Nolato AB

STO:NOLA B

Earnings Call Transcript 2021-Q4

[Operator]

Hello, everyone, and welcome to the Nolato audiocast with teleconference for Q4 2021. [Operator Instructions] Today, I am pleased to present CEO, Christer Wahlquist; and CFO, Per-Ola Holmstrom. Speakers, please begin.

[Christer Wahlquist, President & CEO]

Hello, and welcome to the presentation of Nolato's fourth quarter 2021. This is Christer Wahlquist speaking. I will start on Page 2 in the provided presentation material. And this was a strong quarter for Nolato Group with sales above SEK 3.1 billion, corresponding with a 28% increase in sales, and this is despite our Industrial Solutions business area that was affected by some supply chain disruptions during the quarter. But Medical and Integrated Solutions, both had strong quarters, sales-wise. The operating profit during the quarter rose to SEK 336 million. And during the quarter, we had cash flow that was affected by an increase of working capital requirements and some high investment levels. And therefore, it ended up on a negative SEK 87 million during the quarter. The EBITA margin then gave a 10.7 percentage. Turning to Page 3 with the full year of 2021, and this was another record year for Nolato Group despite a challenging business environment. And our sales for 2021 ended up at SEK 11.6 billion. Earnings per share were SEK 3.70, if we exclude the nonrecurring items, and if we include them, then it was SEK 4.32. Our financial position remains very strong. And we have net financial liabilities of SEK 51 million, and that's giving an equity to assets ratio of 47%. The proposal for dividend from the Board of Directors is SEK 1.90, which should be compared to SEK 1.60 the corresponding year before. And our policy is that we should have more than 50% of the net profit in dividend. And this SEK 1.90 is a payout ratio of 51%, if we exclude the nonrecurring items. Turning to Page 4, giving the overview of the Nolato Group with the 3 different business areas where we set our different markets, that is the Medical Solutions, Integrated and Industrial Solutions. Of course, different markets, but we share the same technology, the same material and the same production equipment and then creating synergies for the group. If we turn to Page 5, starting with Medical Solutions during the first quarter. And on this page, you can see a 20-year graph with consecutive growth. And we have been able to create a true global solution provider within our Medical business area. On Page 6, you will see some of our focused product areas. And if we start with the In Vitro Diagnostics, this is long-term growth potential with the good momentum at the moment, and we are focusing a lot of our future activities towards this segment. The second one is Cardiology, with a stable, high-margin business. The Pharma Packaging is approximately 12% of our business. It consists of different dry containers for liquid and solid drugs, and approximately half of that business is based on platform products. The Continence Care is built up on a very high-volume business or different solutions for continence or incontinence problems. The Endoscopy & General Surgery business has been slow during the COVID. We've seen some improvements during the fourth quarter, but it's still below the normal levels due to the less surges being performed. The Drug Delivery system consists of infusion sets and different types of autoinjectors and those kinds of things to get the large molecule-based drugs into your body. If we turn to Page 7 and do a little bit detail in the fourth quarter for Medical Solutions. We had strong growth during the quarter, corresponding to an 11% increase in adjusted currency. We saw healthy growth in most areas, and we saw some growth in the surgical segment, but we feel a continuous negative impact from the pandemic. The EBITA margin was a little bit low, as explained earlier. We had some lower margins due to the ramp-up of a new large project within the IVD sector and also in combination with material and labor shortages. The expansion of our production capacity is proceeding according to plan. So we are currently expanding in Switzerland, Hungary, Poland, United States and Sweden within our Medical business area. So sales for the quarter ended up just about SEK 1 billion with an operating profit of SEK 112 million, given the 10.5% margin. Turning to Page 8, focusing on the Integrated Solutions business area. Here, you will also see a 20-year graph and a new record for this business area with very strong growth and expansion into new market segments. On Page 9, you will see the split up of the business area Integrated Solutions. We have what we call Consumer Electronics that consists of different connected Wi-Fi system, our VHP business, wearables and mobile phones. And the smaller portion of the business area is called EMC/Thermal. Management is smaller, but with healthy margins. On Page 10, we look deep into the Q4 for Integrated Solutions. We had a remarkable 67% increase in sales in adjust currency during the quarter, and that was built up from strong growth with the VHP volumes, but also strong EMC performance consisting of the 5G rollout that's generating good growth within the telecom business and also strong relative growth in the Automotive due to the electrification and online connection. The sales in the first quarter of 2022 are expected to be in line with the fourth quarter of 2021. So the fourth quarter ended up just shy of SEK 1.5 billion, and then operating profit of SEK 192 million, creating a margin of 13%. But in that margin, we had a subsidy from Chinese authorities that had a positive impact of 0.8 percentage points on the margin. The full year for Integrated Solutions ended up above SEK 5 billion and an operating profit of SEK 671 million. Turning to Page 11, focusing on the Industrial Solutions. And here, we had a 2021 with a record year. So it's been good development, and we are on a technology and geographical expansion journey with this business area. On Page 12, we will see the two parts of the Industrial Solutions business area that is consisting of General Industry, which is the largest portion of the business area consisting of forest equipment, white goods, furniture and other industrial sectors. And the other part is Automotive, where we serve mostly the Scandinavian automotive market, with both the heavy side, with the trucks and the cars. On Page 13, we do the deep dive in Q4 for Industrial Solutions. During the quarter, we saw a decrease in sales of 7 -- sorry, 3%, and that is based on the supply chain disruptions that are leading to lower volume, especially within Automotive. The lower volumes and our lower production efficiency due to the sluggish volumes created a margin of 6.2 percentage, and then, of course, an operating profit of SEK 38 million and sales of SEK 69 million during the quarter. But the full year was a record year, SEK 2.3 billion in sales and SEK 208 million in EBITA, trading margin of 9% for the year.

