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Edited Transcript of NOLA B.ST earnings conference call or presentation 23-Oct-19 1:00pm GMT

Q3 2019 Nolato AB Earnings Call

TOREKOV Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Nolato AB earnings conference call or presentation Wednesday, October 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christer Wahlquist

Nolato AB (publ) - President & CEO

* Per-Ola Holmström

Nolato AB (publ) - Executive VP & CFO

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Conference Call Participants

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* Carl Ragnerstam

Nordea Markets, Research Division - Analyst

* Dhiren Arunkumar Joshi

Stockviews, Ltd. - Analyst

* Mikael Laséen

Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst

* Oskar Vikström

ABG Sundal Collier Introduce - Analyst

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Presentation

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Operator [1]

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Hello and welcome to the Nolato AB Q3 Report 2019. (Operator Instructions) Today, I'm pleased to present Christer Wahlquist, CEO; and Per-Ola Holmström, the CFO. Please go ahead with your meeting.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [2]

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Thank you and welcome everybody, to the presentation of the third quarter 2019 for Nolato. So on Page 2 in the presentation, we sum up the third quarter for the Group. We ended up with sales just below SEK 2 billion. And that is adjusted for currency, a decrease by 5% for the Group. We saw in the quarter a continued positive performance by Medical Solutions and normalized inventory situation at Integrated Solutions and stable volumes for Industrial Solutions. The operating profit rose to SEK 238 million. And that is, of course, build up by positive earnings performance by all business areas.

The margin, strong at 12%. If we exclude non-recurring items it was 11.2%. The cash flow after investments was negative by SEK 4 million in comparison to SEK 68 million in the last third quarter. Continued a solid financial position.

Now I'm turning to Page 3. Just sum up the Group with the 3 different business areas and the split between them. So in this quarter, we, of course, have a good performance across the board.

And then turning to Page 4, we'll go into the Medical Solutions, where we had sales of SEK 602 million (sic) [SEK 612 million] in the quarter. And you also see the graph of long-term global expansion and growth of the medical business areas.

Turning to Page 5. So during the third quarter, the Medical Solutions had a 3% increase in sales. If we adjusted the currency effect, it was unchanged, same situation. And in comparison, last year contained high sales of development work and production equipment as we previously have explained. And the fourth quarter's growth is expected to be affected by a strong comparative quarter as also previously explained. The margin ended up at 13.1%. It's sustained healthy margins within the business area. Obviously, strong project activities within the autoinjectors, the insulin products and incontinence products. So as I said earlier of the sales ended up at SEK 602 million (sic) SEK 612 million and the profit on EBITA level was SEK 80 million giving then the margin of 13.1%.

The Medical Solutions on Page 6, it's divided into 2 different segments. We call them Medical Devices and Pharma Packaging segment of the business area, in which the Medical Devices is the largest portion of the business area.

If we then jump into Integrated Solutions business area on Page 7. You can see the historical sales volumes for this business area in volatile history, the impact of the mobile phones some years ago, then we entered into the new market areas within the business area, creating growth over the last period of time.

Turning to Page 8. During the third quarter, Integrated Solutions had a 3% decrease in sales. But we adjust for currency effect, we had a negative growth of 12%. We see that the inventory situation within the business area has normalized and stabilized. The Heating Device part of VHP delivered new products variants in the quarter. We also saw in the quarter weak growth for EMC, but positive growth for mobile phone performance. The margin, we had a strong margin of 13.5% built up by high production efficiency, good capacity utilization, and of course some currency effects. As previously also informed, we have acquired U.S.-based Company called Ja-Bar during this period. So the sales ended up at SEK 862 million for the quarter and the EBITA was SEK 116 million.

If you turn to Page 9, there is some information about the Ja-Bar company that we acquired. The company is based in New Jersey in the U.S. Approximately 70 people employed and annual sales around SEK 150 million with good profitability. The company has a broad customer base with over 500 clients in different sectors. And we see that this company is very strong together with our EMC business, creating possibilities for new customers and also geographical expansion with footprint in the U.S.

On Page 10, you see the -- will see the 2 different parts to the business area, Integrated Solutions with consumer electronics, with mobile phones, VHP business and different connected or electronically devices in different aspects. We also have the EMC/Thermal, which is heating solutions for networks, equipment, connected things in the car industry and other industrial components that shield the electromagnetic in transit between different components, and the Ja-Bar acquisition will be part of the EMC/Thermal part of the business area.

Turning to Page 11. Coming into the Industrial Solutions business area. Also on this, we present the 20-year graph of our sales. And the sales in this quarter ended up SEK 512 million.

