Nolato AB (publ)

Hello and welcome to the presentation of Nolato's second quarter 2023. If we start on page two in the presentation deck, there's a summary of the second quarter for the group. We had sales just shy of 2.5 billions during the quarter and that was decreased, we saw decreased volumes within our VHB business, but good performance or positive performance within industrial and medical. The operating profit EBITDA ended up at 198 million in comparison to 264. The EBITDA margin was affected by the lower volumes within the VHB sector. We saw good cash flow during the quarter and it rose to 224 millions if we exclude acquisitions. And we have sustained our strong financial position. If we then turn to page three in the presentation deck and look at the different overall picture of the different business areas, starting with the medical, we had sales just shy of 1.4 billion during the quarter and EBITDA of 138. And that is of course then more than half of our sales within medical and two thirds of the group EBITDA result coming from the medical division. On the integrated solution side, we saw the heavy decrease due to the changed purchase and different volumes for the VHB. So it ended up at 392 million and then EBITDA of 16 million during the quarter. On the industrial side, we saw good performance and sales ended up at 724 million and then EBITDA of 56 during the quarter. If we then turn to page four, starting with the medical solutions business area, we are continuing our profitable growth journey and you see on the graph the development of the sales of the business area over the last 20 years. So it continues good development of the business area. On page five, we see a split up of the focus product areas within our medical solutions business area. So most of the areas were performing good and the exception was the in vitro diagnostic where we still see some lower volumes due to the supply chain adjustments after COVID in that business area. We then go to page six, focusing on the medical solutions. First, second quarter, we saw a six percent increase of sales if we adjust for currency. We saw, as I mentioned, good growth in most of the market areas, but the IBD is on an unchanged level and we see still inventory adjustments in the total value chain. The margin ended up at 10.1 percentage, giving them the overall development of the medical business formulato. On page seven, focusing on the integrated solutions, here we have seen dramatic growth over the years within the VHP. We are now in the situation where the VHP has been decreased due to the new sourcing situation and also the lower total volumes in that business and enable us to grow in other market areas and market segments, which we are focusing on. If we turn to page eight, we will see that those areas that I mentioned. The VHP is now decreasing as a total share of the total and we are focusing very heavily on growing the smart home and home security part of the business, the wearable, the well-being devices, the in-ear phones, the speakers and the complex modules on our side, that is the consumer electronics side. On the right-hand side of the page, we see the EMC part of the business and that is then of course sort of a little bit of a different business model in that. If we turn to page nine, summarizing the integrated solutions business area, during the quarter we saw a 63% decline if we adjust the currency and of course it's low volumes and the change of sources strategy at the previous significant customers within the VHP area and the VHP within Nolato is now approximately 5% of the group sales. The EMC sales increased to 174 million and we saw the automotive area increase significantly while we saw the telecom area have lower volumes as a total. The margin ended up at .1% and we are working with cut-cutting but maintaining our strength in order to build new businesses within the other segments of the consumer electronic area. So sales ended up at 392 as mentioned and operating profit 16 million through the quarter. If we turn to page 10, focusing on the industrial solution, here we are on a technology and geographical expansion journey and if we look on page 11, we see the split down of the different product areas that we are focusing on. So these are then the different segments within the industrial sector. If we look on page 12, summarizing up the industrial solutions business area, we saw during the quarter a 1% increase in our sales if we adjust for telecy. We saw volumes in the automotive algorithm and also we saw less disruption in the supply chain compared to previous quarters. We saw also that demand for product and consumer discretionary sector slightly lower due to a weaker economy. So the margin ended up at 7.7 percentage points and due to the less disruption in the supply chain meant of course more efficient production for us.

Good afternoon, this is Per La Onström presenting group financial highlights on page 13. Net sales was almost 2.5 billion in the quarter. The 20% decrease adjusted for currency compared to 2.9 billion. Operating profit was 198 millions with an EBITDA margin of 8.0%. Cash flow was strong in the quarter. After investments excluding acquisitions, it rose to 224 compared to 71 by more favorable working capital and less capex. Earnings per share was 0.58 sec compared to 0.71. Dividend was paid out with 512 millions in Q2 and net financial liabilities increased to almost 1.2 billion.

