Nolato AB

STO:NOLA B

Earnings Call Analysis

Sales Dip but Stable Automotive Demand, Operating Profits Hold

In the third quarter, net sales fell by 15% to SEK 2.3 billion, with operating EBITDA at SEK 193 million, slightly lower than last year's SEK 214 million. Despite a nonrecurring cost of SEK 60 million for consolidating Chinese operations and lower volumes than anticipated, the EBITDA margin held steady at 8.2%. Cash flow remained strong at SEK 188 million, barring acquisitions, and the financial stance is robust with an equity-assets ratio of 54% and net debt reduced to SEK 1 billion. Capital expenditure for 2023 is planned between SEK 450 million and SEK 500 million. The Integrated Solutions segment is expected to see margin improvement gradually in Q4 and into next year, targeting a long-term group margin of 10%. Currency fluctuations and strategic shifts by key players in the market affected financial items and volumes, but these aren't expected to worsen. Cross-segment synergies are being harnessed between Integrated Solutions' electronics and the Industrial segment's mechanical offerings, with stable demand seen, especially in the Scandinavian automotive market.

Overall Financial Performance

Nolato reported a challenging quarter with net sales at SEK 2.3 billion, which represents a 15% decrease from the previous year when adjusted for currency fluctuations and acquisitions. Despite this, the company maintained an operating profit of SEK 193 million, buoyed in part by SEK 20 million in electrical subsidies received from Swedish authorities, with an operating margin of 8.2%. A notable nonrecurring item of SEK 60 million was recorded related to the restructuring of Chinese operations. The company also reported a robust cash flow of SEK 188 million after investment activities, but signaled a potential decrease in cash flow anticipated for the next quarter due to the payout of the nonrecurring item.

Medical Solutions: A Pillar of Stability

The Medical Solutions segment, now representing close to 60% of Nolato's total sales and a majority of its profit at over SEK 1.3 billion, experienced a 6% increase in sales (1% on a currency-adjusted basis). The segment's EBITA margin stood at 9.5% for the quarter. A diverse portfolio that includes in-vitro diagnostics, cardiology, pharma packaging, continence care, endoscopy and general surgery, and drug delivery systems underlines Medical Solutions' steady performance even as it navigates post-COVID adjustments in customer mix and inventory within the IVD sector and supply chain variations affecting surgical volumes.

Integrated Solutions: Searching for New Directions

Integrated Solutions faced a steep 56% drop in sales to SEK 330 million, largely due to a strategic shift by a major customer. This business area, which includes sectors such as complex modules and wearables, experienced a corresponding decline in operating margins to 3%. Despite this downturn, efforts to diversify within new market segments are underway, with particular focus on areas like smart home and home security, and there are positive movements within the Automotive subsector, which offset weaker performance in Telecom.

Industrial Solutions: Incremental Growth Amidst Economic Headwinds

The Industrial Solutions business area reported a subdued 2% growth in sales after currency adjustments, totaling nearly SEK 700 million for the quarter, with an EBITA margin of 9.3%. Their progress was attributed to rising automotive volumes and lesser impact from supply chain disruptions. However, a generally weaker economy has tempered demand in the consumer discretionary sector. Looking forward, the business continues to focus on technology and geographical expansion, targeting segments such as domestic appliances, hygiene products, and packaging.

Capital Expenditure and Financial Outlook

Nolato anticipates its capital expenditures (CapEx) for the full year 2023 to be between SEK 450 million and SEK 500 million. The company retains a strong financial position with an equity assets ratio of 54% and a reduction in net financial liabilities from SEK 1.2 billion at the end of June to SEK 1 billion. The solid financial footing enables strategic freedom, including the potential for acquisitions.

Earnings Call Transcript 2023-Q3

[Operator]

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.

[Christer Wahlquist, executive]

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 to 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, this 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 EBITDA 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 the situation right now after COVID some adjustments.

Cardiology, it's long term. It's mostly implant business, stable and 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 of the 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. We had approximately SEK 10 million in the 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 hand-hand 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 and 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 the 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, we summarize the third quarter for Industrial Solutions. During the quarter, we saw in the 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 and consumer discretionary sector, slightly lower due to a weaker -- weaker economy 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.

[Per-Ola Holmström, executive]

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 EBITDA, 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 EBITDA margin, excluding the nonrecurring item, was 8.2%, similar to last year. The EBITDA and the EBITA margin includes SEK 20 million in electricity subsidies from Swedish authorities. And that was received in Q3.

Yes, 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.

[Christer Wahlquist, executive]

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]

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

[Adrian Gilani Göransson, analyst]

Can you hear me okay?

[Unknown Executive]

Yes.

[Adrian Gilani Göransson, analyst]

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?

[Per-Ola Holmström, executive]

Yes. To start with, it was an increase in margin compared to the same quarter last year. But as I 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 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.

[Adrian Gilani Göransson, analyst]

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?

[Per-Ola Holmström, executive]

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.

[Adrian Gilani Göransson, analyst]

Okay. And then perhaps a bit of a detailed question. The net financials at SEK 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 SEK 21 million is a new normal or whether this number will be coming down in the coming quarters.

[Per-Ola Holmström, executive]

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 cost in Q3. On the other hand, it was a positive change in Q2. So it was a high number this quarter, definitely.

[Adrian Gilani Göransson, analyst]

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 auto injectors 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?

[Christer Wahlquist, executive]

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.

[Adrian Gilani Göransson, analyst]

Okay. I guess 1 small follow-up on that. As you mentioned, Novo, they are a long-term customer of yours, of 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 make -- produce for them today.