We then go into Page 12. We saw a 4% increase in sales and if we adjust that by currency, ended up at 3% increase. We saw stable volumes during the quarter, and we ended up at the EBITA margin of 8.6%, should be compared to 7.1% during third quarter 2018.

We have an impact of unsatisfactory efficiency. One of our production facility implemented an ongoing measures have gradual impact on the margin.

On Page 13, you will see a split of the business area within the 2 major segments. The General Industry containing of general industrial companies where we create solutions and then the Automotive part working with the Scandinavian automotive market, both heavy vehicles and also car industries.

Page 14 summarizes the consolidated Group numbers. Net sales at almost SEK 2 billion, actually the same -- exactly the same number as last year's Q3. If we exclude currency effects, we had a negative growth of 5% coming from the business area, Integrated.

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [3]

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The margin increased to a very strong 12% compared to 10.4% last year. And if we exclude the non-recurring items last year, that number was 11.2% to date, leading to increased profit levels at all levels. The operating profit EBITA was SEK 238 million compared to SEK 222 million, excluding SEK 17 million in non-recurring items, which was a divestment of the company within the Group which we sold last year. The tax rate was in line with accumulated 6 months, 20%. Cash flow after investments that was minus SEK 4 million for the quarter compared to minus SEK 68 million if we exclude the divestment last year. During both these quarters, we did see a working capital need. That was actually almost SEK 200 million during this quarter, mainly an increase of accounts receivables because of high sales numbers in the end of this quarter.

The net investments was SEK 87 million in the quarter below last year's same quarter of SEK 107 million. We expect around SEK 400 million for full year 2019 and maybe, even some millions below that number. The equity/assets ratio is 47%. And net financial assets SEK 186 million, if we exclude pension liabilities and lease liabilities, giving us a strong continued solid financial position.

The summary of lease effects can be seen on the slide package, on the last page, but the effects are similar to the one in previous quarters.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [4]

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Page -- turning to Page 15 and the current situation by business area. If we start with Medical Solutions, we have a maintained growth strategy. A lot of focus on innovation and very strong customer relationships in the background. On the Integrated Solutions business area, we have established a position in new product areas. We see overall, the continued strong position within EMC, and of course, on the background of flexible production structure within this business area.

In Industrial Solutions, we have advanced our market positions. We have efficiency measures taken and we see gradually having an effect. We see some indications of a slowdown in the economy but still stable volumes.

Now we are open for questions-and-answer session.

Hello?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [5]

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Is there any operator on the line? Hello, operator?

(technical difficulty)

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Questions and Answers

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Operator [1]

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Speakers, would you like to take the next question?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [2]

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There was a long delay, operator so may be people are left the conference.

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Operator [3]

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We have a question from the line of Carl Ragnerstam from Nordea.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [4]

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

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [5]

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Yes. Sorry, we had a delay.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [6]

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No problems. So I have a couple of questions. First of all, regarding the heat, not burn, segment. I mean you started the deliveries in new devices during the quarter. I mean how should we look at Q4 as a sequential comparison in terms of inventory levels, et cetera? Should we expect an inventory buildup? Or what do you see there?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [7]

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We have earlier commented that we think the customer can do a better planning than initially when it comes to launches into new markets and launches of new products. So we don't really see the inventory buildup effect that we have seen previously coming from those new products. But it's the same view we had after Q2 when the -- we have the same view now as well. And we don't see that there has been an inventory buildup in this quarter, and we don't expect any major effects of that in Q4 either.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [8]

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Okay. And also, I mean, given your guidance after Q2 on Medical Solutions, I mean, I thought Q3, you should be the main challenging quarter for you. But it looks like Q4 will be meet tough comparisons as well as you commented. But to me, they look fairly normal. So my question is, can you see any slowdown for any consumer segment? Or across the customer segments? Or -- and should we expect you to face tough comparisons going into 2020 as well because I mean the comparison seems quite similar to Q4.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [9]

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I think we have commented that previously and said that during the second half of 2019, we had a tough comparison. And I think you should see that, and we have not seen any slowdown in any specific segment or product groups.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [10]

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Okay. But if I look at numbers specifically, it looks like Q3 is the tough comparison. But it might be Q4 so -- but it sounds a little bit strange.

