Nolato AB

STO:NOLA B

Earnings Call Analysis

Nolato's Strong Margins Amidst Slight Sales Decline

In Q2 2024, Nolato reported net sales of SEK 2.4 billion, a 2% decrease due to VHP effects, but saw operating profit rise by 24% to SEK 245 million. Medical Solutions remained robust with SEK 1.4 billion in sales, representing 56% of group sales, despite some sluggish market activity. Both business segments experienced improved margins: Medical at 10.9%, driven by cost savings and price revisions, and Engineered Solutions at 10% amid favorable product mix and VHP phase-out. The company maintains a strong financial position with SEK 434 million in operating cash flow and expects SEK 750 million in CapEx for the full year.

A Challenging Quarter: Sales Down but Margins Up

During the second quarter of 2024, Nolato reported net sales of approximately SEK 2.4 billion, reflecting a decrease of about 2% after adjusting for currency fluctuations and acquisitions. The decline was primarily attributed to the phased exit from the VHP business segment. However, the operating profit rose significantly to SEK 245 million, indicating a 24% increase from the previous year. This surge in profit reflects effective margin improvement initiatives, with the EBITA margin increasing to 10%, up from 8% last year.

Medical Solutions Leads the Way

The Medical Solutions division emerged as the largest segment of the company, contributing approximately SEK 1.4 billion to overall sales, which is 56% of the group’s total revenue. This segment remained relatively stable compared to last year, showing signs of a strong growth trajectory in In-vitro Diagnostics (IVD). Margins in the Medical unit improved to 10.9%, driven by strategic cost-saving measures and a positive pricing strategy, despite facing challenges such as a temporary slowdown in volumes due to a product recall and external geopolitical factors.

Engineered Solutions Faces Headwinds

Conversely, the Engineered Solutions segment experienced a decline of 4% in sales, primarily affected by challenges in the Consumer Electronics sector and the impact of downsizing from the VHP segment. Excluding the VHP effects, the remaining business showed a promising growth trend of around 5%. Growth was notably sustained in the Automotive sector and some recovery in overall consumer discretionary spending, although the margins landed at 10%, largely due to a favorable product mix.

Strong Cash Flow and Robust Financial Health

The quarter also showcased strong cash flow from operating activities amounting to SEK 434 million. This robust cash generation was supported by higher profits and reduced working capital needs, underpinning the company's solid financial position. Nolato demonstrated a prudent capital structure with net financial liabilities of about SEK 1.1 billion and an adjusted debt ratio of 0.8x.

Guidance and Future Outlook

Looking ahead, Nolato maintains a cautious yet optimistic outlook amidst varying market conditions. For the remainder of the year, they anticipate a continuation of the seasonal impacts, particularly around the vacation period, which may dampen sales in both business segments. With a capital expenditure outlook of around SEK 750 million for the full year and a stable earnings per share forecast of SEK 0.63 compared to SEK 0.58 from last year, the management's focus remains on strategic growth and efficiency enhancing initiatives. The Medical Solutions division is expected to drive future growth potential, despite the challenges that may affect the Engineered Solutions segment, particularly in telecommunications.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, and welcome to today's webcast presentation where Nolato will present their Q2 report for 2024. With us presenting, we have their CEO, Christer Wahlquist; and CFO, Per-Ola Holmstrom. [Operator Instructions] And with that said, please go ahead with your presentation.

[Christer Wahlquist, executive]

Good afternoon, everybody, and welcome to Nolato's presentation of Second Quarter 2024. This is Christer Wahlquist speaking.

Starting on the second page of the presentation deck. We can conclude that the sales amounted to -- a little bit more than SEK 2.4 billion during the second quarter, which is a decrease of approximately 2%, if we adjust for currency and acquisitions. We also see that the VHP effect will be phased out during next quarter. And if we would exclude the VHP effect from this quarter, we would have seen growth.

The operating profit ended up at SEK 245 million in the quarter, and we see that our margin improvement initiatives yield desired effects. During the quarter, we had a very strong cash flow from operating, amounting to SEK 434 million, and of course, the improved profit, but also reduced tied-up working capital created that situation. We have a very strong financial position and the financial liabilities in relation to our adjusted EBITDA amount totaled 0.8x.