[Per-Ola Holmstrom]

Turning to Page 14. Per-Ola Holmstrom. Good afternoon. Some group financial highlights. The net sales in Q4 were SEK 3,146 million, which is an increase of 28% adjusted for currency. The operating profit EBITA for the same period ended up with SEK 336 million, giving a margin of 10.7%. The EBITA can be compared to SEK 283 million for the same period last year. The profit of the financial income and expense was SEK 318 million, if we exclude the positive nonrecurring item of SEK 115 million. That arose from the revaluation of contingent considerations concerning the acquisition of GW Plastics. And according to how to treat that in the income statement, that is within financial income and expense. Profit after tax, SEK 386 million. And the earnings per share, if we exclude the nonrecurring items, was SEK 1.01. So that is giving an earnings per share of SEK 3.76 (sic) [ SEK 3.70 ] for the full year. The tax rate was 17.2%. And if we exclude the nonrecurring item, the tax rate was 19.5% for the full year, and that is more in line with what we expect. And going forward, we expect the tax rate to be between 20% and 21% for 2022. Cash flow after investments, as Christer explained, a minus SEK 87 million compared to SEK 211 million last year the same period. It was affected by the additional working capital needs because of higher sales, but mainly higher inventories to prevent any disruptions to deliveries. We had also higher CapEx. It was final stages of paying for capacity increases mainly within Medical. We have talked about those for some quarters now. And we had a full year number of SEK 782 million of CapEx. And we expect the full year 2022 to be slightly lower than that number. All of that is giving a strong financial position. We are having equity to asset ratio of 47% and net financial liabilities of SEK 51 million if we exclude pension liabilities and lease liabilities. If we turn to Page 15 and focusing on the current situation per business area, starting with Medical Solutions. We have a maintained growth strategy within this business area, a lot of focus on innovation built on strong customer relationship, but we see impact of the pandemic within the business area. If we look on the Integrated Solutions, we have established a position in new product areas, based on very flexible production structure. And we are benefiting from the 5G rollout and new initiatives in the automotive sector that are positive for our EMC business. On the Industrial Solutions, we have advanced our market positions. We see an impact of supply chain disruptions, but we have a lot of emphasis on sustainable solutions. We now opening up for questions.

[Operator]

[Operator Instructions]Our first question comes from Adrian Gilani with ABG.

[Adrian Gilani Göransson, Analyst]

This is Adrian Gilani here at ABG. I'd like to start off in the Integrated Solutions segment. In previous quarters, you've talked a bit about sort of stocking up effect in your biggest VHP customer. If we look ahead at your strong Q1 guidance, can you give us some color on if stocking effects are going to play a significant part of the expected Q1 growth.

[Per-Ola Holmstrom]

We don't see that stocking effect has any major impact on the Q1 numbers we have guided.

[Adrian Gilani Göransson, Analyst]

Okay. And another question. You have also talked about sort of your biggest VHP customer expanding their VHP business geographically as well. Is there something to consider in Q1? Have they entered any new markets, or are there any concrete plans from them on entering new markets?

[Per-Ola Holmstrom]

We don't see that, that is affecting in any major way. It's more in line with the Q4 as we guided for the first quarter.