Turning to page 14 and focusing on the current situation for our business area. Starting with the medical solutions, we are on a maintained growth strategy. A lot of focus on innovation built together with strong customer relationships. On the integrated solutions side, we have established positions in new product areas. We have a very flexible production structure in the base. And we have good success within the automotive area that is positive for the EMC. But, generally speaking, lower volumes within the telecom area. Overall, there are some geopolitical concerns that affect the global supply chains. On the industrial solutions, we have advanced our market positions. A lot of emphasis on sustainable solutions and overall a general weaker economy. We will now open up for questions.

The next question comes from Adrian Jeloni from ABG Sundal Koliya. Please go ahead.

Hello, it's Adrian here at ABG. First question on medical, we are still seeing these inventory adjustments on IVD that you have been talking about for over a year now. And I guess a two part question on that. First of all, are there any signs of improvement on Q3 current trading there? And the second question is, if we do return to a more normalized inventory situation among your customers, can you just help to quantify the margin impact that that could have on medical?

We have not seen any improvements during the third quarter so far.

And margin wise, the situation we had during COVID with very high utilization of that part was of course positive to margins. When that picks up in volume, it won't be like that of course. And then it's a more similar margin that we have in the overall medical business area.

And then on EMC products, you have previously said that these could go around 15% per annum. But now you are saying you are seeing slower demand from telecom. And just for the current year, can you give us some estimation on where the full year growth might end up in EMC given that for the first half growth has been in the single digits?

Yes, I don't think that we should expect much higher growth numbers from that business. It is slow on the telecom side. We have a good situation in other areas which is supporting us. But of course, as telecom is not that strong, the overall situation is not very much more positive. Then of course it's hard to judge when telecom will be stronger. But for the time being, we don't see that change coming.

And am I correct that telecom is roughly 80% of EMC or am I misremembering that?

The telecom part has decreased compared to that. The total telecom has decreased and we have had a good growth in the other areas. So it's a bit less compared to that right now.

And then I guess on the VHP sales, if we take away the current EMC sales it seems like VHP is down sequentially as well. Is this an effect of BAT's total volumes coming down or have you lost further shares on this dual sourcing contract?

That is the effect of volumes. And you are correct, sequentially it is a smaller downturn. That's the way

it is. But is it your customers selling for less volumes in total or have you had a smaller share and the other dual sourcing partner has a larger share of the volumes? Which of those is it?

I

think the situation is similar when it comes to splitting volumes. But it is low volumes totally. So not a very big change but we did see some downturn in our volumes during this quarter.

And a final question also on VHP. Given that we have had really three quarters now with VHP not being profitable and if I remember correctly at the peak sales level you said fixed costs were around 300 million in that segment. How much can you decrease the fixed cost base in VHP?

We should see the cost base as consumer electronics and what we are doing is that we want to grow the business within consumer electronics in those areas that I explained before. And in order to do that we want to maintain our capacity and our strength in order to address other businesses. So we are not maximizing our cost out because we want to continue to grow that business long term.

Okay, that's clear and in that case that's all from me. Thank you. Thank you.

The next question comes from Carl Nåen from SEB. Please go ahead.

Hello, a couple of questions from my side if we start on medical. Martin was relatively flat there year over year in the second quarter here. So I was wondering a bit on the outlook on the margin in medical given that you are facing a bit easier comps now in the second half. Do you think you can improve margins a little bit more than what you did in Q2 in the second half of this year would be my first question.

It's correct that we have a margin situation in previous years which decreased from these levels. I do think that this business should be seen more in a sequential development from the levels we have right now. However, there is a smaller effect coming from Q3 as we have a vacation period during that quarter. So that might affect volumes by a little but except for that I see it more sequentially than comparison.

So Martin should look better year over year than in Q3 and Q4 I guess.

Yeah, it's more in line with.

Good. And then a question also on the IVD sales. Is it possible to quantify? Was it at-lat development or how much was it down year over year?