If we turn to Page 3 in the presentation deck showing the two different business areas within the Group. Across the two areas, we [ have ] the same offering to the market, but of course, with different dynamics creating different key drivers for the two areas. The Medical Solution is now the largest part of our Group and Engineered is in the refocusing phase of the VHP business.

Turning to Page 4, showing a 20 years of Medical development, and its continuously growth over the period with some good growth situation across the years. The quarter ended up just shy of SEK 1.4 billion, and it corresponds to 56% of Group sales. These are the -- on Page 5, we will see the focused product areas within the Medical division. And of course, we've seen a good growth within In-vitro-diagnostics and some small decline within Pharma Packaging.

On Page 6, we have summarized the Medical Solutions business area for the second quarter. We had -- the sales was unchanged -- and then, of course, we saw the IVD grow compared with the weak quarter last year. We saw lower volumes within our Other category, and it's the customer product recall that we have informed previously about. And the Pharmaceutical Packaging experienced lower volumes. We saw inventory adjustments, but also some geopolitical effects affecting the business. The margin improved to 10.9%. And of course, our continuous focus on improving margins is generating good results and also the strategic price revision and cost savings, creating the margin of 10.9%. So the operating profit EBITA ended up at 149 percentages. On the right lower corner, you can see the split of the sales between different product areas. And in that sense, we can see the Other category decreasing 2 percentage points according to -- in the second quarter.

Jumping over to Engineered Solutions on Page 7. We have seen a volatile development but underlying growth, but over the last period, a decline due to the VHP downsizing. On Page 8, we see the split of the different segments. We see the Materials that is a little bit different business than the rest. It was formerly called EMC, but the other 4 categories are very similar in the nature.

On Page 9, we can summarize Engineered Solutions second quarter. We saw a decrease of 4% adjusted during the quarter. And of course, depending on their volumes within the Consumer Electronics declined this quarter as well. And if we would exclude the VHP from the situation, the rest of the business is growing approximately around 5%. The Automotive area continued to grow but on a lower growth level than the first quarter. We saw also good growth in the Hygiene area in comparison to, of course, a weak quarter last year. And in the Other category, we saw also some good growth with the recovery of consumer discretionary sector. The margin ended up at 10%. Of course, driven by a favorable product mix, but also the cost adjustments announced previously.

So the quarter ended up at just shy of SEK 1.1 billion with an operating profit of SEK 108 million during the quarter.

[Per-Ola Holmström, executive]

Hello, everybody. Per-Ola Holmstrom commenting key performance indicators on Page 10. Net sales was SEK 2.439 billion, a decrease of 2% from the effects of the VHP business, except for that effect, the Group did have growth. Operating profit rose 24% to SEK 245 million, now totaling an EBITA margin of 10.0% compared to 8.0% last year. The effective tax rate was 21.9% which we consider to be in line with the full year rate. Cash flow was strong from operating activities, SEK 434 million, supported by higher results and less working capital need. After investments increased as well, as CapEx was slightly lower than last year and totaled SEK 336 million. .

For the full year, we expect around SEK 750 million in CapEx. Earnings per share increased to SEK 0.63 compared to SEK 0.58 last year. We have a solid financial position with net financial liabilities of just about SEK 1.1 billion and an adjusted debt ratio of 0.8x.

On Page 11, we are commenting on the current situation per business area. Starting with Medical Solutions, we have a maintained growth strategy, but temporarily, we see some sluggish market activity. A lot of focus on margin, cost adjustment, pricing strategy and efficiency. The business, of course, is based on innovation and sustainability. We see a broad customer base with long-standing, close customer relations. And of course, the new significant customer contract validates our overall strategy.

On the Engineered Solutions, we see the effects of the VHP phased out from third quarter this year. We have advanced our market positions and established a position in these new areas, creating some underlying growth. We focus, of course, on innovative and sustainable solutions, and we also see success in the Automotive area that is positive for the Materials part of the business area, but continuously lower volumes within the telecom area.

We will now open up for questions.

