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

Welcome to Nolato Q2 Report 2023. [Operator Instructions] Now I will hand the conference over to CEO, Christer Wahlquist; and CFO, Per-Ola Holmstrom. Please go ahead.

Hello, and welcome to the presentation of Nolato's second quarter 2023. If we start on Page 2 in the presentation deck, there is a summary of the second quarter for the group. We had sales just shy of SEK 2.5 billion during the quarter and that was -- we saw decreased volumes within our VHP business, but good performance or positive performance within Industrial and Medical. The operating profit EBITA ended up at SEK 198 million in comparison to SEK 264 million. The EBITA margin was affected by the lower volumes within the VHP sector. We saw good cash flow during the quarter, and it rose to SEK 224 million if we exclude acquisitions, and we have sustained our strong financial position. If we then turn to Page 3 in the presentation deck and look at the different overall picture of the different business areas, starting with the Medical. We had sales just shy of SEK 1.4 billion during the quarter and an EBITA of SEK 138 million. And that is, of course, then more than half of our sales within Medical and 2/3 of the group EBITA result coming from the Medical division. On the Integrated Solutions side, we saw the heavy decrease due to the changed purchase and different volumes for the VHP. So it ended up at SEK 392 million and then EBITA of SEK 16 million during the quarter. On the Industrial side, we saw a good performance and sales ended up at SEK 724 million and then EBITA of SEK 56 million during the quarter. If we then turn to Page 4, starting with the Medical Solutions business area. We are continuing our profitable growth journey, and you see on the graph the development of the sales of the business area over the last 20 years. So it continues good development of the business area. On Page 5, we see a split up of the focused product areas within our Medical Solutions business area. So most of the areas were performing good and the exception was the In Vitro Diagnostic, where we still see some lower volumes due to the supply chain adjustments after COVID in that business area. We then go to Page 6, focusing on the Medical Solutions first. Second quarter, we saw a 6% increase of sales if we adjust for currency. We saw, as I mentioned, good growth in most of the market areas, but the IVD is on an unchanged level and we see still inventory adjustments in the total value chain. The margin ended up at 10.1 percentage, giving them the overall development of the Medical business for Nolato. On Page 7, focusing on the Integrated Solutions. Here, we have seen a dramatic growth over the years within the VHP. We are now in the situation that the VHP has been decreased due to the new sourcing situation and also the lower total volumes in that business, and it enabled us to grow in other market areas and market segments, which we are focusing on. If we turn to Page 8, you will see those areas that I mentioned. So the VHP is now decreasing as a total share of the total, and we are focusing very heavily on growing the smart home and home security part of the business, the wearable, the well-being devices, the in-earphones, speakers and the complex modules on our side, that is, the Consumer Electronics side. On the right-hand side of the page, we see the EMC part of the business. And that is then, of course, sort of a little bit of a different business model in that. If we turn to Page 9, summarizing the Integrated Solutions business area. During the quarter, we saw a 63% decline if we adjust for currency. And of course, it's low volumes and the change of sourcing strategy at the previously significant customers within the VHP area, and that the VHP within Nolato is now approximately 5% of the group sales. The EMC sales increased to SEK 174 million. And we saw the Automotive area increase significantly while we saw the telecom area at lower volumes as a total. The margin ended up at 4.1%, and we are working with cost-cutting, but maintaining our strength in order to build new businesses within the other segments of the Consumer Electronics area. So sales ended up at SEK 392 million, as mentioned, and the operating profit SEK 16 million during the quarter. If we turn to Page 10, focusing on Industrial Solutions. Here, we are on a technology and geographical expansion journey. And if we look on Page 11, we see the split down of the different product areas that we are focusing on. So these are the different segments within the Industrial sector. If we look on Page 12, summarizing up the Industrial Solutions business area. We saw during the quarter a 1% increase in our sales if we adjust for currency. We saw volumes in the Automotive risen. And also, we saw less disruption in the supply chain compared to previous quarters. We saw also that demand for products in consumer discretionary sector slightly lower due to a weaker economy. So the margin ended up at 7.7 percentage points and due to the less disruption in supply chain meant, of course, more efficient production for us.

Good afternoon. This is Per-Ola Holmstrom presenting group financial highlights on Page 13. Net sales was almost SEK 2.5 billion in the quarter, a 20% decrease adjusted for currency compared to SEK 2.9 billion. Operating profit was SEK 198 million with an EBITA margin of 8.0%. Cash flow was strong in the quarter. After investments, excluding acquisitions, it rose to SEK 224 million compared to SEK 71 million by more favorable working capital and less CapEx. Earnings per share was SEK 0.58 compared to SEK 0.71. Dividend was paid out with SEK 512 million in Q2 and net financial liabilities increased to almost SEK 1.2 billion.

