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Edited Transcript of NOLAb.ST earnings conference call or presentation 17-Jul-20 1:15pm GMT

Q2 2020 Nolato AB Earnings Call

TOREKOV Jul 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Nolato AB earnings conference call or presentation Friday, July 17, 2020 at 1:15:00pm 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

* Mikael Laséen

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

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Presentation

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Operator [1]

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Hello, and welcome to the Nolato Q2 Report 2020. (Operator Instructions) Today, I'm pleased to present Christer Wahlquist, CEO; and Per-Ola Holmström, CFO. Please go ahead with your meeting.

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

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Hello, and welcome, everybody, to the presentation of Nolato's second quarter 2020. This is Christer Wahlquist speaking, and I have Per-Ola here next to me. So I hope you have the presentation in front of you. And then I would like to start on Page 2 with summarizing up the second quarter for the group.

We had a record quarter with the sales of SEK 2.3 billion, and that was a sales increase by substantial 12% in the quarter. We saw particularly strong growth for the Medical Solutions business area and Integrated Solutions business area.

Our operating profit, EBITA rose to SEK 269 million compared to SEK 233 million in the second quarter 2019. We saw strong margins for the Medical Solutions and the Integrated Solutions business area. The EBITA margin for the group was 11.7%. And we had an excellent cash flow of SEK 685 million during the quarter. It was boosted by some temporary effects that Per-Ola will go into later on in this presentation. And we ended the quarter with a very strong financial position with net assets of SEK 1.245 billion, and that is, of course, enabling us to execute our strategy, which involve growing organically with existing customers as well as our acquisition strategy going forward.

Turning to Page 3. Summarizing the 3 business areas for the group. And the group consists of the well-balanced group with 3 strong legs, creating synergies from the different markets that we are operating on. Of course, we are sharing technology behind the scenes and giving that back to the different business areas, creating synergies for our customer.

Jumping into Medical Solutions business area on Page 4. We are executing our global expansion strategy. And of course, you can see here our 20-year growth of this business area, and that is continuing in this quarter.

On Page 5, you see 2 different divisions in the business area. The Medical Device is the largest portion of the business area doing customized design work and production for our global customers. Then we have the smaller portion, the Pharma Packaging, which consists of liquid and solid drug containers for large pharma customers.

On Page 6, we summarize the second quarter for Medical Solutions. We saw a currency-adjusted growth of 9% in the quarter. We saw strong growth in our production volumes, and we saw high demand in segments such as diagnostic and respiratory aids, of course, driven by the high demand from the corona COVID-19. We also saw some lower volumes in the surgical business portion of the business with the delayed surgeries for -- on the global scene based on the corona COVID-19 situation. The margin -- the EBITA margin ended up at 14.3%, very strong, and that was built up by high volumes and positive sales mix. For the quarter, it ended up at sales of SEK 700 million and an operating profit of SEK 100 million.

Turning to Page 7, with the Integrated Solutions business area. This business area is currently expanding into new market segments, and we have executed that strategy for the last couple of years in a very good manner.

And the business area is consisting of 2 segments on Page 8, Consumer Electronics being the largest portion where we work with the vaporiser heating products, connected WiFi systems and wearables and different mobile phones. The smaller portion of that is the EMC/Thermal, creating shielding and thermal solutions for electromagnetic influences. And that was where we, late last year, had the latest acquisition, Ja-Bar.

If we then turn to Page 9, summarizing up the Integrated Solutions second quarter. We saw a substantial growth of 32%, of course, high demand in the VHP area, but also some inventory buildup by customers that continue to have a positive impact. We also had rollout of new product variants. We expect the inventory buildup to be back to a normal level in the third quarter, but with continued healthy volumes. The EMC part of the business area experienced a good growth in the quarter, and we had continued low mobile phone volumes. We had a very strong EBITA margin of 14.4 percentages, of course, based on high volumes, and we also had a general contribution from the Chinese authorities that had a positive impact of just over 1 percentage point of the EBITA. So the sales ended up at SEK 1.150 billion, and the operating profit ended up at SEK 166 million, creating a very, very strong quarter for the Integrated Solutions.

Turning to Page 10, Industrial Solutions. Here, we are on a technology and geographical expansion journey. But in this quarter, we had some negative effects of the COVID-19 situation affecting the quarter.

The Industrial Solutions business area is consisting of 2 different parts, I'm on Page 11 now, and the general industry being the largest portion with design and production work for general industrial customers. And then we have our automotive sector, working with the Scandinavian automotive market, both the heavy truck side and the vehicle side. This part of the business was, of course, affected mostly by the COVID-19 situation.

