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

Hello and welcome to today's webcast with Nolato, where CEO Christer Wahlquist and CFO Per-Ola Holmstrom will present the company's report for the third quarter of 2023. [Operator Instructions] And with that said, I hand over the word to you, Christer.

Okay, thank you. And good afternoon or good morning to all listeners. This is Christer Wahlquist, presenting the third quarter of 2023 for Nolato. On Page 2 in the presentation deck, we summarize up the third quarter for the group. And our sales totaled to SEK 2.3 billion, and that is a 15% decrease if we adjusted for currency and acquisition. We saw an increased sales for Medical and Industrial Solutions but markedly lower volumes within the Integrated Solutions business area. Operating profit amounted to SEK 193 million, excluding a nonrecurring item of SEK 60 million corresponding to our changes in our Chinese operations. That will give a margin of 8.2 percentage if we exclude the nonrecurring item. SEK 20 million in electrical subsidies from Swedish authorities is included. The cash flow during the quarter, after our investments, rose to SEK 188 million, excluding acquisitions. We sustained a strong financial position, giving us the freedom to create further acquisitions. Turning to Page 3, summarizing the 3 business areas and the group. So the first, the Medical Solutions business area, is now close to 60% of our total sales and more than 60% of our profit, amounted then to a little bit more than SEK 1.3 billion. Integrated Solutions, we saw a dramatic decrease in sales, ending up at SEK 330 million in the quarter, with a lower profit. Industrial Solutions ended up at close to SEK 700 million in third quarter, with an EBITA of SEK 64 million. If we then start digging into the Medical Solutions business area. On this page, we can see a graph of the last 20 years development of sales for the business area. And it's, of course, growth and global expansions behind the scenes. If we look into the -- our focused product areas within the business area of Medical Solutions, we have the in vitro diagnostic, approximately 15% of total sales. This is a long-term growth market but in a situation right now, after COVID, with some adjustments. Cardiology, it's long term. It's mostly implant business, stable and a high-profile market to be in. Then we have our pharma packaging side, which consists of containers for liquid and solid drugs, approximately 13% of the business area. Continence care, approximately 11% of the total market, this is a high-volume market with huge quantities. Endoscopy and general surgery, approximately 22% of the business area sales, it's a market that we've been fluctuating a little bit after COVID with the supply chain variations. And then drug delivery systems at 14%, consisting of autoinjectors, delivery devices for long-term injection of drugs into your system. The third quarter for Medical Solutions. We saw a 6% increase in sales, but if we adjust that for currency, it ended up at 1% increase. We saw continued inventory adjustment and a change in the customer mix within IVD sector. We saw somewhat lower volumes in the surgical area, but that is due to the variations of the supply chain after the COVID situation. We ended up at an EBITA margin of 9.5 in the quarter. And we had approximately SEK 10 million in electrical subsidies within the -- Sweden. So sales ended up at SEK 1.3 billion, operating profit SEK 126 million in the quarter. Looking into the Integrated Solutions business area. Here we saw a dramatic decrease, as you can see on the graph, on the sales. We are expanding ourselves into new market segments, and on this Page 8, we can see those areas. So the heavy decrease in sales was within the VHP sector, listed here on the left, but we are focusing our activities to grow the other 5 areas, which are then complex modules; different kind of speakers; in-, on-, over-ear phones; wearables and handheld well-being devices; and then of course, smart home and home security. On the right-hand side, we see different type of products and applications of our EMC & Thermal business. If we then turn to Page 9, looking into the Integrated Solutions third quarter. We saw a 56% decrease in sales during the quarter. Of course, it was low volumes. And the change in sourcing strategy at a previously significant customer had a strongly negative impact. The EMC ended up at SEK 170 million, in comparison to SEK 185 million last year. And we saw that the automotive area increased significantly, while the telecom areas had lower volumes across the board due to the -- less of investments in new telecom infrastructure. The EBITA margin ended up at 3%, of course affected by the lower volumes. So the quarter, SEK 330 million; and operating profit of SEK 10 million during the quarter. The adjustments of the Chinese is going according to plan within Integrated Solutions. If we then look at Industrial Solutions, where we are on a technology and geographical expansion journey, and look into the different product areas that we are focusing on. We are focusing on domestic appliances, different type of hygiene products, furniture sectors, automotive, gardening, forestry and packaging. On Page 2 (sic) [ 12 ], we summarize the third quarter for Industrial Solutions. During the quarter, we saw an -- after currency, an increase of 2% of the sales. We saw that volumes within automotive have risen, and supply chain disruptions have led to less of an impact than previously. We also saw that -- demand for product in consumer discretionary sector slightly lower due to weaker economic condition. The quarter ended up just shy of SEK 700 million, with an operating profit of SEK 64 million, giving us an EBITA margin of 9.3%.

Good afternoon. Per-Ola Holmstrom, commenting on group financial highlights on Page 13. Net sales decreased by 15%, adjusted for currency, to SEK 2.3 billion. Operating profit, EBITA, excluding a nonrecurring item, was SEK 193 million compared to SEK 214 million last year. The nonrecurring item of SEK 60 million is for concentrating the Chinese operations and was announced 24th of August. The EBITA margin, excluding the nonrecurring item, was 8.2%, similar to last year. The EBITA and the EBITA margin includes SEK 20 million in electricity subsidies from Swedish authorities. That was received in Q3. We had good cash flow in Q3. It was SEK 188 million, excluding acquisitions. We had favorable change in working capital and comparatively low investments in the quarter. The fourth quarter this year is expected to have lower cash flow, as a big part of the nonrecurring item will be paid out in that quarter. We have a sustained strong financial position. The equity-assets ratio is 54%. And net financial liabilities was about SEK 1 billion compared to SEK 1.2 billion end of June. We expect CapEx to be between SEK 450 million to SEK 500 million for the full year 2023.

