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Nolato AB
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Thank you, and welcome to the presentation of Nolato's Third Quarter 2022. This is Christer Wahlquist speaking. If we start on Page 2 in the slide deck, we have a quarter with sales at SEK 2.6 billion. And this sales was affected by lower VHP sales, as previously communicated within Integrated Solution, but increasing sales within Medical and Industrial, of course, fueled by inflation and currency effects.
The operating profit, EBITA, amounted to SEK 214 million, creating a margin on the EBITA level of 8.1 percentages. We saw the lower margin that was affected by inflation and production efficiency measures. The cash flow after investment increased to SEK 166 million as a result of lower investments during the period.
Turning to Page 3. The Nolato Group is working as a solution provider for global leading customers in different segments. The 3 business areas are creating synergies for our customers and competitive advantages for the Nolato Group.
If we then start on Page 4 with the Medical Solutions. As you see on this graph, we have had consecutive growth, actually, over 25 years since the creation of the Medical business area. And then, of course, during the period, numerous acquisitions, creating a global leading solution provider for the medical and pharma industry.
If we turn to Page 5, focusing on the different segments of product areas within Medical Solutions. We have, of course, the IVD Diagnostics, In Vitro Diagnostics, corresponding to approximately 18% of the sales; Cardiology, 7%; Pharma Packaging, around 12%; Continence Care, 12%; Endoscopy & General Surgery amounting to approximately 20% of our net sales; and then Drug Delivery at 15%.
If we then go into the details of Medical Solutions third quarter, we saw a 27% increase in sales. This was -- approximately half of that came from currency effects. And I would say, approximately half of the rest came from adjustment of cost inflation. And of course, we saw that IVD volumes were low during the quarter due to the pandemic-related inventory adjustments, but we saw good growth in the surgical area.
The EBITA margin ended up at 8.4 percentages and of course, affected by the change in sales mix between the IVD and the surgical area. Also inflationary effects and higher manufacturing costs, and this was particularly in the United States and the cost impact of capacity investments made in 2021 that are not fully utilized yet. So the quarter ended up at sales at SEK 1.245 billion and an operating profit of SEK 104 million, creating the EBITA margin of 8.4 percentages.
If we then turn to Page 7 and focusing on Integrated Solutions. This area is former telecom, now we are expanding into new market segments since few years creating a stronger platform and less volatility.
And if we turn to Page 8, we will see the split up of the different parts of the businesses. On the right-hand side, we will see the EMC/Thermal part of the business. And on the left-hand side, the Consumer Electronics part of the business.
If we then go into Page 9, focusing on details for Integrated Solutions during the third quarter. We saw above 50% decrease in sales. And if we adjust that for currency, the decrease was some 60%. This was affected of end market -- end customer demand affected by the situation in Eastern Europe with the Russia's invasion of Ukraine but also effects of the dual sourcing on our VHP side, and we have licensing underway due to new regulatory requirements for the VHP products in China.
So in October so far, we have had no manufacturing of VHP products. EMC is continuing to perform well, and we estimate the fourth quarter to be in the region of SEK 0.5 billion in sales due to lower VHP volumes corresponding to the situation of the new regulatory requirements in China for VHP. The margin ended up at 10.3 percentages and of course, affected by the lower volumes produced during the quarter. So sales ended up at SEK 745 million and the operating profit, EBITA, at SEK 77 million, creating the margin of 10.3 percentages.
If we then turn to Page 10, focusing on the Industrial Solutions business area. On this business area, we are on the technology and geographical expansion journey, creating good production footprint in the 3 important continents of our business.
And if we turn to Page 11, looking into the business area Industrial Solutions, we have 2 parts to this business. We have the larger portion called General Industry, which is products for household, white goods, and furniture and other industrial areas; and then we have the Automotive industry, focusing on the car manufacturing but also on the other vehicles.
Turning to Page 12, focusing on the details of the third quarter for Industrial Solutions. During the quarter, we saw an 18% increase in sales. And if we adjust that for currency and up at 9%. And of course, charging of high cost contributed positively to the sales numbers. And we see continued healthy volumes in general, but indications of reduced demand looking ahead of time.
