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Edited Transcript of NOLA B.ST earnings conference call or presentation 4-May-20 12:30pm GMT

Q1 2020 Nolato AB Earnings Call

TOREKOV Jun 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Nolato AB earnings conference call or presentation Monday, May 4, 2020 at 12:30:00pm 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

* 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 Q1 Report 2020. (Operator Instructions). Today, I'm pleased to present Christer Wahlquist, CEO. 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 First Quarter 2020. I would like to start, this is Christer Wahlquist, and here I have Per-Ola Holmström besides me.

And I would like to start on Page 2 in the presentation material, summarizing up the group Q1 figures. And during the first quarter, we have seen good growth overall during the quarter with a 17% increase compared to last year. And it is built up by growth in all business areas, and the sales ended up at SEK 2.65 billion.

The profit -- operating profit, the EBITA, rose to SEK 241 million, excluding the nonrecurring items. And we see -- we have seen increase across all 3 business areas and very pleased of the overall good performance. The EBITA margin ended up at 11.7 percentage, if we exclude the nonrecurring items. And we feel that we -- in the special times, we are with the COVID-19 situation, we feel secure with our financial positions and in a good position to execute our long-term strategies, which, of course, then also includes acquisitions.

Turning to Page 3, summarizing up the 3 different business areas we have. Of course, they are different in the market segments they operate in, but a lot of similarities behind the scenes. So we use the same materials, same sort of solution-oriented development partner, same sort of production technology. But in the sense of business, they are a little bit different.

The Medical is, of course, long term, very stable business with step-by-step buildup, a lot of focus on quality assurance, quality control. Then we have the Integrated Solutions area, which is more a fast-moving business, a lot of focus on flexibility and those kind of items. Then we have the Industrial Solutions part of the business, which is then, of course, more following the business cycle and those kind of things, a lot of focus on efficient, lean manufacturing.

Turning to Page 4. Starting with the Medical business area. Here, we see stable growing business, very long term, conservative, consecutive growth in this business area. And the latest quarter ended up at SEK 642 million in sales. Good situation in the Medical.

Turning to Page 5. We have 2 different business segments in this business area. Medical Device being the largest portion of the business, consists of customer-specific development and production for all kinds of different areas of the medical community. Then we have the Pharma Packaging, which is dry containers for liquid and solid drugs. Part of that business is our own designs that is then adopted to different drugs, different consumers. But part of the pharma business is also unique development for individual customers and the specific drugs.

Turning to Page 6, going into the Medical first quarter. We saw an increase in sales, 5% in total. But if we adjust that for currency, it ended up a 2% increase. We saw, during the quarter, very good growth in the production volumes, a little bit slower sales on the project side. Long term, we see a very good growth on the product and as a total.

The corona COVID-19 situation, we have seen some effects of that in the Medical. We have seen some delays in projects depending on the situation where we can't travel and the customer cannot travel so much to us. But we saw a positive impact on some segments of the production side, mostly related to the diagnostic and those kind of products.

During the quarter, we saw good EBITA margins of 13.6% and, of course, we saw a positive sales mix, but also if we look into the difference between the project and the production, we see a little bit higher margins on the production side than on the project side, especially when we sell equipment to the customers.

Jumping into Integrated Solutions on Page 7. On the graph there, you see 20 years of different sales. And our ambition over the last period -- the last few years has been to expand into new market segments. And we have been successful in that integration. Hence, we see a little bit higher sales numbers during the last years here.

Turning to Page 8. Even in the Integrated Solutions business area, we have 2 different market segments. We have the Consumer Electronics, which is the largest portion of the total business area. That consists of what we call vaporizing heating products, different connected devices and, of course, the mobile phone and the wearables.

The smaller portion of this business area is the EMC/Thermal, which, of course, is shielding solutions for electromagnetic influences and heat distribution from electronic devices. In this portion of this business area, the EMC/Thermal, we have, of course, our latest acquisition, Ja-Bar, which fits into the EMC/Thermal.

If we then turn to Page 9, we jump into the Q1 of Integrated Solutions. We saw a sharp increase in sales during the quarter, a 50% growth, if we adjust for currency and the Ja-Bar situation that we acquired in late 2019. During the quarter, we saw an inventory buildup by customers. Of course, it's a result of the contingency for the corona situation, but also a buildup for the rollout of new product variances in the VHP sector.

During the quarter, we saw EMC affected by coronavirus, but during the later part of the quarter, we saw a strong situation. We also had low volume on the mobile phone segment. The margin ended up at 13%, strong margin in Q1. And of course, this is the first quarter with Ja-Bar, and it contributed by SEK 43 million in sales, and that is -- it's well according to our plan of the acquisition.

