Nolato AB

STO:NOLA B

Earnings Call Analysis

Nolato’s Q3 Highlights: Growing Sales and Margins Amid Challenges

In the third quarter of 2024, Nolato achieved a 5% increase in sales, reaching SEK 2.4 billion, driven by strong growth in both Medical Solutions and Engineered Solutions divisions. EBITDA rose by 22%, yielding a margin of 9.8%. While the Automotive segment faced a decline due to reduced demand, In Vitro Diagnostics and Drug Delivery recorded healthy performances. The company anticipates SEK 700 million in CapEx for 2024, with a strong cash flow from operations of SEK 327 million. Margins are expected to remain stable despite market fluctuations, reflecting a strategic focus on innovation and cost efficiency.

Revenue Growth and Financial Strength

Nolato Group reported a 5% increase in sales for Q3 2024, reaching SEK 2.4 billion, indicating strong expansion across its business areas. The operating profit significantly rose by 22% to SEK 235 million, resulting in an EBITDA margin of 9.8%. With a robust financial position reflected by an EBITDA to financial liabilities ratio of just 0.6x, the company is well positioned to sustain operations and pursue growth initiatives.

Performance by Business Areas

The earnings report highlighted noticeable growth within both Medical Solutions and Engineered Solutions sectors. Medical Solutions saw resilient growth in In Vitro Diagnostics (IVD) and Drug Delivery markets after a post-COVID recovery. Notably, adjustments for currency showed a solid 5% growth in IVD business, while Engineered Solutions experienced a 4% currency-adjusted increase despite challenges in the Automotive segment, which is poised for potential declines next quarter.

Cost Dynamics and Investment Plans

Nolato announced net investments of SEK 136 million, part of which is attributed to ongoing medical expansions in Hungary. For the entire year, the company plans capital expenditures of approximately SEK 700 million. This includes around SEK 600 million earmarked for significant projects like the one with Novo Nordisk, with projections indicating an additional SEK 100 million in 2024.

Challenges and Market Adjustments

Despite the overall growth, there are notable challenges ahead. The Automotive sector has begun experiencing downturns due to lower end customer demand, which is expected to negatively impact fourth-quarter results. This sector alone faced a year-over-year decline of about 15% and a similar contraction is anticipated for Q4, indicating market volatility.

Future Outlook and Strategic Focus

Nolato remains committed to its growth strategy, emphasizing margin improvement, cost adjustments, and ongoing partnerships with major pharma and medtech companies. A new significant contract within the Drug Delivery segment illustrates the firm’s strategic direction towards sustainable and innovative offerings. Meanwhile, ongoing destocking from customers in the Medical Solutions area suggests that normalized inventory levels could impact sales performance in the near future.

Conclusion

In summary, Nolato's latest earnings report highlights a robust financial performance coupled with strategic growth initiatives. However, investors should remain vigilant regarding external market challenges, particularly in the Automotive sector, and the impact of ongoing adjustments in customer inventory levels. By keeping an eye on the company's capital expenditures and future contracts, investors can gauge Nolato's long-term growth trajectory.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to today's call with Nolato. Our CEO, Christer Wahlquist and CFO, Per-Ola Holmstrom, will present the report for the third quarter of 2024. After the presentation, there will be a Q&A. [Operator Instructions] And with that said, I hand over the word to you guys.

[Christer Wahlquist, executive]

Thank you, and welcome to the presentation of the third quarter of the Nolato Group. This is Christer Wahlquist speaking. If we start on Page 2 with a summary of the third quarter. We saw a quarter with an increased sales approximately 5%, and the growth was across both business areas. We saw an increased EBITDA that rose to -- rose by 22%, ending up at SEK 235 million. That, of course, corresponds to an increased margin ended up at 9.8%, and we saw this situation in both our business areas. The strong financial position with relation EBITDA towards financial liabilities ended up at 0.6x. This is enabling us to act together with customers and continue to build our global offering to the market.

Turning to Page 3. Summarizing the two business areas. We saw the good growth and focusing on offering on two different markets, but with the same offering across and enabling and creating synergies between the business areas.

Jumping into the Medical Solutions business area. On this slide, you will see the long-term growth, continuous growth over the 20 years shown on the graph. Building strong footprint together with customers on a long-term basis by continuous growth together with these customers across.