[Adrian Gilani Göransson, Analyst]

Okay. And then, I guess, moving on to the Medical segment. You've obviously been held back a bit by elective surgeries. Is there a reason to assume that these headwinds might get a bit worse in Q1 due to the Omnicom variant outbreak and hospitals canceling more surgeries in Q1?

[Per-Ola Holmstrom]

I would not expect further slowdown in that sense. I rather get some feelings that the electric surgery are picking up.

[Adrian Gilani Göransson, Analyst]

Okay. So already in Q1, you see -- you have seen a pick up in elective surgeries?

[Per-Ola Holmstrom]

We saw some pick up in Q4, and we expect that to continue.

[Adrian Gilani Göransson, Analyst]

Okay. And another factor for here in the Medical segment that you mentioned was the labor shortages that you've gotten. Is this also, again, looking ahead at Q1, should we expect more labor shortages as a result of sick leaves from Omicron current cases? Has that been a fair assessment?

[Per-Ola Holmstrom]

Yes. I think that is a situation that is currently going on. And we don't know how long it will continue, but we see that continuing.

[Adrian Gilani Göransson, Analyst]

Okay. And have you sort of been able to fill these positions with temp workers or outside workers, or has there been a downtime in production due to this? And if so, in which segments specifically?

[Christer Wahlquist, President & CEO]

It's been affecting some deliveries, not on a large scale at all, but some minor effects.

[Adrian Gilani Göransson, Analyst]

Okay. Okay. And just a very final question, a bit of a detailed question on Integrated Solutions. You said margins were boosted by a small subsidy that you received. I assume this was a onetime thing and we shouldn't expect similar subsidies going forward?

[Per-Ola Holmstrom]

It is very hard to say. We have got these kind of subsidies during the years from time to time. And we are, of course, grateful for those. But it's very hard to predict. And we do see that as a non the carrying item, which happens from time to time. And yes, that's the way it is. We can only give the information that we have got it and the effects from it because we don't know when that will get that will happen again.

[Operator]

Our next question comes from Carl Ragnerstam with Nordea.

[Carl Ragnerstam, Analyst]

It's Carl here Nordea. A few questions. Firstly, you mentioned that you're still taking extra costs related to the large project in -- at a project ramp-up in Medical. Could you give us an idea how much it's -- how much cost you are taking there? And also, could you give some flavor on the potential for that project looking a few quarters or maybe even years out?

[Per-Ola Holmstrom]

Yes, I can start with the effects during the last quarter. And we have had similar effects during the Q4 as in the Q3, and that was what we expected really when we gave the Q3 report some months ago. So it's a similar situation. It is affecting the margin and -- it is, of course, higher costs that we have compared to a more normal situation. Then, of course, also in a more normal ramp-up phase, the -- let's say, the margin is in that part, not as it will be in the situation when we run the product in high volumes. But we have guided that the costs are higher than a normal ramp-up and that is what we are trying to explain during these 2 quarters. And relating to the volume situation, this is a gradual growth that we're going to see for period of time. And it's part of our overall long-term growth planning. So you should not expect anything very spectacular.

[Carl Ragnerstam, Analyst]

And how long will the higher cost continue for? Is it over in Q4 or will it continue in H1 as well or...

[Per-Ola Holmstrom]

As I said, we anticipate that to be over as Q4 is ended. But again, that part of the business will not show very high margins, of course, as we are still in a ramp-up phase. But we have had some initial situation, which we have had higher costs and that is then in a more normal situation in the ramp-up phase, if you see what I mean.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And you mentioned that you had some problems with higher sick leaves due to Omicron. But on the positive side, I guess, that you were fueled by COVID testing historically, right, a few quarters ago. Is that something that could boost your IVD segment in the very short term here going to the last testing?

[Per-Ola Holmstrom]

I think the IVD growth is a long-term growth potential. Of course, there is maybe a slightly extra need, but the capacity is what it is. So I don't think there will be any dramatic movements due to the COVID on the IVD.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And also in terms of Industrial Solutions, it's a bit of a bump in the row, I guess. But have you implemented any measures in order to cope with the current volatile situation, or is it fair to expect a more sort of normalized situation in H1, or is it too early to say?

[Per-Ola Holmstrom]

I would say it's a little bit too early to say. And the sluggish volumes are, of course, due to our customers having difficulties getting the right components to the assembly lines, and then affecting our -- sorry, our volumes in the short period of time. So there's a lot of rescheduling and those kind of things affecting us.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And the final one. When reading the report, I get the sense that you are ready to sort of do another acquisition here. Have you increased M&A ambition overall, or is it -- and also secondly, on that note, is it too soon to use GW Plastics as a sort of the generator when it comes to acquisitions in the U.S.?