If we then turn to Page 10 and looking into the Industrial Solutions business area. Here with Industrial Solutions, we are on a technology and geographical expansion. It's a journey of expanding geographically and technology. So we established the U.S. footprint during last year and it's performing well according to our plans.

If we then turn to Page 11, we will see the 2 different market segments of our Industrial Solutions. We have the General Industry, which is approximately 60% of the total, and we have our Automotive part of Industrial Solutions, which is an approximately 40% of the Industrial Solutions business area.

If we turn to Page 12, we will jump into the Q1 of Industrial Solution. During the quarter, we saw an increase of sales. If we adjust that for currency, it's a 4% increase. We saw new customer projects, within the General Industry, continue to make a positive contribution. We saw a normalization in the hygiene area.

And we -- during the later part of the quarter, we saw a production suspension within the automotive industry. And we saw that in the late of March and we see it in most part of April. And after that, we also felt a sort of volatile start-up of part of the automotive industry. So we feel that the automotive industry production will impact few -- second quarter of this year.

The margin -- EBITA margin ended up at 8.2% in comparison to the 8.3% last year. We saw a negative impact, approximately 1 percentage point, due to the Automotive Industrial production suspensions during the quarter.

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

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Good afternoon, Per-Ola Holmström presenting group financial highlights on Page 13. We did see growth of 17 percentages, and in combination with increasing the margins, it resulted in an EBITA result of SEK 241 million. And we did have a nonrecurring item of SEK 14 million. And those were connected to the closedown of the -- one of the operations we have in U.K. within the Pharma Packaging business within Medical.

We have taken SEK 22 million in cost in Q4 last year and the remaining part, according to accounting principles, were taken in this quarter, SEK 14 million. So totally, SEK 36 million. And we have estimated the cash flow effect of those of about SEK 30 million.

The EBITA margin was 11.7%, excluding the nonrecurring items. Tax rate this quarter about 20%, and that is also in line with what we estimate for the full year 2020. We did have a negative cash flow after investments. It was minus SEK 73 million compared to plus SEK 25 million last Q1 last year.

We did see a working capital need during the quarter from the increased sales numbers and also an increase in inventories because of those sale -- because of the sales increase, but also because of the corona situation, we did have higher larger -- higher inventory numbers in this quarter.

The rolling 12 number for earnings per share was SEK 28.29. And the equity assets ratio ended at 49%. We have a financial net asset of SEK 601 million, and we have a strong financial situation because of this. We expect the full year investment number to be about SEK 400 million during 2020. It was only SEK 70 million during the Q1. And hence, the pace of the investments will increase during the second half of this year.

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

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Turning to Page 14, looking at the current situation per business area. On the Medical side, of course, maintain growth strategy, a lot of focus on innovation, and we feel that we have strong customer relationships. On the Integrated Solutions side, we have established our position in the new product areas. We see a continued strong position within the EMC business. And of course, as building up this, we have our really strong production structure flexible.

On the Industrial Solutions business area, we have advanced our market positions. We see the efficiency measures are taken and we see an effect on those. Of course, we see the disruptions as a result of the corona situation, the COVID-19. Now we would like to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of 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. First of all on the Medical Solutions business area. You said that some projects are postponed due to the COVID-19 situation. Could you perhaps quantify that during the quarter? And could you also give any indication of the growth pace during the end of the quarter? I mean, was it just damped organic growth? Or was it even negative organic growth in the end of the quarter?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [3]

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Yes. First, a comment on the project situation. It's -- I would not say it's postponed, but it's taking a little bit more time when it's hard for our engineers to have meetings with our customer engineers, either at our places or at their places.

So it's not postponed. It's just that some things take a little bit more time when it's difficult to have physical meetings. And of course, we are working with video solutions and so on. But it's not really the same thing. So I hope I answered your first question there.

And the second was the growth rate during the quarter. And I would say it's been stable over the quarter. We have not seen any decline as a total in the later part of the quarter.

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

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Okay. And is it possible to quantify the impact of the slightly slower project development? Or is it --?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [5]

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No, it's more -- a little bit takes some more time, but it's nothing that we see will impact the big picture.

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

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Okay. And I guess we should expect, as you said, project business could have lower margins, I mean, then we should probably expect slightly or similar margin mix going into Q2, is that correct?

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

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It depends on the product mix, I would say. So I think our long-term guidance is the right way to look at it. Of course, we have quarters with a little bit higher or lower margin. But it's variating plus/minus 0.5% points, and that's what we should expect going forward as well.