Turning to Page 12, summarizing up the Industrial Solutions second quarter. We saw during the quarter a decrease of 16% currency adjusted of the sales. We saw lower demand from the automotive industry as a result of a halt in operation in the first quarter. We saw low but rather increasing volumes from the second half of this quarter. The coronavirus situation, combined with summer holidays, is also affecting volumes in the third quarter. The EBITA margin ended up at 2.4 percentages, of course, affected by low volumes, but also some redundancy costs that had an impact of just over 2 percentage points in this quarter. So the sales ended up at SEK 459 million, and the operating profit was SEK 11 million.

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

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Good afternoon, Per-Ola Holmström speaking. Commenting on Page 13, group financial highlights. I will focus on the left side of that picture, comparing the Q2 2020 with 2019 Q2.

Net sales growth was 12% or a bit more than SEK 2.3 billion, combined with the same level of margin, 11.7% for EBITA margin, giving an EBITA result of SEK 269 million. We had a very strong cash flow in this quarter, SEK 685 million. That was very much affected by less tied-up working capital and some of that is temporary effects.

The inventory levels have normalized following the temporary rise in the first quarter from the coronavirus situation. We had trade receivables, relatively low trade credit days at the end of the period. And we did see higher sales with short credit periods in the second quarter. Strong earnings, of course, and low level of investments also contributed.

In this quarter, we had SEK 63 million of investments and the first 6 months did show SEK 133 million in investments, and we still see investments for the full year of about SEK 400 million, meaning that investments will increase the second half of this year. Still, we have a very strong financial situation with more than SEK 1.2 billion of net financial assets, given, of course, the opportunity to have those CapEx investments we plan to and the good situation for taking opportunities going forward.

If we turn to Page 14, a little comment on our current situation per business unit, starting with the Medical Solution, where we have a maintained growth strategy. Of course, a lot of focus on innovation built on strong customer relationship. We have seen and are seeing a coronavirus impact affecting part of the business with higher demands, such as the IVD and the diagnostic side and the respiratory aids. But on the other hand, a little bit slower volumes on the surgical side.

If we look into the Integrated Solutions business area, we have established a position within the new product areas. We have a continued strong position within the EMC and this is all then based on our flexible production structure.

On the Industrial Solutions business area, we have advanced our market positions. We have seen efficiency measures having a good effect, but we are impacted by the coronavirus affecting, especially then, of course, the automotive side of the business.

We are now opening for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question from participant will be Carl Ragnerstam from Nordea.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [2]

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It's Carl here from Nordea. I have a few questions. First of all, did you receive any government support in the quarter mainly related to industrial, if any?

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

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Yes, we have received the court case (inaudible) support during the second quarters in a couple of our industrial sites in Sweden. That is correct.

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

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Is it possible to quantify it? On the group, at least, you try to...

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

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Yes, it's about SEK 10 million for the quarter.

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

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Okay. Perfect. And regarding Medical Solutions, I mean you have positive impact from some areas related to COVID-19. You also have some negative impact as well. If you try to give us the net impact of the growth for medical, would you say that it's positive or negative with the COVID outbreak, for the organic growth, I mean?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [7]

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Yes, I understand. I would summarize it as positive.

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

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Could you say if it's significantly positive or just slightly? Or could you give some flavor on that?

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

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I would say it's slightly positive.

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

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Okay. Perfect. And regarding Integrated Solutions, could you comment what you have seen so far in July? Would you say that you still have a positive inventory buildup effect or in -- or did it normalize in June?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [11]

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I think currently, we don't have an impact right as we speak.

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

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Okay. Perfect. And in terms of the organic growth in Integrated Solutions, is it possible to try to split what was inventory buildup for the old devices and how much that came from the new device that you launched? Or is it the whole inventory buildup related to the new device, perhaps?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [13]

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I would say that the sales in this quarter is very much related to new products, definitely.

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

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New products or the new product?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [15]

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New products.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [16]

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Okay. So it's not just one new product. I guess you have 3 products now, right? And 1 launched in April or...