[Per-Ola Holmstrom]

I think we have a good plan for the acquisitions going forward, and we are ready and we are -- continues our strong ambition in acquiring companies. I'm not -- I don't think we will use GW as our lead generator. We know which companies we want to buy.

[Operator]

[Operator Instructions] Our next question comes from Mikael Laséen with Carnegie.

[Mikael Laséen]

Yes, I was wondering if you could maybe quantify in any way the component and material shortage effect and the supply and delivery disruptions you had in Q4.

[Per-Ola Holmstrom]

It is very hard to say. I would say that the main impact we have is, of course, within Industrial. The volume effect is maybe less, but it's very hard to say what it could have been if those problems wouldn't have been there. We don't have the full let's say, view on that with our customers. What we can see is the problems that we get when it comes to the internal efficiency on our side. And that is not a good situation. And that is very much the reason for the low margins we do see in Q4 within Industrial.

[Mikael Laséen]

And when it comes to Medical, you mentioned material shortage. So can you talk about that or not?

[Per-Ola Holmstrom]

It is again not affecting volumes or sales very much, but it is, in some way, affecting our internal efficiency, not as much as within industrial, of course. But part of the margin decrease, we did see is coming from diverse effects. But it's, of course, a mixed picture of material shortage, component shortage, labor shortage and it is affecting our efficiency.

[Mikael Laséen]

Okay. And is it possible to increase the prices? And how much effect was that in the quarter?

[Per-Ola Holmstrom]

We have increased prices for additional increases of material prices, raw material prices, and that is and has been an ongoing action from our side during 2021. It was done during Q4 as well. The increase of the raw material prices were not that high in Q4 as previous during the year. But there are effects of the increased raw material prices. And those effects, we have agreements, giving us the opportunities to do that quite quickly. Other effects, they are, of course, harder to compensate for. And that is a more long-term work and not that transparent as the raw material changes.

[Mikael Laséen]

All right. Okay. You also had a data breach in your European side in Q4. Can you say something about the impacts from this? Was it sort of managed and you didn't see any impact at all, I guess, so?

[Per-Ola Holmstrom]

The impact we did see was some delays during a week's time in our European operations because our IT environment was standing still. But we do assess that we delivered those delayed orders later during the quarter. So volume-wise, we don't see that we lost something during Q4. We did have a lot of internal work, of course, with this. And we did have some additional consultant fees that we paid out during Q4. But those costs were somewhere between SEK 5 million and SEK 10 million during the quarter, and it stayed with that number. And I think that was something we communicated quite early in that process, and it stayed that way. So the impact was not that big during the quarter.

[Mikael Laséen]

Okay. Got it. And just getting back to the material and component situation for 2022. What do you hear from your suppliers right now and from your customers? And what is your estimate and this can be more [indiscernible]?

[Per-Ola Holmstrom]

Think it's going to be a continuous challenge on that side. But for how long, we don't really know.

[Mikael Laséen]

Fair enough, difficult to say, of course. And I got a couple of more questions on Integrated, first of all. How large part of this segment's revenue was generated by the VHP product category in the quarter, approximately?

[Per-Ola Holmstrom]

The quarter was more in line with the recent quarters, and those have been on the level of 3 quarters of VHP sales for the business area. So that has gone up from some quarters ago when it was on 2/3 to 3/4 instead like it has been during some quarters now.

[Mikael Laséen]

Okay. So when we are looking at this for 2022 and trying to figure out what is going to happen in the coming quarters, not only Q1, how should we think about this category -- the VHP category? Q4 and Q1 and Q3 relevant benchmark quarters for coming quarters, or is it anything unusual here that we should maybe be aware of?

[Per-Ola Holmstrom]

There are some variations between quarters, but it's more to the total supply chain movements. So we will see some difference between different quarters. But I think from a general perspective, we think this area is an interesting area. It's a growth area, and you should more see it on a yearly basis. But then, of course, on the other side, we have the cost of initiatives going the other way, and we've been communicating that for some quarters.

[Operator]

At this time, we have no further questions. I will now hand back to our speakers for a final remark.

[Christer Wahlquist, President & CEO]

Thank you very much for your interest in Nolato's presentation of the fourth quarter and full year 2021. I wish you all a great day. Thank you.