On Page 5, we are showing our focused product areas within the Medical Solutions business area. If we start on the top right corner in In Vitro Diagnostics. This area saw a growth in the quarter after some sluggish volumes or low volumes after COVID. This area has been affected by COVID with strong growth early on in the COVID situation and then some supply reduction or stock reductions across the full scope and now we see growth again. The second one, Cardiology has been affected also by the COVID and we've seen first slow volumes in the early days and then some supply chain buildup and now some reductions in the supply chain.

Pharma Packaging, it's a stable market. It contains of drug containers for liquid and solid drugs based on an offering to big pharmaceutical companies. Then Continence Care, it's, of course, a high-volume market with the high usage of these products for people that have some difficulties with the continence situation. Endoscopy and General Surgery, it's an interesting market with some changes coming with more optimization of the surgical business. This business area has also had some sluggish volumes during COVID and after COVID with buildup and long supply chain disruptions.

The Drug Delivery market, long-term growth market, stable and continues, not affected by COVID at all, not in any directions. So it's more of a home care business, you get your drugs and continue to use these drug deliveries. We see a long-term potential in this.

Looking into the financials of the third quarter, we saw an adjusted -- currency adjusted growth of 5%. And within that situation, we saw a good growth of IVD business. We saw healthy volumes within the Drug Delivery. We saw, on the other hand, lower volumes in Other category, and we've been communicating about the customer product recall affecting this year.

We saw within the Pharmaceutical Packaging, some lower volumes. There were some customer inventory adjustments and also some geopolitical effects in this quarter. This total sales ended up at SEK 1,355 million and an operating profit of SEK 145 million, creating a margin of 10.7%. If we look on the pie chart on the right corner, down. We see some movements between different segments. We saw, of course, In Vitro Diagnostics growth, growing as a total percentage of our sales. We also saw Drug Delivery growing. Then on the other hand, we saw some decline in the percentages for Pharmaceutical Packaging also on the other segments in this quarter.

If we then jump to Page 7, focusing on Engineered Solutions. On this 20-year graph, we see some heavy growth over some years and then a downturn with the phaseout of our VHP business. We are building a solid and strong footprint within multiple areas. So that's what we are doing at the moment with this business.

If we look on the focused product areas within Engineered Solutions, starting at the right upper corner on the Consumer Electronics. This consists of different wearables, smart home, connected WiFi systems and different type of products. Then we have our Automotive area, where we focus on very technology advanced product, but mostly based on the Scandinavian automotive market.

Hygiene products are different kind of devices and such things that are around the hygiene area. On the Other area, we see some household appliances, furniture and some clean tech products. Then we have the Materials selections, which consist of electromagnetic shielding products, communicating devices and thermal management product protecting electronics. This area is a little bit different in the business setup than the rest. It's more our own platform products that are applied in different areas.

Jumping into the third quarter of Engineered and the financial side of the business. We saw an increase in the quarter, 4% if we adjust for currency. We saw during the quarter a temporary rise within the Hygiene segment. We saw also signs of the decline in volumes within the Automotive based on lower end customer demand, and we think this will negatively impact the fourth quarter as well.

Within the Materials, we have generated increased volumes and a growth of 17% adjusted for currency. We saw growth across but also a healthy growth for the telecom in comparison with a slow quarter last year. So the margin ended up at 9.8%, of course, based on our cost adjustments in our Asian operations, but also a favorable product mix. If we look on the sales per customer area chart, we saw a decline of the Automotive. Other area was growing good, and of course, Materials were growing good in the quarter.

[Per-Ola Holmström, executive]

Good morning. Per-Ola Holmstrom commenting group financial highlights on Page 10. Net sales was a growth quarter by 5%, and sales was SEK 2.4 billion compared to SEK 2.340 billion. Operating profit rose 22% to SEK 235 million compared to SEK 193 million totaling an EBITDA margin of 9.8%. The effective tax rate was 21.8%, very similar to the Q2 number.

Cash flow from operating activities increased to a strong SEK 327 million compared to SEK 280 million. However, net investments increased to SEK 136 million, which is higher than the previous quarters this year, as the medical expansion in Hungary for the new project has started, and we are paying out money for that equipment.

For the full year 2024, we expect around SEK 700 million in CapEx. Adjusted earnings per share rose to SEK 0.61 compared to SEK 0.48 in the quarter. Return on capital employed increased to 11.5% as a combination of the improved profitability and a more slim balance sheet.