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [17]

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Well, it's depending on what you mean with new ones. But I would say, if we compare to old products sold in 2019, those are gone, so to say, and the ones sold in this quarter is the new ones after that.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [18]

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Okay. Perfect. Got it. And the final one for me. I mean you still have a quite significant net cash position. I mean, it's maybe up to the Board, but would you consider distributing dividend for 2020 or at least have the discussion?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [19]

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As you say, it is a question for the Board to decide on. We did say at the general annual meeting that the Board will consider the situation during this autumn and how the world situation has developed, and of course, our own development. So I mean there will be a new evaluation going forward about this and the situation.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [20]

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Okay. Sorry, one more, if I may, sorry, that -- could you also give some more flavor on the efficiency measures that you are implementing in Industrial Solutions?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [21]

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I think we would like to say that we have seen the effect, and it's -- we -- in a normal situation, we will be back on normal levels.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [22]

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And what measures are you taking? Is it just cost-out measures? Or are you taking some efficiency measures as well? Or...

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Christer Wahlquist, Nolato AB (publ) - President & CEO [23]

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The situation was created by a very long period of organic growth in part of our business sites. And of course, that takes some time to make sure you get the efficiency up, you get the yields up and so on. And we are on that situation now.

Are there any other questions?

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Operator [24]

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The next participant is Mikael Laséen.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [25]

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Okay. Yes. I also have a few questions, and the first one is on the Integrated Solutions segment and the outlook comment that you made. What you mean with normal inventory levels in Q3 and healthy volumes ahead? Is that on par with Q2 revenues?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [26]

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I would say that in Q2, we had, of course, some help in the growth by the inventory buildup situation. But then, of course, if we take away that, that will then not help the third quarter by that factor. But of course, if you compare to the relatively low level in Q3 last year, then, of course, we will see growth -- good growth compared to that number at good levels.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [27]

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Okay. So maybe more in line with what is a bit better than what you had in Q1, I assume, so maybe around SEK 1 billion, if that's what you mean? Or just to be -- I mean, take away misunderstandings here.

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [28]

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That's one way of putting it, yes.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [29]

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Okay. And it would be great to get more insights into the EMC segment and the other product areas that you have within Integrated Solutions, how they are performing. How much, for example, is EMC generating right now on revenue.

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [30]

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The split between EMC and the rest, which is very much VHP, in the second quarter is quite the same, actually. We have, of course, higher sales in, but we have also higher VHP sales. So in relative terms, they are quite equal. And as we describe it backwards in time, the EMC part is between 15% and 20%. So we have had growth in that area, but also growth in the other areas, mainly then VHP.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [31]

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Okay. And then another question here is regarding the industrial side. How did the automotive revenue develop in Q2? I'm thinking about the year-on-year growth and how much of Q2 revenue that was generated by automotive customers approximately.

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [32]

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The bulk of the decrease in the second quarter come from the automotive side. So mainly all of the decrease is automotive related. Then we have some positive things on the upside, but also some segments on the negative side, but very much of the decrease is from the automotive.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [33]

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Okay. So most other part of your segment had more or less that revenue, correct?

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

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Yes. If you sum them up, then, of course, there were some also affected by COVID. But there are some with an increase as well.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [35]

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Okay. And the final question for me. If the Medical segment, you grew 9% and you had some positive effects and some negative ones from COVID-19, but could be great to hear more just in absolute terms or how much diagnostics and respiratory aid, how much of revenue those 2 areas are generating and also the negative side of surgical product areas, how much of revenue is that approximately?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [36]

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I think for those type of information, we would ask you to look at our -- when we had a Capital Day last year, then we shared some of that information.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [37]

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Okay. Yes, I'll hasten to do that. Was it a significantly different picture now in Q2 than you had last year?

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

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No. I would not say that. We -- you don't -- in the medical business, you don't see significant changes because it's relatively, how should I say, you need to have equipment for anything. So it takes some time to adjust.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [39]

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Okay. And maybe one more, if I may, regarding medical. Can you talk about the pipeline that you have in the medical segment, key drivers? And it seems that you have really good momentum there. And can you maybe continue to grow by almost 10% ahead, something that you can share maybe?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [40]

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More on a general level. We are pleased with the pipeline we have, and it's okay. And the areas that we are focusing on are, of course, the growth areas within the medical, as described last year as well. Then of course, we have a long-term target to outgrow the market, which we are doing. You will not get double-digit growth every quarter, of course, it's up and down. But over a period of time, our ambition is to outgrow the market.

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Operator [41]

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Since there is no more participants for the Q&A section, so I will hand over back to the speaker for the closing. Please go ahead.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [42]

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Yes. Thank you very much for your interest in the presentation of the second quarter for Nolato. And I wish you all a very pleasant summer. Thank you.

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Operator [43]

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Thank you. This overall will conclude our conference for today. Thank you for all the attendees. You may now disconnect your line. Thank you.