Turning to Page 14, on the current situation per business area, starting with Medical Solutions. We have a maintained growth strategy focusing on margins and margin improvements based on innovation and sustainability, of course with deep and long-standing customer relationships. Within the Integrated Solutions business area, we have established position in new product areas. We have success in the automotive area that is positive for EMC but lower volumes within the telecom area. This business area is then, of course, affected by geopolitical concerns. Industrial Solutions, we have advanced our market positions, emphasized a lot on sustainable solutions, but we see generally a weaker economy. We will now open up for questions.

[Operator Instructions] And I will start by hand over the word to the cell number that ends with 92.

Can you hear me okay?

Yes.

Okay. It's Adrian here at ABG. A couple of questions from my end. First of all, on medical, the margin came down quite a bit on a sequential basis. And I understand there's some seasonal weakness in Q3, but 60 basis points down from Q2 is still quite significant, so can you just elaborate on what drove that difference?

Yes. To start with: It was an increase in margin compared to the same quarter last year, but as you say, in comparison to earlier quarters this year, it was a decrease. And volumes and sales were lower than these quarters. And we did see a vacation effect this year which was bigger than last year. So those are the underlying changes, so to say, and explaining the lower margin as well.

Okay, I understand. And then on the integrated, the downsizing you're doing at the moment right there: You haven't really given a concrete figure on the cost savings. Are you able to give some sort of quantitative indication on that?

We commented that after the press message August 24. And we do see some effects during Q4, and we should be able to increase the margin within Integrated Solutions somewhat. We will see gradual improvement of margins in Q4 and Q1 next year. And long term, we have the group target for margin 10%, for Consumer Electronics as well.

Okay. And then perhaps a bit of a detailed question. The net financials at 21 million in the P&L caught us a bit off guard, I think. Are you able to sort of split out how much of this is just normal interest expense? And if there are any other big line items like derivatives or something disturbing the comparison here. I'm just trying to figure out whether 21 million is a new normal or whether this number will be coming down in coming quarters.

We expect that to come down. This quarter had a negative currency effect within the financial items, and that was almost half of the finance costs in Q3. On the other hand, it was a positive change in Q2. So it was a high number this quarter, definitely.

Okay, that's very helpful. And then finally from my end, a more general question since we've seen some of your peers start talking about supply contracts for these new autoinjectors for obesity medications like Novo Nordisk's Wegovy. And obviously this is expected to become a massive market. And I understand you won't comment on any potential contracts, but are you able to sort of give your general view on the space and whether you as a supplier meet the criteria to compete on these new contracts?

The customer in this discussion is a long-term customer of ours. And of course, we are not commenting on new things, but we would definitely be in a position to compete with these kind of contracts. Of course, it's a long-term thing to set up production for this [ type ].

Okay, I guess, one small follow-up on that. As you mentioned, Novo, they are a long-term customer of yours. That, we know. Can you give us any sort of figure of how big of a customer they are and perhaps some color on what you produce for them today?

That is a customer which is on the top 10 list of our customers, but it's in the end of that list, so to say. So we have a long relationship, but it's not one of our largest customers. And just to be clear: We have no ongoing business with that kind of product you are referring to. And maybe Christer, you can explain what we do for them today.

We are working within their insulin diabetes care products.

So I will now hand over the word to the cell number that ends with 17.

It's Carl here from Nordea. Can you hear me?

Yes.

Okay, very good. Just to follow up on the medical margin here. I mean, of course, buying that it's -- that Q3 is seasonally a bit weaker quarter, a smaller quarter, but looking at it, it's touching an all-time low, right, adjusting for the electricity subsidies, so is it really just seasonality? I guess, looking at, for instance, Q2 last year, you had raw material headwinds, right, as well, so I guess, to what extent is the mix effect impact in IVD? And also, what do you mean by sort of the statement where you say that -- this change in customer mix at the end of the quarter? What does that mean really?

The mix effect is not positive but not a very big thing, I would say. Instead, it was a quarter with lower volumes and also volumes lower than we expected. So we had lined up a bit too much resources in this quarter and vacation came in a bit more than we expected. And all in all, that did that. The margins, together with the lower sales, was a bit disappointing, as you say.

And taking the second part of that question, relating to the IVD and the changes. It's the thing is we have -- there is a large Tier 1 player in the field that the OEMs tend now to find new ways to supply themselves and rather go directly to the producer, which is then affecting short term some of the volumes in the market.

I didn't really catch that. Could you please take it once again? It's -- so that's contributing to the statement, number one, that you see even further -- I mean that's inventory reductions. Is that what you're referring to?

No. It's one of the big Tier 1 players within this field that has been supplying a lot of the cuvettes for the IVD to the OEMs. And the OEMs are now gradually changing that and rather buy directly from the producer, changing the market dynamic a little bit; and which means that ramping up capacity for the OEMs, at the same time reducing for the Tier 1, is affecting our volumes.

And how long with that last, do you think? And was it just in the later part of the quarter, meaning that we should see an even worsening effect entering Q4 here on volumes and, of course, margins as well?