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

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Okay. Perfect. And on Integrated Solutions, you said that you expect the inventory buildup to stay in Q2 and then decrease. So could you perhaps clarify that? I mean, do you expect a decrease in the inventory buildup pace or a year-over-year volume decrease? Or how should we look at that?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [9]

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That is a comment concerning the inventory buildup situation. So we expect that to continue during Q2 and then drop off as an effect in Q3.

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

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Okay. So you don't mean the year-over-year decrease, you mean adjust -- yes.

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

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Adjust the inventory effect, yes.

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

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Okay. Perfect. And is it possible to quantify or give any indication on the underlying volume development, if you exclude the inventory buildup?

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

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No. We don't have the exact numbers for that. It's an assessment we do that we have these effects, and we cannot explain the effects in more detail behind those numbers. But we are certain that there has been such an effect during this quarter.

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

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Okay. Perfect. And the final one for me. Could you give an update on whether you have any production units closed globally currently? And if you see any supply chain disruptions right now?

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

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Currently, we don't have any production units closed due to the COVID-19 situation. Of course, we have the ones related to the automotive industry not going full speed due to some constraints in the total supply chain, but Nolato is not causing any disruptions and all our units are producing.

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Operator [16]

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And the next question comes from the line of Mikael Laséen from 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. If you can just take a look at the Integrated again here, the development in the quarter and the inventory buildup. Because I think that we started 2020 at relatively sort of stable revenues compared with the second half. And then you had a disruption in the middle of the quarter. That means that March must have been really, really good. If the March level [disrupts], what you're also expecting in Q2?

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

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We agree fully what you said. We had the disruption, and we ended the quarter quite strongly. That is correct. Understood. We said early that we have a good order situation, but we had the disruption of not being able to produce those orders. We ended up the quarter being able to ship out a lot of those. And of course, ended up with the strong end of the Q1. That is correct, yes.

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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 will the March level, the very high level that you had in March, continue in Q2? Is it that level we should expect here in the near term? Or is it more the average that we saw in Q1 in total on the Integrated side.

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

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I think 2 comments to that. The -- Q1 was a bit up and down as we commented. But on an overall basis, we see a similar situation during the second quarter. Then, of course, we had about a bit more than 1 week, where we stood still in production in Q1, which we then don't expect to do during Q2 if the stable situation continue in China.

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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. Got it. And in general, what's your view on tobacco heating or VHP in this market climate, where we have a lot of lockdowns and difficulties maybe with the retail channel. What's your view on the situation right now? Could it impact your volumes in Q2 and Q3 more than expected, maybe, or -- and if you can say something about this?

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Christer Wahlquist, Nolato AB (publ) - President & CEO [22]

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If we comment there on a more general way of doing it without going into which customers and so on, but that type of business and that type of product and what we generally understand is that if you want those products, you will get them and it could be maybe affected on converting other type of -- users of other type of those kind of products to a new version that could be affected by having retails closed. But if you are using it, you will most likely get it.

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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. Innovative customers. And just the final one. Can you talk about the climate for the Industrial segment right now? And what is the sentiment? What is -- in terms of general demand? We see that the indicators are falling massively. And just curious to know and get more input from you.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [24]

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As we are in many different market segments in the Industrial sector, we have some segments that we see, maybe, an increased need during this situation, and we have other parts of the business seeing less volumes. But as a total, we expect the Q2 to be impacted by the corona situation.

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Operator [25]

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And the next question comes from the line of Oskar Vikström from ABG.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [26]

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I just have one more question to follow up on this discussion. So could you just repeat what you said about the Automotive exposure and sort of how it has affected Q2 thus far, as customers are maybe starting production again? Where are you in your production? And just give more detail on that, please?

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Per-Ola Holmström, Nolato AB (publ) - Executive VP & CFO [27]

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To summarize, we have about 40%, 4-0 percent of our industrial business area towards the automotive industry. And we have communicated earlier that this segment is mainly the one that we have seen problems within and the reason for that has mainly been our main customers closing down their operations. And of course, we had to do the same.

During some weeks, we did that and, of course, affecting our sales numbers and results because of that. We did stop for about one week in the end of Q1, and we have been standing still for some weeks until last week within April. And then production has started in a slow pace and, of course, not the ideal production setup. It's going up and down, and we are producing at a low level, of course, that is the situation right now. That is the short-term situation right now.

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Operator [28]

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(Operator Instructions) And as there are no further questions, I will hand it back to the speakers.

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Christer Wahlquist, Nolato AB (publ) - President & CEO [29]

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Thank you for listening to our presentation of first quarter, and I wish you all a very good day, and thank you again.

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Operator [30]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.