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [11]

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I think you could also say that may be we expected Q3 comparison to be a bit more tough so to say. But it ended up as it did. And I think having said that, I think we have to see the 2 quarters during the second half of 2019 together so to say. And now we ended up may be a bit better for the Q3, but still we have the same view of the second half of 2019.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [12]

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Okay. And finally, you mentioned that you saw EMC softness during the end of the quarter. Do you have any view what's behind that? And should we expect slowdown in there, going into Q4 as well?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [13]

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Our estimation of the slowdown is due to a possible delay of the rollout of the 5G in the -- in mostly China and the investments coming from that.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [14]

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Okay. And do you expect them to stick -- to burden, so to speak, in Q4 as well or to be slow?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [15]

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Yes. It possibly could affect Q4 as well.

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Operator [16]

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Our next question comes from the line of Mikael Laséen of Carnegie.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [17]

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A couple of questions. Yes. First of all, can you clarify the non-recurring positive effect now in Q3 of SEK 16 million?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [18]

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Yes. The non-recurring effect came from last year's Q3 and that was the sale of a subsidiary, and had a negative effect of Q3 last year of SEK 17 million, 1-7.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [19]

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Okay. So you didn't have anything this year?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [20]

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No. That's right.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [21]

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Okay. That's what I thought. It was that I couldn't understand that initially. Great. And second one was about the inventory buildup in -- late in Q3, in what area did you see that? Was it across the board? Or was it in some specific segments?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [22]

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It was all over the company actually and maybe with some additional inquiries in the business area integrated in combination with the new products in VHP segment.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [23]

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Okay. So the other segment, Industrial, Medical has more, sort of, a normal seasonal pattern in Q3 regarding this late volume and deliveries?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [24]

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That's right. Yes.

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Operator [25]

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Our next question comes from the line of Kiran Joshi of Stocknews.

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Dhiren Arunkumar Joshi, Stockviews, Ltd. - Analyst [26]

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So that's Dhiren Joshi of Stockviews. But I'll let that go. Just 2 questions for you guys. I think at you at the Capital Markets Day, you discussed that your customer within VHP was finding a bottleneck within, sort of, regulatory approval when entering new market. Have you seen any developments there? Any sort of progress on your VHP customer getting access to new markets?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [27]

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I think the rollout of this into new markets is -- it's according to plan. And for better information, I think it's better to look at the actors or the big players in this field and see how they're progressing.

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Dhiren Arunkumar Joshi, Stockviews, Ltd. - Analyst [28]

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Okay. And maybe if I can touch again on the working capital. So I think in the note, you mentioned that as was the case last year, increased sales at the end of the quarter, driving working capital requirements. So we have seen that rise in accounts receivable. Can you explain, if it's some sort of seasonality within your business? And is there any reason why we see this build up in inventory or sales late in the third quarter?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [29]

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Yes. I think it's mainly 2 reasons behind it. One is a bit of a seasonality coming from mainly the Industrial business area and to some extent from the Medical business area where we see a vacation affect during the summer doing that -- most of the sales in this third quarter happens in the last part of the quarter doing that with our terms of the days outstanding but we increase the accounts receivables mainly at the end of the quarter. And then maybe with some effects from the VHP segment as well in the end of the quarter. Those are the main effects. So yes, there is a seasonality effect in this quarter.

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Dhiren Arunkumar Joshi, Stockviews, Ltd. - Analyst [30]

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So the VHP part was more a one-off with the release of the new product, is that right? Whereas the Industrial and Medical [seek upon] the pattern of (inaudible)?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [31]

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Yes. That's right.

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Operator [32]

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Our next question comes from the line of Oskar Vikström of ABG Sundal Collier.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [33]

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So I got disconnected before. The question was -- about to start, I heard that you touched on this, but I got in a bit late. But just the Medical Solutions, I'm a bit curious there just, I mean, basically you're talking about this difficult content. It seems to me that Q3 could be the most difficult quarter and still you remained flat. And are you repeating guidance then for H2 as a whole? Or how do you view that? I'm sorry if you have to repeat yourself.

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [34]

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Yes. That's correct. I think we might have seen the Q3 coming out a bit tougher than expected, but we still keep our guidance from the second half of 2019.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [35]

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But yes it's just strange because I don't -- I mean Q4 doesn't appear to be that challenging of a comparable. Is -- could you just elaborate a bit on Q4 last year and refresh our minds?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [36]

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Yes. We did see a high activity from projects, and also from some equipment sold doing that part of the sales was high also in the fourth quarter. So our remark about the second half of this year is there also for the fourth quarter. And even if we might have thought that the third quarter was a bit more challenging. Yes.

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Operator [37]

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(Operator Instructions) And there are no further questions at this time. Please go ahead, speakers.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [38]

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Thank you for listening to the presentation of the third quarter. And all those nice questions. Thank you very much, and have a nice afternoon.