The EBITA margin ended up at 5.2 percentages and was affected by fluctuating call-off orders, resulting in low operating efficiency, especially for the automotive industry and also with the time lag in charging on cost increases for some customers. So in the third quarter, the sales ended up at SEK 638 million with an operating profit, EBITA, of SEK 33 million, creating the margin of 5.2 percentages.
Good afternoon, Per-Ola Holmstrom, and I will comment on group financial numbers on Page 13. Net sales decreased in the quarter and totaled SEK 2.6 billion compared to SEK 3.0 billion the same quarter previous year. The EBITA margin was [ adverse ] with 3.1% compared to Q3 last year being 8.1%. The lower margin affected profits negatively in combination with lower sales, mainly VHP. Operating profit was SEK 214 million compared to SEK 339 million the same quarter last year. Cash flow after investments increased compared to latest quarters and the same quarter last year to SEK 166 million.
Net investments decreased to SEK 109 million, and working capital was almost neutral. The full year CapEx last year was SEK 782 million, and we reiterated the full year CapEx this year between SEK 600 million to SEK 750 million, depending on when we pay for real estate in Sweden. Earnings per share were SEK 0.59 compared to SEK 0.95 previous year the same quarter. Net financial liabilities decreased further this quarter to SEK 580 million when excluding pension and lease liabilities.
Turning to Page 14 and some comment on the current situation of our business area. If we start with the Medical Solutions. We have a maintained growth strategy, lot of focus on innovation based on strong customer relationship, but we also have the inflationary effects. If we look on to Integrated Solutions, we have established a position in the new product areas based on our flexible production structure.
We see the 5G rollout and new initiatives in the automotive sector that are very positive for our EMC business. We have some geopolitical concerns and of course, the Chinese licensing procedure is ongoing within the VHP.
On the Industrial Solutions side, we have advanced our market positions. We are impacted by supply chain disruptions, mainly at our customers. We emphasize on our sustainable solutions and of course, the inflationary effects.
We now open up for questions.
[Operator Instructions]
And our first question comes from Adrian Gilani from ABG.
It's Adrian here at ABG. A few questions from my end. First of all, one regarding input costs. Obviously, we've seen both oil and gas come down quite significantly from peak levels earlier this year. And you had already made clear this wasn't going to affect Q3, so no surprises there. But how should we sort of think going forward? Is Q4 still too early? Or should we start seeing a positive impact from decreasing input costs already in Q4?
Yes. I think Q4 will not show much decrease. And as you say, we have seen some effects of these kind of costs flattening out. But one thing to remember is when we look into the different indexes sharing price developments, often there are surcharges to those which adds on to the pure material cost. And there are, for example, surcharges for energy which we think will increase going forward.
Okay. That makes sense. But can you just remind us that at some point the current cost levels seem a bit unsustainable. So in a scenario where they eventually go down, how long have you historically been able to sort of keep your elevated prices to customers?
yes, in many cases, there are transparencies. But of course, as we have time lags, there will be time lags in the opposite direction as well. So some kind of time lag I would expect also in that direction.
Okay. If You look at Medical Solutions, you've said for several quarters that the sales mix in Medical has had a negative effect on margins. And you've talked about sort of destocking effects in your high-margin segments, IVD, for example. Presumably this as well has to turnaround at some point. So how should we think on this -- on the sales mix in Medical for the coming few quarters? When are these IVD inventories starting to sort of become depleted?
We don't have full transparency of this since those stocks are in different levels in the downward supply chain. But I agree with you, it cannot stay forever. But so far, we have not seen indications of easing up of that stock level.
Okay. So just to be clear, how long is your visibility? If you haven't seen it now, does that mean not only Q4 we won't see it, but also maybe in Q1? Or is it too early to talk about Q1?
We don't know. Of course, we have visibility on our order situation. We have long-term plans together with the customer. But then, of course, the call-offs are on the shorter horizon. So it could start happening in late Q4. It could start happening in Q1. We don't exactly know.
