Nolato AB

STO:NOLA B

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Nolato Audiocast Teleconference Q1 2022. [Operator Instructions]. Today, I am pleased to present you, Christer Wahlquist, CEO; and Per-Ola Holmstrom, CFO. Please begin with your meeting.

[Christer Wahlquist, executive]

Thank you, and welcome, everybody, to the presentation of Nolato's First quarter 2022. This is Christer Wahlquist speaking, and I will start on Page 2 on the provided information deck. And to summarize the first quarter for Nolato Group, we ended up with sales close to SEK 2.9 billion. That was affected by a positive currency effect, and if we adjust for that, it was a 1% increase if we adjust for currency. During the quarters, we saw that volumes and profitability was negatively affected by restricted supply of components. We also saw shortages of raw material and labor, as a result of the pandemic. This gives us an operating profit EBITA at SEK 267 million, giving them an EBITA margin of 9.3%, and the margin was then affected by volumes and cost inflation. Cash flow during the quarter was negative with SEK 42 million, and we had an increased working capital requirement during the quarter.

Turning to Page 3, showing the total Nolato Group. So, Nolato Group consists of 3 business areas. We have the Medical Solutions that is working with pharma and med tech industries and delivering complex product systems and the different components for medical devices. We have the Integrated Solutions, working with design development and manufacture of different consumer electronics, E&C, and thermal, and we have Industrial Solutions doing development and manufacture of products and product systems for different industrial customers, such as automotive, hygiene, packaging, and so on.

Turning to Page 4, starting with Medical Solutions. In the Medical Solutions business area, we are on the global expansion journey. We're focusing our efforts on leading pharma and med tech companies globally, and we've seen a continuous growth of the business over the years. On Page 5, we are listing the focused product areas for business area medical solutions. We have there in vitro diagnostics, which is approximately 18% of our turnover. This segment is a long-term growth segment with different diagnostics. It's been affected during the pandemic with some temporary increased volumes due to testing of COVID, and we've seen lately good movement and reduction of stocks in that part of the business.

The next segment is Cardiology, which is long-term implants that correspond to different heart surgeries and so on. We have Pharma Packaging. It's a high-volume market for containers of liquid and solid drugs. We have Continence Care, a large volume segment, and we have Endoscopy and General Surgery. It's a large area and it's been negatively affected during the pandemic, but now it's coming back. And then Drug Delivery Systems, which is different types of devices to get large molecules of drugs into your body.

Turning to Page 6, summarizing Medical Solutions first quarter, we saw an 8% increase in sales, but if we adjust for currency, it corresponds to 1% increase. The rise in sales was mainly due to the pattern of price increases in raw materials. We saw that the IVD volumes were low in the quarter due to inventory adjustments. We also saw that the surgical were picking up during the quarter. The margin ended up at 9.7%, and we saw a change in the sales mix with a higher share from surgical segment and lower share of IVD business. We also had rising materials costs and it's offsetted in a positive way, but we see some time lag. And of course, we have increased our capacities over the last year in investments, and that is gardening our cost side a little bit. So, the quarter ended up in close to SEK 1.1 billion with an operating profit EBITA of SEK 106 million.

Moving to Page 7, Integrated Solutions business area, in this segment we've been working with the telecom industry for many years, and over the last 6 years, we've been expanding into new market segments very successfully. So, if we then turn to Page 8, you will see a little split-up of the business area. We have the larger portion called Consumer Electronics, which consists of the VHP different connected Wi-Fi systems or home security and, of course, different kinds of wearables, and the smaller portion called EMC Thermal. It's heating solutions for electromagnetic influences. In this smaller segment, we have premium margins compared to the rest of the group.

Turning to Page 9, focusing on Integrated Solutions first quarter. During the quarter, we saw a 9% increase in sales, but if we adjust for currency effects, it was a decrease of 1%. We saw lower volumes than we previously expected and there was restricted supply of electronic components within the VHP sector. We also saw that the end customer demand was adversely affected by the situation in Eastern Europe in March, and EMC Thermal is continuing to perform well. During the quarter, we saw sales of above SEK 1.1 billion with an operating profit of SEK 103 million, giving a margin of 10.8%, and the margin has been affected by lower volumes during the quarter.

If we turn to Page 10, going into Industrial Solutions business area. In this business area, we are on a technology and geographical expansion journey. And if we turn to Page 11, we will show a split-up of the business area into different segments. We have the general industry corresponding to approximately two-thirds of the business area, so that is a different type of white goods and forest equipment, furniture, and so on, and then one-third approximately is automotive industry.