Turning to Page 14 and focusing on the current situation per business area, starting with the Medical Solutions. We have -- we are on a maintained growth strategy, lot of focus on innovation, built together with strong customer relationships. On the Integrated Solutions side, we have established positions in new product areas. We have a very flexible production structure in the base, and we have good success within the Automotive area that is positive for the EMC, but generally speaking, lower volumes within the telecom area. Overall, there are some geopolitical concerns that affect the supply -- global supply chains. On the Industrial Solutions, we have advanced our market positions, a lot of emphasis on sustainable solutions and overall, a general weaker economy. We will now open up for questions.

[Operator Instructions] The next question comes from Adrian Gilani from ABG Sundal Collier.

Hello. It's Adrian here at ABG. First question on Medical. We're still seeing these inventory adjustments on IVD that you've been talking about for over a year now. And I guess a 2-part question on that. First of all, are there any signs of improvement on Q3 current trading there? And the second question is if we do return to a more normalized inventory situation among your customers, can you just help to quantify the margin impact that, that could have on Medical?

We have not seen any improvements during the third quarter so far.

And margin-wise, the situation we had during COVID with very high utilization of that part was, of course, positive to margins. When that picks up in volume, it won't be like that, of course. And then it's a more similar margin that we have in the overall Medical business area.

Okay. And then on EMC products, you've previously said that these could grow around 15% per annum. But now you are saying you're seeing slower demand from telecom. And just for the current year, can you give us some estimation on where the full year growth might end up in EMC, given that for the first half, growth has been in the single digits?

Yes. I don't think that we should expect much higher growth numbers from that business. It is slow on the telecom side. We have a good situation in other areas, which is supporting us. But of course, as telecom is not that strong, the overall situation is not very much more positive. Then, of course, it's hard to judge when telecom will be stronger. But for the time being, we don't see that change coming, yes.

Okay. And am I correct that telecom is roughly 80% of EMC? Or am I misremembering that?

Yes. The telecom part has decreased compared to that as the total telecom has decreased and we have had a good growth in the other areas. So it's a bit less compared to that right now.

Okay. And then, I guess on the VHP sales. If we take away the current EMC sales, it seems like VHP is down sequentially as well. Is this an effect of BAT's total volumes coming down? Or have you sort of lost further shares on this dual sourcing contract?

That is the effect of volumes. And you are correct. Sequentially, it is a smaller downturn. That's the way it is, yes.

But is it your customers selling for less volumes in total? Or have you had a smaller share and the other dual sourcing partner has a larger share of the volumes. Which of those is it?

I think the situation is similar when it comes to splitting volumes, but it is low volumes totally. And yes. So not a very big change, but we did see some downturn in our volumes during this quarter.

Okay. And a final question on also on VHP. Given that we've had really 3 quarters now with VHP not being profitable and if I remember correctly, at the sort of peak sales level, you said fixed costs were around SEK 300 million in that segment. How much can you decrease the fixed cost base in VHP?

We should see the cost base as Consumer Electronics. And what we are doing is that we want to grow the business within Consumer Electronics in those areas that I explained before. And in order to do that, we would -- we want to maintain our capacity and our strength in order to address other businesses. So we are not maximizing our cost out because we want to continue to grow that business long term.

The next question comes from Karl Noren from SEB.

A couple of questions from my side. If we start on Medical, the margin was relatively flat there year-over-year in the second quarter here. So I was wondering a bit on the outlook on the margin in Medical. Given that you are facing a bit easier comps now in the second half, do you think you can improve margins a little bit more than what you did in Q2 in the second half of this year, would be my first question.

It's correct that we have a margin situation in previous years which decreased from these levels. I do think that this business should be seen more in a sequential development from the levels we have right now. However, there is a smaller effect coming from Q3 as we have a vacation period during that quarter. So that might affect volumes by a little. But except for that, I see it more sequentially than comparing to...

Yes. So margins should look better year-over-year, then, in Q3 and Q4, I guess?

Yes. It's more in line with, yes.

Yes. Good. And then a question also on the IVD sales. Is it possible maybe to quantify what -- was it a flat development? Or was it -- how much was it down year-over-year? Is it possible to quantify that?

The IVD volumes, you mean?

Exactly. How much did it decrease year-over-year in Medical?

The volumes for IVD were similar to the same period last year.

Okay. That's great. And then a question on Industrial. Nice to see the good margin development there. Just wondering a bit on the outlook for the cycle, basically. What are you seeing in terms of demand from your customers? And how did it develop during the quarter? Was it stronger in April or stronger in June? Or any form of guidance there would be very helpful.

If we look on the second quarter, I would say it was fairly stable during the quarter. We didn't see a strong start or a strong end. It was fairly stable during the quarter.