Okay. And then I assume that once the IVD volumes do return that's also going to significantly sort of improve capacity utilization. So it will be sort of a double, positive effect on margins? Or are there other areas of low demand in Medical that we should be aware of as well other than IVD?
I would say that the lower volumes are within the IVD sector if we look on the Medical side.
Okay. And then on Integrated, the whole permit situation that you recently came out with. Your customer in VHP, while you were not able to produce, can they sort of compensate for those lost volumes through their other sourcing partner? Or is this other partner in the same situation where they're also waiting for Chinese permits?
We don't have the full visibility on the supply chain. But -- so we don't exactly know how that is affecting. It's been going on for October so far. And we expect to get our license, our best estimate is, during November.
Okay. And I assume that in Q4 for you guys, there will be some significant inventory buildup due to not being able to produce as planned. Is that reasonable to assume?
We are, of course, evaluating the situation every day, so to say. And the -- did you mean inventory buildup...?
For you since you cannot produce. I assume that the components are already with you, and you'll just have to sit on them for now.
Yes, that's right. But we are, of course, trying to stock as much as we can, but we have seen some effect of that, and there is still some going on. But of course, we try to adjust and there are certain possibilities to that. But overall, it is increasing our inventories, yes.
Okay. In that case that was all from me.
The next question comes from Carl Ragnerstam from Nordea.
It's Carl from Nordea. So firstly, on Industrial, I mean, we have seen sort of falling margins for quite a while now, right? And I mean, have you any measures in place how to sort of restore margin because looking at the trading margins, it's -- we haven't seen these levels since, I mean, the financial crisis basically? And also with Volvo's production stop next week in October -- next week -- or in 1 week, sorry, I mean should we expect an even worsening situation in Q4 in [indiscernible] or how should we look at it?
The main reason for our lower margins is, of course, the volatility and the call-offs from our customer on a short horizon such as the one you mentioned now coming in next week. So that is the biggest thing affecting our margin. Then of course, we have the cost increase and the price increases towards the customer with the lag effect. But I think we have to get those volumes stabilized in order to get the margin where we wanted.
Okay. So it's purely volume related. You're not planning to do anything on the cost side of it?
No, it's -- basically, it's coming from the sluggish volumes. And you know Nolato is always in a position where we honor our customer and try to be the best partner long term for them. And if we would take away a lot of people, then we would not be able to follow the needs for our customers. We are in this together with our customers.
Okay. That's also fine. And on the Medical side, quite thin margin in the quarter. Is it possible to sort of quantify or try to split up the negative effects year-over-year here in the quarter?
Yes. We can comment on that. And there are some different effects affecting the margins, and we have mentioned those in the report. But I would say that the 2 biggest ones, and they are similar in size, almost 1% each. And those come from the time lag and the effects of the increased purchase pricing, increased labor costs, increased energy costs going on, which we have commented for quite some time. Then the mix effect is the other larger effect coming from less IVD and more surgery. And then there is a slight effect coming from not fully utilized investments made in 2021.
Okay. Super helpful. And also, I mean, while you said you had a negative margin mix, I mean, you also said that surgical is seemingly growing, and I suppose it's partly GW Plastics in that. But it looks like you have some margin pressure in GW Plastics as well, right? Or is it a miscalculation from my side?
That is correct. I mean they -- as you know, they come from a lower margin than we used to have. And then, of course, they run into the same kind of problems with the higher cost situation as we have in that business area totally. And they have -- and see the same effect from raw material, energy and labor cost. And the labor cost effect is the highest in U.S. compared to where we have production.
Okay. That is also super helpful. And the final one from my side is on EMC. It is actually growing quite nicely year-over-year about 20%. Could you help us split up the main drivers you have Automotive. You obviously, have telecom as well.
Yes. We see growth across all parts of EMC business. Of course, Automotive is a newer segment for us, so in percentages it is growing faster than the total but we see good growth across.
The next question comes from Johan Skoglund from DNB Markets.