The IVD volumes you mean?

Exactly. How much did it decrease year over year in medical?

The volumes for IVD were similar to the same period last year.

That's great. And then a question on industrial. Nice to see a good margin development there. Just wondering a bit on the outlook for the cycle basically. What are you seeing in terms of demand from your customers and how did it develop during the quarter? Was it stronger in April or stronger in June? Any form of guidance there would be very helpful.

If we look on the second quarter I would say it was fairly stable during the quarter. We didn't see a strong start or a strong end. It was fairly stable during the quarter.

Okay, that's great. And then just one question on price increases. Now we are seeing that production costs, more material costs, electricity costs etc. are coming down. Is it possible to quantify how much price helped you in, I guess it's mostly predominantly in industrial and maybe in medical, but is it possible to say anything on how price helped you or what the impact on price was year over year?

There was a slight support from that, but not very much. The margin improvement came mostly from more efficient production and that is mainly within automotive. We didn't see much of the fluctuations in production planning that we have seen previously. So that was the most affecting positive reason for improving the margin additionally.

And the medical is the 6% organic growth. Is that mainly volume driven you would say?

That is mainly volume driven, yes.

Okay, that's all for me. Thank you.

Thank you.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. The next question comes from Mikael Leysin from Carnegie. Please go ahead.

Okay, thank you. Just a housekeeping question here when it comes to the administrative expenses. It was 122 million in Q2, I think, and step up compared to Q1 and quite a lot higher than last year. Can you explain what this is? Is it FX driving this or what's behind this?

That's correct. It was higher and I think last year should be seen as a low number to start with. Then in comparison to Q1, I would say that this quarter is a bit on the high side. Different explanations to that. But one area would be that we had notice costs for some management levels, more MD levels during this quarter which affected with some millions on top of Q1.

Is this part of the integrated solutions segment or is it included in the intragroup line?

It's not part of the business area levels. It's on the group level. When we have that kind of cost for MDs and above that level, we normally treat that as a group level cost outside the business areas. And the same this quarter.

Can you maybe specify what you have done and how much it was?

There are not many, but some of these positions that have been replaced. And it's in different business areas and it's around five plus millions in this quarter.

It sounds a bit non-recurring.

That's correct. I would call it more, I mean it happens from time to time so it's not the very unusual thing of course. But it's not every quarter and it was on the high side this quarter of course. So it's a bit non-recurring. I agree.

Okay. Also just a quick question on CapEx if you have any changes to the CapEx plan for this year?

No, I would say it's the same picture as it has been for some time. Looking at this year, we do see 600 to 650 million in CapEx. And then it's including paying for one production unit real estate in Sweden, which is 150 million included in that number. We don't know exactly when that will happen. We expect it will be this year. So yeah, the same situation as last quarter.

Okay, got it. Can I just follow up with a question on IVD? Approximately how much of the medical product category is under approximately the profit level that that area is generating right now if it's possible?

That is around 15% of the business area. And the profit level is slightly below the average of the business area because capacity utilization is lower than what it should be.

Okay. And when it comes to GW Plastics or the North American business, is the entire North American business at roughly 7, .5%? I'm thinking about medical now.

If we look on the different regions, we have lower margins in the North American market, yes, that is correct.

Okay, did you have any improvement sequentially or is it still at stable levels?

It's still on a low level.

Okay, so that means that the other product areas excluding North America are maybe at your historical average margin levels of 12-13%. Is that a fair assumption?

Yes, it's a fair assumption.

Alright, thanks.

Thank you. The next question comes from Johan Skoglund from DNB Markets. Please go ahead.

Thank you. So just a quick question on VHP. Did you say how much this was of group revenues and could you say if the segment contributed with profits or was it negative in the quarter?

VHP is around 5% of group sales in this quarter. And coming back to the non-profit situation, we do have still a situation where this part is not positive in result for us. It's a slightly negative situation for that part.

Okay, that was all from me. Thank you and good luck with Q3.

Thank you. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you very much for your interest in Nolato's second quarter and I hope you all get a really great summer. Thank you.