Turning to Page 11, focusing on the current situation per business area. On the Medical Solutions business area, the maintained growth strategy, but we see some temporary sluggish market activity. We focus on margin, cost adjustment, pricing strategy and efficiency. Our offering is, of course, based on innovation and sustainability. We have a very broad customer base with long-standing close customer relationships, focusing on the large pharma and medtech companies.

The new significant customer contract within our Drug Delivery, it's validating our role strategy, and we are looking forward to that large program. On the Engineered Solutions, we have phased out the VHP from this quarter. We, of course, have advanced our market positioning and establishing positions in new product areas. We are successful in the Automotive area that are positive for our Materials business.

And so that's sort of the current situation, and we'll now open up for questions.

[Operator]

[Operator Instructions] And the first question here is from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

Hello, it's Carl from Nordea. Can you hear me?

[Per-Ola Holmström, executive]

Yes.

[Carl Ragnerstam, analyst]

A couple of questions from my side here. You mentioned that you had one customer who had inventory buildups in the surgical segment. Is it of any magnitude? Or is it more that you wanted for onshore good phase just mentioned it?

[Per-Ola Holmström, executive]

It's not a large effect. We had 5% growth in the quarter. And this effect is estimated to be less than 1% unit of this 5% unit growth.

[Carl Ragnerstam, analyst]

And this effect, is it just related to Q3? Or will it linger into Q4 and Q1?

[Per-Ola Holmström, executive]

As we see it, this is a onetime thing, which is positive in Q3, and it will be negative in Q4, and then it's gone.

[Carl Ragnerstam, analyst]

Okay. Very clear.

[Per-Ola Holmström, executive]

Changing ERP system, and that's the reason at this time.

[Carl Ragnerstam, analyst]

Okay. Got it. Very clear. And looking at Page 6 in your presentation sales by customer area. I'm just trying to square the mixes year one. And you had surgical volumes being quite good, which I guess is a little bit negative mix wise, but IVD growing, which is mix accretive. So if you look at those changes, and you try to aggregate it, would you say that you had a positive mix nonetheless?

[Per-Ola Holmström, executive]

Yes. It's a positive mix slightly, I would say.

[Carl Ragnerstam, analyst]

And would you then say that the mean or the absolute majority of the year-over-year delta margins is still perhaps pricing and initiative -- efficiency initiatives rather than the mix effect in the quarter?

[Per-Ola Holmström, executive]

Yes. Yes.

[Carl Ragnerstam, analyst]

Okay. Very clear. You also mentioned that networks grew seemingly for the first time in a while, if I don't -- I mean, if I remember correctly in EMC. Is it a sustainable trend you see or is it more hard to determine or hard to speculate currently?

[Christer Wahlquist, executive]

I think it's been very low for a period of time, and it's a little bit of some of that coming back. How long term it is, it's difficult to say.

[Carl Ragnerstam, analyst]

But do you see the current same trends so far in Q4 as well? Or is it volatile between the quarters?

[Christer Wahlquist, executive]

I think it's a small uptick from the low volumes we are comparing to. And in that sense, it will be a little bit stronger than the comparison quarter in Q4 as well.

[Carl Ragnerstam, analyst]

Okay. Very clear. And the final one from my side is maybe the auto market, did you experience that was tough throughout Q3 year or was it more of the latter part of Q3? And how do you see volumes play out over the coming few quarters here? Also, if you could a little bit square, I guess, the positive mix effect in EMC with auto and also their telecom networks coming in that might at least on an EBITDA level of that the auto drop for -- how should we look at those dynamics?

[Christer Wahlquist, executive]

Starting with the first part of your question with the automotive market, we saw a gradual decrease during the quarter and we estimate it will continue to be slow. So that was that part. It's mostly affecting the non-Materials part of the business, more on the Other part of our business.

[Carl Ragnerstam, analyst]

And the mix effect from EMC perhaps offsetting the auto? Or is it difficult to answer over the coming quarters here?

[Per-Ola Holmström, executive]

Well, I would assume that there is a positive mix effect coming from that. As you know, we have higher margins within materials and that will support the mix effect you're asking about.

[Operator]

And we will now go ahead and give the word to Adrian Gilani from ABG Sundal Collier.