[Per-Ola Holmström, executive]

Yes. 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 1 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.

[Christer Wahlquist, executive]

We are working within their insulin diabetes care products.

[Adrian Gilani Göransson, analyst]

Okay. Perfect. That's very helpful. That's all for me.

[Operator]

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

[Carl Ragnerstam, analyst]

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

[Unknown Executive]

Yes.

[Carl Ragnerstam, analyst]

Okay. Very good. Just a 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? 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 the change in customer mix at the end of the quarter, what does that mean really?

[Per-Ola Holmström, executive]

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.

[Christer Wahlquist, executive]

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.

[Carl Ragnerstam, analyst]

I didn't really catch that. Could you please take it once again? 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?

[Christer Wahlquist, executive]

No. It's 1 of the big Tier 1 players within this field that has been supplying a lot of the -- the [ cavets ] for the IVD to the OEMs. 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.

[Carl Ragnerstam, analyst]

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

[Christer Wahlquist, executive]

I don't think we will see a worsening effect going forward, but it will take some time to put new capacity in place for the OEMs directly.

[Carl Ragnerstam, analyst]

Okay. Sounds fair. And also you said on the surgical side, that it's also a bit soft here. Is it anything temporary? I mean, is it -- I mean, also their inventory reductions? Or what do you see? Because other companies in the sector seems to be -- thrive currently, but...

[Christer Wahlquist, executive]

Yes. I think it should rather be seen as a temporary thing where we have some swings of the COVID and we have a strong surgical quarter in comparison 2022. So it's more of that than anything else. There is no changes in the total market in more a comparison number, Q2 -- Q3 2022 compared to Q3 2023.

[Carl Ragnerstam, analyst]

Okay. And that will last how long, you think?

[Christer Wahlquist, executive]

We had specifically a strong surgical quarter, Q3 2022. So that thing specifically is a quarter thing and not something that we see going on.

[Carl Ragnerstam, analyst]

Okay. And also finally, perhaps on -- you're talking about achieving synergies between Industrial and Integrated. Could you talk a bit about -- more about that? Is it just cooperation between the segments? Or are you actually merging plans? And also, have you achieved any interesting sales leads from that so far? Is it to [indiscernible]?

[Christer Wahlquist, executive]

Yes. Integrated Solutions is mostly working with integrating electronics into devices, and Industrial is mostly working with the pure mechanical. And by addressing the same set of customers with both offerings and combining them, we see good synergies. And we have seen good opportunities that we have sort of built up together with customers by cross-selling and working together with the 2 parts of our businesses.

[Operator]

So I will now hand over the word to the cell phone number that ends with 79.

[Karl Norén, analyst]

Hello, can you hear me?

[Unknown Executive]

Yes.

[Karl Norén, analyst]

It's Karl from SEB. Just coming back to the Medical segment again. I mean, I was also a bit surprised by the lower growth there. And it doesn't really sound like it's anything that should last as long, but I'm just curious to hear your thoughts on next year. Are you at any -- are you afraid that growth will be a bit lower for next year for the Medical side? Or should we expect normal 7% to 8% organic growth in Medical next year as well?

[Christer Wahlquist, executive]

Our long-term ambition is to outgrow the market, but we will have periods with a higher growth rate and some periods with a little bit lower growth rate. And this quarter was lower, and it will vary between different quarters.

[Karl Norén, analyst]

Okay. But the weakness in surgery, I mean, I guess that it was a lot that -- you pushed out a lot of surgeries during the vacations last year, especially in the U.S., and that is now maybe not so much. So then, I guess, Q4 should be bit better then, right? [indiscernible] organic growth year-over-year.

[Christer Wahlquist, executive]

I think on the surgical side, specifically, we would not have that effect in Q4. But then, generally speaking, we are not giving prognosis on our growth quarter-by-quarter.

[Karl Norén, analyst]

Yes. Okay. And then just a question on the Industrial side. I mean you mentioned that outlook for some of the segments is weakening. But Automotive is still going strong. And we are seeing some signs in the market that auto demand maybe for '24 is -- looks a bit soft when the backlogs are being run through. Can you say anything about what you see in the Automotive business and if you still see growth here in the coming quarters?

[Christer Wahlquist, executive]

Our main automotive market is the Scandinavian truck and car manufacturer. And we see, of course, there will be changes, but we see a continuously stable demand.

[Karl Norén, analyst]

Okay. That's good. And just on Integrated again, did you say that you expect margins to increase gradually from Q3's level going forward here?

[Per-Ola Holmström, executive]

That's correct. Yes. Step-by-step.

[Operator]

So I will now hand over the word to the cell phone number ends with 94.

[Johan Skoglund, analyst]

This is Johan from DNB Markets. Just a detailed question on the cash flow. So cash flow from financing came in at negative 265. Could you please break down the good components of this?

[Per-Ola Holmström, executive]

Could you repeat which cash flow you meant?

[Johan Skoglund, analyst]

Cash flow from financing in the quarter, please.

[Per-Ola Holmström, executive]

Yes, the financing?

[Johan Skoglund, analyst]

Yes. Thank you.

[Per-Ola Holmström, executive]

That is coming from repayment of loans that we have made in the quarter mainly from that.

[Operator]

So do anyone have any more questions? [Operator Instructions] I think that was all for the questions. Thank you so much for the presentation and answering our questions today.

[Christer Wahlquist, executive]

Thank you, and thank you all for being interested and listening to the presentation of Nolato's third quarter. We wish you all a very good rest of the day. Thank you.