare that number with our EBIT number, we ended up with a cash conversion percentage of 87%, very much in line with 2019 and above our target of 75%. So a good cash flow in relation to our results level.

If we turn then to Page 15. Some comments about the current situation for business area. If we start with the Medical Solutions, our maintained growth strategy remains. A lot of focus on innovation based on strong customer relationships and we see achievements of synergies across markets. We see, as mentioned before, impact of the pandemic. If we look into the Integrated Solutions, we have established a position within the new product areas. We see continued strong position within EMC. We base all of our business of the Integrated Solution on a flexible production structure. And on the VSP, we see cost reductions throughout the supply chain together with the customer. On Industrial Solutions, we have advanced our market positions. We see continued efficiency improvements. We have impact of the pandemic, especially earlier this year, and we emphasize on sustainable solutions. Thank you. And we now open up for questions.

[Operator Instructions] Our first question comes from the line of Erik Cassel at ABG Sundal Collier.

The relatively strong guidance for Integrated Solutions of more than SEK 1 billion in sales for Q1. Could you go into that a bit more? Is that kind of the run rate we should expect for 2021? Or do you expect further sequential improvements?

We did see a quite slow quarter in the Q4 as expected and that we communicated around when we reported the Q3 numbers, we have a relatively good view of the coming quarter, and that is what we're guiding about -- and when we say more than SEK 1 billion. The outlook for the coming quarters is not that good for us. Our visibility is more limited. But we do see that the fourth quarter was relatively slow, as we said. And we think long-term that this is a growth area for us. And hence, the outlook is good for us.

Okay. So it's not some sort of temporary buildup here in Q1, more like increased demand?

We don't see the Q1 as something un-normal because of building up inventory or other causes.

Okay. And then is it possible to quantify and sort of split up the margin for the legacy Medical Solutions versus GW Plastics?

Yes. The legacy Nolato margin in medical was good during the fourth quarter. And I think that's natural coming from that in the old part of Nolato, so to say, we have, of course, the main business within IVD and those areas that has been progressing good during the fourth quarter. So I think that's quite natural that we had a better margin in that area. And on the other hand, in the GW area, we have a lot of surgery, and as we explained, that part has been quite slow during the fourth quarter because of the pandemic. And hence, of course, the margin in that part was slower.

Okay. And you also mentioned on the call that synergies could take some time. But when do you think we can see some initial synergies from the acquisition? And what sort of the time line for full synergies here?

If we talk about market synergies, then we are talking about creating new business together by cross-selling to existing customers on new geographical markets. And in the medical field, that takes a long time because there's development time and so on. But we see the initial, or should I say, business creation of that, but it will take time before we see it in our P&Ls. On the other hand, then we're also working on the measurements of improving the margin of GW from where we acquired it, and that is also gradually coming.

Okay. One last question for me. You are talking about expanding the capacity in some additional regions here in this report compared to the last quarter. So what sort of CapEx could we see here? And how much capacity increases are you planning to do? And then also, do you have orders to fill this increased capacity already?

I can start with first part of that question. Medical Business is long term, and we have seen a good growth for the Medical Business area. We continue to see growth for the Medical. And of course, we know which projects that we are sort of expanding, and we are expanding for some years ahead of time. So we have the project. But of course, there's always the joker if -- when some of these development programs are closed before entering the market. But that's the normal situation for us. So that's the reason and the thinking behind expanding.

And I can add around the CapEx. When I mentioned the SEK 600 million to SEK 650 million of CapEx 2021, that is including payments for these expansions as well.

Okay. And then how much capacity was this in relation to sort of the capacity you have now?

It's a little bit difficult to answer that question in a good way because we have capacity in order to utilize the facility in a good way. We need machinery and clean-room space. Now we expand clean-room space. And we always do that for some years ahead of time at the individual sites when we need them. So it would be for a couple of years of expansion of these sites that we talk about.

And our next question comes from the line of Carl Ragnerstam of Nordea.

It's Carl here from Nordea. So regarding your Q1 guidance with Integrated Solutions, is it primarily driven by the tobacco or what you see in EMC going forward?

It's a combination of those, of course, but as VHP is the largest part, that is, of course, influencing a lot in that number. And but we do see a good situation for EMC as well. It's promising. So it's actually both. But of course, VHP is the larger part.

Yes. I see. Okay. Perfect. And the Medical Solutions, we saw a quite clear sequential slowdown in organic growth from 12% to 5%. I mean, is it due to the tightening restrictions impacting the surgery side even worse or compared to Q3? Or is it a sequential slowdown in IVD? Or how should we look at that also when entering Q1?

I think growth rates for individual quarters will vary over time as we have been talking about a long time. I would say that our ambition is to outgrow the market year-by-year on the medical. And we have done that for a long period of time, and we anticipate that we will continue that. But of course, growth targets or growth numbers for individual quarters will vary.

Okay. So you don't see a sequential slowdown in IVD basically then, I guess?

No, we don't see a sequential slowdown. We don't see a sequential movement of growth rates.

Okay. Perfect. And also, in general, it might be quite a tough question. But in a scenario where we successfully -- or where we have a successful vaccination and we return to sort of a more normal society, would you say that the pent-up demand in the surgery side is enough to offset sort of maybe more challenging comparison and maybe headwind from your IVD segment? Or how should we look at that?

I think if surgical goes back to sort of a normal steady state, then it would be -- that would help us, of course. I think there is a lot of postponed surgeries around the world, but I don't think the healthcare systems are in a position where they can dramatically increase the number of surgeries from a normal state. So I would anticipate a more normal to normal plus situation after the pandemic on the surgical side.