Nolato - Q3 Presentation 2023

Hello and welcome to today's webcast with Nolato where CEO Christopher Wallquist and CFO Per-ola Holmström will present the company report for the third quarter of 2023. After the report there will be a Q&A, so if you have any questions, press star nine and you will be handed the word. And with that said, I hand over the word to you, Chris.

Okay, thank you. Good afternoon or good morning to all listeners. This is Chris Wallquist presenting the third quarter of 2023 for Nolato. On page two in the presentation deck, we summarize the third quarter for the group. Our sales total to 2.3 billion Swedish kronor, and that is a 15% decrease if we adjust it for currency and acquisition. We saw an increased sales for Medical and Industrial Solutions but markedly lower volume within the Integrated Solutions business area. Operating profit amounted to 193 million, excluding a non-recurring item of 60 million corresponding to changes in our Chinese operations. That will give a margin of 8.2% if we exclude the non-recurring item. 20 million in electrical subsidies from Swedish authorities is included. The cash flow during the quarter after our investments rose to 188 million excluding acquisitions. We sustained a strong financial position, giving us the freedom to create further acquisitions.

Turning to page three, summarizing the three business areas and the group. So 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 1.3 billion Swedish kronor. Integrated Solutions we saw a dramatic decrease in sales, ending up at 330 million in the quarter with a low profit. Industrial Solutions ended up at close to 700 million in third quarter with an EBIT of 64.

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 our focused product areas within the business area Medical Solutions, we have the in vitro diagnostic, approximately 15% of total sales. This is a long-term growth market but in a situation right now after COVID with some adjustments. Cardiology, it's a long-term, mostly implant business, stable and a 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. Continent care, approximately 11% of the total market. This is a high volume market with huge quantities. Endoscopy andren surgery, approximately 22% of the business area sales. It's a market that has been fluctuating a little bit after COVID with the supply chain variations. And then drug delivery systems at 14%, consisting of auto injectors, 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 IBD sector. We saw somewhat lower volumes in the cervical area, but that is due to the variations of the supply chain after the COVID situation. We ended up at an EBIT margin of 9.5% in the quarter, and we had approximately 10 million in electrical subsidies within Sweden. So sales ended up at 1.3 billion, operating profit 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 of the sales. We are expanding ourselves into new market segments, and on this page eight 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 five areas, which are then complex modules, different kind of speakers in on over-earphones, wearables, and handheld 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 nine, 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 170 million in comparison to 185 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 EBIT margin ended up at 3%, of course affected by the lower volumes. So the quarter, 330 million and operating profit of 10 million during the quarter. The adjustments of the Chinese operations are 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 two we summarize the third quarter for Industrial Solutions. During the quarter we saw, after currency, an increase of 2% of the sales. We saw that volumes within automotive, har rizon and supply chain disruptions have led to less of an impact than previously. We also saw that demand for products in consumer discretionary sector slightly lower due to weaker economy conditions. The quarter ended up just shy of 700 million with an operating profit of 64 million, giving us an EBIT margin of 9.3%.

We will now open up for questions. Thanks so much for the presentation and we will now start a Q&A. And to ask a question, press star 9 on your telephone. And to withdraw the question, press star 9 again. And I will start by handing over the word to the cell number that ends with 92.

Hi, can you hear me? Okay. Hi, it's Adrian here at ABG. A couple 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?

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?

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

Okay, that's very helpful, thank you. 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?

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

We are working with them within their insulin diabetes care products.

Okay, perfect. That's very helpful. Thank you. That's all for me. Thank you.

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

Hi, it's Kia from Ria. Can you hear me? Yes, okay, very good. Just a follow-up on the medical margin here. I mean, of course, buying that Q3 is a little bit weaker quarter, smaller quarter, but looking at it, it's touching an all-time low, right? Adjusting for the electricity subsidies, so is it really just the seasonality? Because looking at for instance Q2 last year, you had raw material headwinds as well. So I guess to what extent is the mix effect impacting 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?

I didn't really catch that. Could you please take it once again? Is so that's contributing to the statement number one that you see even further? I mean, inventory reductions is that what you're referring to?

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

Okay, sounds fair. And also, you said on this surgical side that it's also a bit soft here. Is it anything temporary? I mean, is it also their inventory reductions or what do you see? Because other companies in the sector seem to be thriving currently, but yeah.

Okay, and that will last how long, you think?

Okay, and also finally, Per, perhaps, on you're talking about achieving synergies between Industrial and Integrated. Could you talk a bit more about that? Is it just cooperation between the segments or actually merging plants? And have you achieved any interesting sales leads from that so far, or is it too early on?

Okay, very clear. Thank you.

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

Hello, can you hear me? Yes, yes, I call from SCV. Yes, coming back to the medical segment again. I mean, yeah, I was also a bit surprised by the lower growth here, and I'm just, it doesn't really sound like it's anything that should last that long, but I'm just curious to hear your thoughts on next year. Are you, what say, 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?

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 US, and that is now maybe not so much. So then I guess Q4 should be a bit better then, right, on the organic growth?

Yeah, okay. And then there's the question on the industrial side. I mean, you mentioned that the outlook for some of the segments is weakening, but the automotive is still going strong, and we are seeing some signs in the market that auto demand maybe for 24 looks a bit soft when the backlogs are being run through. Can you say anything about what you see in the automotive business and you still see growth during the coming quarters?

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

That was all for me. Yeah, thank you. For me, thank you.

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

Hello, this is Joan from DMB markets. Just a detailed question on the cash flow. So cash flow from financing came in at -265. Could you please break down the components of this?

Yeah, the financing. Yes, thank you.

So do anyone have any more questions? If you have any more questions, please raise your hand now. I think that was all for the questions. Thank you so much for the presentation and answering more questions today. 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.