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

Hello, and welcome to the presentation of Nolato's fourth quarter 2022. This is Christer Wahlquist speaking, and I'm starting on the second page of the provided material. So, in summary, the fourth quarter ended up at just short of SEK 2.4 billion in sales. That was affected by a positive currency effect. And it was -- if we adjust for that, it was a 34% decrease of sales. We saw lower volumes in the VHP area affecting the overall numbers. The operating profit ended up at SEK 163 million in comparison to SEK 336 million the corresponding quarter last year. That gave us a margin of 6.9 percentages, and the margin was affected by volumes, of course, cost inflation and production efficiency. If you look on the right-hand side of the page, you see that we have been building and working with a focus on creating a true global service provider across our 3 different business areas. Turning to Page 3, focusing on the full year of 2022. The full year's sales ended up at SEK 10.8 billion and with a margin of 8.4 percentages. The earnings per share ended up at 2.44 in comparison to the 3.7 last -- the year before. We still have a very strong financial position with net financial liabilities of approximately SEK 700 million and an equity ratio of 54%. The proposal for the -- from the Board of Directors on the dividend is to keep it on the SEK 1.9 per share. If we then turn to Page 4, summarizing the 3 different business areas within the group. We have the medical solutions coming in at SEK 1.3 billion in sales in the quarter, and Integrated Solutions at around SEK 400 million and Industrial Solutions, SEK 651 million. And across the board, we are performing similar tasks for our customers, but in different market segments. If we turn to Page 5, focusing on our business area Medical Solutions. In this business area, we have continuously expanding our footprint and created a very good growth over the years, as you see on the graph and building a global footprint together with the large customers within pharma and medtech -- on Page 6, you will see some of our focused product areas within Medical Solutions. And those are the in-vitro diagnostics, IVD with good potential for long-term growth, even though we are in a situation where we have some lower volumes at the moment. And you can notice that the percentages of our total sales is around 15% for that business area coming down a little bit. The next one is cardiology focused products at around 8% of our total sales. Pharma packaging, 13%; then Continence Care around 11%, and we saw a stronger than average growth within the surgical, ending up at approximately 22% of the total sales. And of course, that is due to the situation where the hospitals are now back on track after the COVID situation, then we have the drug delivery coming in around 14%. If we turn to Page 7, focusing on the details of the fourth quarter for Medical Solutions. Within the quarter, we saw a 9% increase of sales adjusted for currency. So we continue our good growth. We saw a particular growth within the surgical area. And on the other hand, the IVD volumes are low in the quarter due to pandemic-related inventory adjustments. The charging of higher costs contributed to increase in sales during the quarter. The margin ended up at 9.6 percentages. And in comparison to the year before, it was a little bit lower, and that is due to the fact of the change in the sales mix with the growth within the surgical area and somewhat decrease in the IBD sector but also cost impact of the previous capacity investments that are effective. For the quarter ended up at SEK 1.3 billion with an operating profit of SEK 126 million, creating the margin of 9.6% percentages. I would then turn to Page 8 and looking into the Integrated Solutions business area. As mentioned, we are working on expansion ourselves into new market segments within this business area. We then look on Page 9. We can see those focused product areas. And as you understand, we have had a dual sourcing situation within the VHP sector, and that enables us to continue the growth within the other areas, such as the complex modules, the speakers in on over-air phones, wearables on different kind and smart homes. If we look on the consumer electronics side of the business. And on the other side, we have our EMC/Thermal business, focusing on shielding solutions and thermal management of electronic components. Turning to Page 10, the details of fourth quarter for Integrated Solutions. The sales was a heavy decrease in sales, and that is due to the VHP area that we had a regulatory -- new regulatory requirements for producing this in China and resulting in that we had sales stop or production stopped during a portion of a large portion of the quarter. And of course, the end customer demands within the VHP was adversely affected by the situation in Eastern Europe. We have dual sourcing effect. And on the other side of the coin, the EMC is continuing to performing well. and we expect the VHP volumes to remain at similar levels in the first quarter of this year. So the sales ended up at SEK 407 million with an operating profit of SEK 25 million, creating the EBITA margin of 6.1 percentages, and that was, of course, affected by the lower volumes. Turning to Page 11, focusing on our business area, Industrial Solutions. Within this business area, we are on a technology and geographical expansion journey, continuing to expand our geographical footprint in different regions of the world. On Page 12, you can see the 2 major parts of the Industrial Solutions business area. So that is a general industry with a white goods, forest equipment, furniture and other industrial solutions and the other smaller portion is that automotive sector. If we turn to Page 13, focusing on the fourth quarter for Industrial Solutions. We saw an increase in sales, but if we adjust for currency, there was a decrease of 2 percentages. We saw also charging of higher cost contributed to positive to the sales number, but lower volumes for product in consumer discretionary sectors during the quarter. The margin ended up at 2.8 percentages and was affected by fluctuating call-off orders resulting in lower operating efficiency, especially in the beginning of the quarter. We also had a little bit lower volumes and [ inflatory ] effects on labor and energy costs. So the quarter ended up with sales numbers of SEK 651 million and an operating profit of SEK 18 million, creating the margin of 2.8 percentages.