If we turn to Page 12, focusing on Industrial Solutions First Quarter. During the quarter, we saw a 10% increase in sales, but if we adjust for currency, it was a 5% increase, but we saw lower volumes during the quarter and the passing on of material price increases has affected the sales. We saw component shortages, mainly in the automotive, and the quarter ended up at SEK 653 million in sales with an operating profit EBITA of SEK 40 million, raising a margin of 6.1%, and that margin was low due to lower volumes and low production efficiency due to the short-term movements of production orders in the quarter.

[Per-Ola Holmström, executive]

This is Per-Ola Holmstrom presenting consolidated financial numbers on Page 13. Net sales increased in the quarter to SEK 2.9 billion compared to SEK 2.6 billion in the previous quarter 2021. We did have positive currency effects, and if we adjust for those, it was 1% adjusted growth. The EBITA margin was 9.3%, which is lower than the same quarter of 2021, and resulting in decreased results in different profit lines. The effective tax rate of almost 20% was more in line with the full year of 2020. Net investments or CapEx affecting cash flow were SEK 130 million compared to SEK 178 million in the same quarter of 2021. Net investments were lower and we expect slightly lower full-year CapEx than the full year of 2021. Cash flow after investments ended up minus SEK 41 million in the quarter. We did have a negative cash flow due to working capital requirements in the quarter. Earnings per share were SEK 0.75.

[Christer Wahlquist, executive]

Turning to Page 14, focusing on the current situation per business area, starting with Medical Solutions, where we have a maintained growth strategy, a lot of focus on innovation built on strong customer relationship, but impacted by the pandemic. Integrated Solutions, we have established a position in new product areas. In the base, we have a very flexible production structure, and we see a 5G rollout and more new initiatives in the automotive sector that are very positive for the EMC business. The business area was impacted by the geopolitical situation. Industrial Solutions, we have advanced our market positions. We are impacted by supply chain disruptions and a lot of emphasis on sustainable solutions. We will now open up for questions.

[Operator]

[Operator Instructions] Our first question is from Mr. Adrian Gilani from ABG.

[Adrian Gilani Göransson, analyst]

I'd like to start off with a question on your VHP customer. You're right obviously, in the report that they are looking to assess their sourcing strategy. Should we take this to believe that they're looking to dual source their production? And if yes, can you talk about how that would affect your volumes and your pricing power?

[Per-Ola Holmström, executive]

Yes, we have been talking about our relationship with this customer for many, many years now, and we have a very large business and the customer is opening up for discussions on dual sourcing, not only on our product but also on other parts of the portfolio.

[Adrian Gilani Göransson, analyst]

In that case, how would that affect, do you believe, your volumes to them and also the price you can take for those volumes?

[Per-Ola Holmström, executive]

This sourcing strategy will not affect existing products that we are producing. It will affect the next generation of products, and we are in a good position, so we will be a supplier of those going forward. But exactly how that will -- what's the timing of that and the split of those volumes, we don't really know yet, but there are also opportunities on other products.

[Adrian Gilani Göransson, analyst]

Have you received some sort of time line as to when your customer will take this decision? Will you know this during Q2 or could it take longer?

[Per-Ola Holmström, executive]

We have discussions with our customers, but the formal decisions are not made.

[Adrian Gilani Göransson, analyst]

Also, on your guidance in Integrated Solutions, you say you expect a negative 20% quarter-over-quarter growth in Q2. Can you just talk about is this development primarily due to component shortage issues or is it primarily due to lost volumes in Eastern Europe, which we understand to be sort of a meaningful end market for VHP?

[Christer Wahlquist, executive]

I think you should see it in the light of having had a Q1, which for most part of that was affected by the shortages of electronic components. In the end of the quarter, it turned more to a situation where the demand for these kind of products in the Eastern Europe countries decreased. And I think going forward, in the second quarter, it's more the latter, the Eastern European situation doing that, demand from these countries are zero, and that is pretty much the effect we do see in the second quarter.

[Adrian Gilani Göransson, analyst]

Also, you say that despite having 20% lower volumes, you expect a comparable margin and just asking how confident are you in being able to maintain a similar margin despite the 20% lower volumes?

[Per-Ola Holmström, executive]

It is, of course, our best assessment that we can do today. It is an effect of 2 different things. Of course, we have from a margin point a more favorable mix situation, having more E&C with a higher margin or at least a larger part. And secondly, we have had some time to correct our cost situation the best we can, and hence, we do think that we can achieve a similar margin in the second quarter as well.

[Operator]

Next question is from Mr. Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

A question on Medical, I mean you said that you had sort of lower or weak IVD volumes during the quarter. I think you said before that it is partly due to inventory reductions from your customer. Would you say that this situation will improve in Q2 or has improved so far? Or how should we look at the IVD softness?