[Operator]

Thank you very much for that presentation. And like you said, now it's time for the Q&A. [Operator Instructions] And we've got a person calling in with a phone number ending in 8692. Please go ahead, you have the word.

[Adrian Gilani Göransson, analyst]

It's Adrian here at ABG. Can you hear me okay?

[Christer Wahlquist, executive]

Yes.

[Adrian Gilani Göransson, analyst]

Perfect. So first of all, just regarding you mentioning the bigger vacation effect in Q3. I guess what's the underlying reason for why that has been less of an effect in recent years and why it's a bigger effect now?

[Christer Wahlquist, executive]

It's more a general observation based on history. And if the business cycle is a little bit weaker, some of our customers tend to use that as creating a little bit longer close down and movement of products and so on.

[Adrian Gilani Göransson, analyst]

Okay. I understand. And then also just a question really for both segments since you saw a clear jump in margins in both of them. Was there anything unusual in the mix effect or other factors that you expect to reverse? Or are these margins sustainable, other than factoring in the seasonal effects like you're flagging for, otherwise, are they sustainable?

[Per-Ola Holmström, executive]

Of course, there are many aspects affecting the margins. But I wouldn't say there are any unusual or -- things going on in this quarter, largely affecting the margins. So under these circumstances, with the sales roughly in the levels we have seen and utilization like it is, no big mix deviations. It's good margins, but it should be sustainable.

[Adrian Gilani Göransson, analyst]

Okay. Perfect. And also, you happen to release Q2 numbers at the same time as [indiscernible]. And for their fairly new medical segment, they write that the protracted inventory adjustment phase is deemed to have eased during the quarter for Medical. Is that something you agree with that destocking effects are sort of subsiding? Or are you seeing a different trend there? .

[Christer Wahlquist, executive]

I think we are in different market segments and so on and so forth. But I think we see -- we have seen those effects of stock changes and so on, on different segments, in different periods. And now we saw it on the Pharma Packaging but we have seen some ease of it on other areas. .

[Adrian Gilani Göransson, analyst]

Okay. Perfect. And the final one from my end. Could you give us some sort of an outlook for the EMC or the Materials segment that it did go in the quarter, but also still weak demand in telecom. Is that something you expect to sort of see any improvements in the second half of the year?

[Christer Wahlquist, executive]

We will continue to emphasize growth in the new areas like Automotive and Others. And the telecom is very hard to predict at the moment. And I think following the big players in that area is probably a better thing to get a grasp on when that is coming back. .

[Adrian Gilani Göransson, analyst]

Okay. I understand. In that case, that was all for me.

[Operator]

[Operator Instructions] We've got the next person calling in with a phone number ending our 5594. Please go ahead, you have the word.

[Johan Skoglund, analyst]

Johan Skoglund from DNB here. Continuing on Adrian's vacation question. Do you mean that the vacation effect should provide a net negative effect this year? Or could like OpEx gains on your end balance that [ somewhat ]. How should we interpret the guidance here? .

[Per-Ola Holmström, executive]

I think that guidance is around sales numbers mostly. We do have a situation which is normal, of course, where most of the cost base, which is personnel-related is not affecting margins as that is reserved earlier during the year. And the comment we make is then around sales mostly.

[Johan Skoglund, analyst]

Okay. Very good. And with the IVD growing, can we assume that the specific customer situation where a middleman was cut out earlier, is that finished? .

[Christer Wahlquist, executive]

That situation has developed most likely like we anticipated, and we have gained business with sort of the direct, the large OEMs and decrease our sales through the middleman.

[Johan Skoglund, analyst]

Okay. And with IVD growing year-over-year, could you say anything about the quarter-over-quarter development?

[Per-Ola Holmström, executive]

That is the same situation and it's similar. So we did see the same development in this quarter as well. Between the quarters sequentially, there is no big effect. So it's not clear trend going forward. But comparing to last year, it's a similar development, I would say. .

[Johan Skoglund, analyst]

Okay. Very good. And the final question is on the VHP effects. You mentioned they are phased out. Does that mean you still produce some volumes? Or are the production of that product completely phased out now? .

[Christer Wahlquist, executive]

We have -- towards that customer, we still have some low volumes that will continue on a low level going forward.