Good afternoon, Per-Ola Holmstrom presenting group financial highlights, and that would be on Page 14. Net sales amounted to almost SEK 2.4 billion compared to a bit more than SEK 3.1 billion the corresponding quarter 2021. That is a decrease of 34% adjusted for currency. Operating profit was SEK 163 million compared to SEK 336 million, which results in an EBITA margin of 6.9%. The effective tax rate was 20.3% for the full year 2022. But when excluding nonrecurring items, it was 21.3%. We expect the tax rate around 21% for the full year 2023 as well. The cash flow after investments was a negative SEK 188 million, again affected by working capital requirements within VHP because of winding down the supplier finance program. Net investments affecting cash flow, excluding acquisitions and disposals, was SEK 451 million for the full year 2022. A comment about this year 2023, we do expect around SEK 600 million in CapEx as we will pay for real estate in Sweden with SEK 150 million during the year. If we then turn to Page 15, focusing on the current situation per business area, and starting with the Medical Solutions business area. In this area, we have a maintained growth strategy, focus on innovation based on our strong customer relationship. On the Integrated Solutions, we have established a position in new product areas. Of course, in the base of flexible production structure, we see the 5G rollout and no new initiatives automotive sector that are positive for the EMC business. Of course, on the integrated solutions, we also see some geopolitical concerns. On the Industrial Solutions side, we have advanced our market positions, but are impacted by supply chain disruptions. We put a lot of emphasis on the sustainable solutions, but we see a weaker economic conditions. We will now open up for questions.

[Operator Instructions] The first question is from Carl Ragnerstam of Nordea.

It's Carl from Nordea. A few questions. Firstly, I mean, we saw quite a nice sequential uptick in the medical margin in the quarter. Could you perhaps give some flavor on what's behind that? Is it primarily price compensation for raw materials? Or yes, what is behind it, would you say?

Yes, I would agree to that. We have had less increases and a more flat situation, and we have been able to come back with some of the effects from previous quarters, and that has helped the margin this quarter.

And have you seen any improvements at all now or entering Q1 here on the IVD side?

I would say that the IVD volumes are still affected by the stocks in the total value chain after Covid.

Okay. Perfect. And also on Industrial Solutions, I mean, could you help me understand sort of the margin drop in the quarter. You had just 2% negative organic growth and quite significant margin contraction there. Is it -- should we see it as -- I mean, the continued downward trend during 2023 for a year or maybe that the worst impact was from the volatility in the automotive sector in the beginning of the quarter. I mean, how should we see the margin profile in industrial, we have seen a sort of a quite negative trajectory here in the past few quarters?

No, we don't see that, that trend is continuing in Q1. And we had a bad start of the quarter -- the fourth quarter last year, and we did stand still at some of the automotive areas, and that has affected, and we don't see the same situation in this quarter so far anyway. So we don't expect worsening margin looking forward into the Q1.