Now I read a comment in the report saying that dual sourcing is now in effect. Could you please in raw terms elaborate a bit what this will mean in terms of price and volume going forward? Is it only you and another actor? Or do you know if there are several? I understand if you don't have all the details you can share there, but some color would be helpful.
We have earlier commented that the old product that is not affected by other sourcing. But since the customer has changed sourcing strategy, from new products, they are sourcing from other parties and that is affecting going forward. And that is somehow also one effect that we have calculated when we do the estimate for the fourth quarter.
Okay. Understood. And for some looking ahead then, you mentioned robotics surgery on your Capital Markets Day. I know we discussed this a few weeks ago as well, but could you please talk a bit more about the future opportunities in this segment?
Generally in Medical? Or do you mean automated surgery specifically?
Robotic or automated surgery specifically.
Okay. So we see a change of the surgical business going forward, and it's going to be more and more robotics. And this is, of course, creating opportunities with more advanced, how should I say, devices for that. And we think this is going to be an interesting area to be in and growth area. So we are, I would say, well positioned within the robotic surgery. But you should always remember that in medical, there are slow changes, and it's more a step-by-step change than anything else.
The next question comes from Mikael Laséen from Carnegie.
Three questions. First of all, can you say something about the indications of lower demand that you highlighted in your report and what indications are you referring to and in which areas and maybe something about the magnitude?
Yes. This is more of a forward-looking statement. And of course, as we described earlier, we have short-term plans, long-term plans and medium-term plans with our customers. And on some of the Industrial side customers, we get those signals that it might be some lower margins going ahead. It's nothing that we see in our order books or anything like that. It's more maybe during next year.
Okay. So the plan for slightly lower volumes, I guess, that's what you are seeing.
Yes.
Okay. And when it comes to Integrated Solutions on your guidance for Q4 of SEK 500 million, can you say something about margin impact? Do you expect to be at this level that you had in Q3? Or will there be other effects coming in and a lower margin, therefore?
Well, the low volumes. And as we stated, those are, of course, affecting VHP. And having those low volumes that we have during the fourth quarter is during that, we, of course, not earn much money on that part. There might be a small loss in that part because of that.
Then we have the EMC part and we give the sales numbers for that, so that has become a larger part, of course, of the total business area. We have premium margins in that part, which is then supporting the total margin. And then we have other products outside VHP within Consumer Electronics, where we have more general level of margins. So summarizing these 3 areas, I do expect lower margin during Q4 in Integrated Solutions because of that. It won't be a double-digit margin.
Okay. Yes, that makes sense, and thank you for that clarity. And my final one is on Medical Solutions. On Page 5, you have the product areas. It would be great if you can maybe say something about the growth for these different segments. We understand IVD is declining probably. But can you give some indications of roughly where -- how much they grow in Q3?
Yes. As a general thumb rule, the medical market is -- the market is growing 3% to 4%. And if we look into the different segments, I would say, faster growing -- on the fast growth side, Drug Delivery would be one of those. And long term, I think also In Vitro Diagnostics would be higher growth than that in average not right now but over time. And then, of course, we expect Endoscopy & General Surgery to be on the higher growth rate but of course, with the robotics coming in.
Okay. And what did you see in Q3? Is surgery growing really fast from lower levels? Or is it developing in line with what you indicated I guess...?
Yes. If we take Endoscopy & General Surgery, in this third quarter, we had lower comparison number during 2021 due to the pandemic. So of course, the growth rate of that was higher than normal, but it was more due to a lower Q3 last year.
Yes. And the split of the segment for that area, is that a good representation that you have on the slide that IVD is roughly 18% in Q3?
It's not corresponding to the third quarter. It's more a yearly overview.
Okay. But it's not significantly different, right?
Of course, during the third quarter, we had some lower IVD as we commented, so that would be -- maybe a little bit lower during the third quarter.
Thank you. No further questions at this time. I hand over the word back to you, Christer and Per-Ola, to add any closing remarks.
I would just like to thank you all for your interest in Nolato and listening to us presenting the third quarter. Thank you, and I wish you a very good rest of your day.