[Johan Skoglund, analyst]

Okay. Very good. That was all for me. Thank you. Have a nice summer and good luck with Q3.

[Operator]

[Operator Instructions] The next person calling in here is 2 2479. Please go ahead, you have the word.

[Carl Moran]

Hello. Can you hear me?

[Christer Wahlquist, executive]

Yes.

[Carl Moran]

It's Carl Moran from SCD. I just had a question on the margin here in the Medical side. As you said, IVD is now back to growth again. How much of the margin improvement would you say is driven by mix? And how much would you say is driven by internal cost works usually? Can you say anything about that? .

[Per-Ola Holmström, executive]

I would say that most of the improvement come from the cost improvements and other measures we have taken to improve margins rather than mix effects.

[Carl Moran]

Yes. That's good. And on this vacation impact that you're guiding for in Q3, is that in both segments? Or is it more in one -- or one segment from the other .

[Per-Ola Holmström, executive]

It's partly in both segments, but of course, Engineered is having a larger part of their business in let's say, Europe and these countries, so we do see a larger effect in that area. But it's also in Medical to some extent. .

[Carl Moran]

Yes. And in Medical, do you think you can get back to organic growth here in the second half? I mean you are facing a bit easier comparison but it still seems to be a quite weak market.

[Christer Wahlquist, executive]

Our long-term targets for the Medical remains. Of course, we see that the large new program that we have won are taking -- we are addressing a lot of engineers towards that preparation. And that, of course, takes some of the energy out of some other area in the shorter period. .

[Carl Moran]

Okay, I see. And then a question on Engineered, just on demand here coming into the second half. I mean maybe related to that you're [ guiding ] for some [indiscernible] automotive players spoken like light vehicles just Volvo cars and also the larger truck manufacturers are seeing slightly lower demand here in Europe. Can you say anything about what you see on that side for the second half here? .

[Christer Wahlquist, executive]

I think some of that effect might be in the -- what we see in longer -- more strong seasonal effect during vacation time. .

[Carl Moran]

Okay. So we are seeing slightly lower demand case from the Automotive side short term? .

[Christer Wahlquist, executive]

It could be -- if they, of course, have a slowdown, they might use more longer vacation times and so on to sort of use -- have people on vacation instead of producing full speed.

[Carl Moran]

Okay. That's clear. That's all for me. Have a good summer.

[Operator]

We're moving on here with the questions. We've got a few written ones here. In Q1, EMC was flat. Now in Q2, you recognized a slight organic growth for this segment. Is it fair to assume that EMC is set to accelerate its organic growth pace from here? Or will telecom hamper the pace also in the second half of the year? .

[Christer Wahlquist, executive]

The development of telecom in the second half is a little bit uncertain, I would say. But the other segments within the Materials or EMC is growing. And of course, we have -- we are coming to some lower comparison quarters for the telecom as well. .

[Operator]

And in Q2, it was last quarter with heated tobacco in the comps. Is it possible to update us on the organic growth pace during Q2 in the former Industrial Solutions segment?

[Per-Ola Holmström, executive]

I would say if we looked into the Engineered Solutions but exclude the VHP effect, I think Christer, he commented that we did see a 5% roughly growth between the quarters. So that is, let's say, a more -- a better number to rely on, and that is what we did see. So quite good growth except for that part, of course. .

[Operator]

And you mentioned in the report that you have seen a slower number of projects start recently. Given the long project cycles, will this hit you in the short term? Or is it more of a mid- to longer-term effect for you? .

[Christer Wahlquist, executive]

We have a good pipeline of projects. It's more a general comment that the sort of -- there is precedence on starting new projects. But I think that's a very short term and most likely will not be seen in the growth rates going forward. .

[Operator]

Okay. That's a wrap here of the Q&A. That's all the questions that we have. Thank you very much, Christer and Per-Ola for presenting and also answering all of your questions. And also thank everyone who followed along for this presentation with Nolato.

And hope you have a great summer and until the next time. Thank you very much, and goodbye. .

[Christer Wahlquist, executive]

Thank you. Goodbye. Have a great summer.