[Per-Ola Holmström, executive]

We don't have the full picture of the total supply chain. During the pandemic, there has been temporary solutions for providing these type of products from temporary sources, and of course, there has been a huge demand in that. And now, the major players in this field are sort of ramping down those temporary resources and focusing on their core sources and exactly how that will play out and when we will see the volumes coming back to a more normal situation, we don't really know at this time.

[Carl Ragnerstam, analyst]

So it sounds like you still have inventory reduction going on, right?

[Per-Ola Holmström, executive]

Yes.

[Carl Ragnerstam, analyst]

You also said that the Surgical side of Medical Solutions, I mean, that's at least equally important part of medical right? Is it fair to assume that the growth in Surgical could offset the IVD volumes in the short term?

[Christer Wahlquist, executive]

From a sales perspective, I would give...

[Carl Ragnerstam, analyst]

Yes, exactly right.

[Christer Wahlquist, executive]

Yes, correct. Then, of course, the Surgical business is mostly part of the acquisition of GW, so we see some lower margins in that compared to the former Nolato legacy production, but sales-wise, yes.

[Carl Ragnerstam, analyst]

You also said that you are able to offset raw material headwinds, but with a time lag. So should we also expect a more severe margin impact from raw materials in Q2 than what we have seen in Q1, as if I guess, the main inflation came at late Q1 or early Q2.

[Per-Ola Holmström, executive]

No. I would say we've been very good in handling those pass off to customers price increases. So, we've seen some time lag during this quarter, but you should not expect lower margins or severe margins going forward.

[Carl Ragnerstam, analyst]

In addition to that, when I look at your inventory levels, you're continuing to build quite a bit of inventory despite a bit muted outlook maybe in the very short term. How should we look at that? Are you too aggressive in building inventory given the demand situation, or is it pricing driven?

[Christer Wahlquist, executive]

The inventory situation is stabling right now, I would say, and we have tried to build inventories in different sections where we have seen shortages. We do see shortages also in raw materials in some cases. So it's not only components or electronic components, and what that has done that our inventories has increased, but I think that's leveling out what we have so to say, and we are trying to go in the other direction going forward, at least in areas where we can see it's not that critical anymore.

[Carl Ragnerstam, analyst]

Just for clarification, in Q2, do you still have component issues [ in tobacco ], I mean, to some degree, or is it primarily or solely due to BAT exiting Eastern Europe?

[Christer Wahlquist, executive]

Let's say, hypothetically, that volumes or demand would have been more in line with the end of last year, we would still have electronics component shortages, but with the situation with lower demand, that is not that critical anymore right now.

[Operator]

[Operator Instructions] Next question is from Mr. Mikael Laséen from Carnegie.

[Mikael Laséen, analyst]

A couple of questions. First of all, the quarter came in better than you guided for. Can you explain the reasons for this, and where you saw the improvement or the deviation compared to your March guidance?

[Per-Ola Holmström, executive]

We did report on March 24, and we still had about a week to go, and we did see some areas selling a bit more than we expected. We had also a bit more currency effect than we expected, so it's a combination of those, so ending a bit better than expected.

[Mikael Laséen, analyst]

So that sounds it was across the border, United States?

[Per-Ola Holmström, executive]

In different areas, I would say, yes.

[Mikael Laséen, analyst]

The price component here in Q1, if you can comment on that, approximately how much price increases you have in the quarter driven by raw material cost changes, and how we should think about this volume and price going forward?

[Per-Ola Holmström, executive]

It's always the question of starting points and where you start those calculations, but we have seen ongoing large price increases in this quarter as well and, of course, that is affecting us most in the industrial business area. The material part of our cost is largest in that business area, and we did have a sales increase of 10%, but half of that was currency effects and we do see that a bit more than the rest was the price mechanism effect. So, if not having that, we would be down on some percentages negative sales in Industrial, for example. So, that is sort of showing the big effects and changes that we do have.

[Mikael Laséen, analyst]

That's really helpful, and the final one on your sourcing question, just a follow-up on that. In general, how long are the product cycles, if you can say something about when new products will be launched and what remains from the current product offering in the market right now?

[Per-Ola Holmström, executive]

Normally, there is an overlap of all the new products parallel in the market. So, the product maybe lasts some years, but then new products are introduced in different markets and then gaining market share of the total over a period of time.

[Mikael Laséen, analyst]

Just to be broadly thinking about the total year, is it fair to assume that we should expect lower market share for you in the second half already, or is this something that could come in 2023, maybe, and then only eventually?

[Per-Ola Holmström, executive]

Since, we have not seen the final decisions of this new strategy, we can only anticipate, but to see some effect during second half of this year could be possible.

[Operator]

We have no other questions.

[Christer Wahlquist, executive]

Then, I would like to thank you for your interest in Nolato's presentation of the first quarter, and wish you a great day.