Okay. And also on your tobacco guidance here for Q1. I mean you were close to half of Q4, maybe had a catch-up effect or some of the volumes, but still sequentially unchanged in Q1. I mean, have you -- would you say that your customers have reallocated more volumes to the second supplier than you previously thought? Or has the sort of conversion to the new product being faster? Or is it also maybe simply an effect of a cyclical element of these products? And the final question on this is also if you're profitable for this subsegment at the current volumes.

If we look on the volume situation first and that, of course, we had some catch-up effects during we only produced for a short period of time during the fourth quarter. But I would say that the dual sourcing situation, we are now in a situation where the new products are dual sourced, and that is what's currently being produced. In the ramping of those new products, of course, there are -- we were on the slow start with the situation of the nonproduction situation in the fourth quarter, and that is affecting the split going forward a little bit...

Perfect. As the profitability -- sorry, sorry.

Yes. Coming back to the margins in this integrated area, we are, of course, seeing an effect of the margins because of the low volumes. And that is, of course, hurting in Q1. And if we look separately at the HP part, these volumes are not supporting a profitability situation right now. And there are, of course different things going on to decrease our cost base. But also an improvement of volumes will change that later on. But in Q4 and Q1, that is not a profitable segment within Nolato.

Next question is from Adrian Gilani of ABG.

It's Adrian here at ABG. First of all, a follow-up on the input costs. You mentioned sort of flattening out input cost situation. But given that sort of a lot of oil-based products are starting to see a declining trend. Could we be seeing an opposite lag effect where you get a sweet spot for a few quarters on margins on input costs? Or is that being a bit too optimistic?

As you say, right now, we do see some lower costs when it comes to raw material and plastic materials -- the labor situation and energy costs, those costs are still on a high level, and we don't see that change in these areas.

Okay. And on the integrated solutions, you talked quite clearly about the VHP part. Looking at the EMC subsegment, you only say that it looks to continue its strong trend. Should we take that to believe that the growth rate for 2023 can be similar to that of 2022?

I think we will have a good situation within EMC. But there are some signs in the telecom sector that the 5G rollout is maybe not that strong right now. and going forward in the near time. We do have still a good situation within automotive. And we think the telecom sector will be stable, but maybe not that maybe not that growth driven as it was part of the 2022 year.

Okay. And also, apologies if you mentioned this before, I could have missed it. You said that VHP itself was not profitable at the moment. Did you mention how we should think about the margins on the segment as a whole for integrated for Q1?

Well, the margins will at least not improve, but we can see it and the situation is similar to the Q4 in that respect, I will say.

Okay. And these two quarters of sort of SEK 400 million, are these indicative quarters of how integrated or how VHP will look going forward? Or will the sales growth be a bit more lumpy going forward?

We have guided the Q1 with the best knowledge we have of that quarter. And as Christoph mentioned, we are lagging a bit behind in the dual sourcing because of the delay in Q4. And I think there will be chances to improving that. But the speed of that, we don't really know yet. And we have been approved into new markets with the new products, but in a slower speed than we expected earlier because of the permit missing that permit. And we have to see how that developed beyond the first quarter, but we have for an improvement in that, enabling us going up in volumes after that.

Okay. And the final question from my end on the cash flow. You had quite a bit of working capital build up here in Q4 and actually on the full year 2022. How much of this would you say is possible to release in Q1 and full year '23? And how much of this is sort of a permanent effect?

I would say that the largest part of that is something that will stay into 2023 as well. The largest part is the winding down of the supplier finance program, which we have used within VHP and doing -- when we decrease volumes, the working capital is having a need of a requirement of working capital. So I don't see much of that will bounce back. We have had some extra inventory because of delays within waiting for the permits. That will -- that will sort of ease out in the Q1 and give some positive effect as a more temporary thing.

In that case, that was all my questions.

The next question is from Mikael Laséen of Carnegie.

I have also a few questions. We can only start with the CapEx side. Can you just repeat what you said about CapEx in '23? How we should think about that?