[Adrian Gilani Göransson, analyst]

Can you hear me okay?

[Christer Wahlquist, executive]

Yes.

[Adrian Gilani Göransson, analyst]

I'd just like to start with a follow-up question on the auto market. You said you expect continued weakness in Q4, but was that sort of an increased deterioration compared to the Q3 levels or similar levels? And I guess also if you expect that Engineered Solutions in general can defend the current margin levels if we see a further deterioration?

[Christer Wahlquist, executive]

Due to the fact that we saw a gradual decrease of volumes during the third quarter, it will most likely be a little bit slower in the Q4 compared to Q3.

[Adrian Gilani Göransson, analyst]

Okay. Understood. And then on Medical, it sounds like destocking among customers was a tailwind in several of the product areas. Is that something that's expected to persist as well? Or are we now on more normalized inventory levels? And should we expect that you will now see sales in line with the actual market demand?

[Christer Wahlquist, executive]

I think within -- some of the areas within Medical, there are very long supply chain situation downstream. So I think there are some more to come on the adjustments.

[Adrian Gilani Göransson, analyst]

Okay. Could you elaborate on which product areas those are?

[Christer Wahlquist, executive]

I would -- we see a long supply chain in -- within the Endoscopy and General Surgery. I think that's probably the longest, but also in some of the cardiology.

[Adrian Gilani Göransson, analyst]

Okay. Understood. And then on EMC or Materials as they're now called, listening to players in the telecom space, it seems like there's an expectation of better market conditions into next year. Are those -- or are you getting similar signals from your customers on that front? Do you expect an improvement in 2025?

[Per-Ola Holmström, executive]

We are into most of these customers and well, then, of course, we are part of that situation and if they are sort of seeing an increased market situation, we will be part of that as well. But of course, remembering we are coming from very low volumes last year.

[Adrian Gilani Göransson, analyst]

Okay, I understand. And the final one for me. Just on the SEK 700 million CapEx figure for the full year. Can you just remind us how much, if any, of that was tied to the Novo Nordisk deal or whether that will come more in '25 and '26?

[Per-Ola Holmström, executive]

The situation with the big project you are referring to, we estimated SEK 600 million in CapEx in that project. And we are starting to see the effects of that in this quarter. And we estimated that we will have a bit more than SEK 100 million in 2024 and then even more in 2025 and a small part of it in 2026. So that is the situation for CapEx in that project.

[Operator]

We move on to the last question here, it is Karl Norén from SEB. You have the word.

[Karl Norén, analyst]

Hello, can you hear me?

[Per-Ola Holmström, executive]

Yes.

[Karl Norén, analyst]

I missed some parts of the call here. But I have one question on the group cost. Just I note that they are up a little bit here to like SEK 12 million, SEK 13 million in Q2 and Q3 versus before where they were a bit lower. Is there any specific reason for that with why that has come up?

[Per-Ola Holmström, executive]

I wouldn't say it's a very big change. It's, as you say, with higher numbers these quarters. They might be a bit on the high side. And the previous comparison you might be a bit on the low side. So yes, that's how I see it.

[Karl Norén, analyst]

Yes. Clear. And then just a clarification question on Automotive. I didn't really hear you there, but it looks like Automotive was down some 15% year-over-year here in Q3. Did you say that you expect a slight or a similar decrease year-over-year in Q4, slightly higher?

[Per-Ola Holmström, executive]

Can you repeat the question?

[Karl Norén, analyst]

Yes. I mean if you look on Automotive sales, I think it appears they were down 15% year-over-year. And I'm just wondering if you see the similar level in Q4 in the year-over-year decline, so to say?

[Per-Ola Holmström, executive]

I don't really think it is that high effect, as you are saying in this quarter. It's more a few percentages below that point. There might be some roundings. But we do see a similar situation, maybe slightly more than that in Q4 as we didn't see the full effect in the beginning of the quarter.

[Karl Norén, analyst]

Okay. I understand. So not that dramatic then it sounds. That's good. I think that was it for me. On with strong numbers here, so congrats on that.

[Operator]

And that was all the questions we had for today. So I want to thank you Nolato for presenting here and answering all the questions. Thank you all for tuning in. I wish you a great weekend.

[Christer Wahlquist, executive]

Thank you all, and have a great day and weekend.