Nolato AB (publ)

Hello and welcome to today's webcast with Nolato where CEO Christopher Walquist and CFO Per-Ola Homsund will present the company's report for the third quarter of 2023. After the report there will be a Q&A so if you have any questions press star 9 and you will be handed the world. And with that said I hand over the word to you Krister.

Okay thank you and good afternoon or good morning to all the listeners. This is Krister Walquist presenting the third quarter of 2023 for Nolato. On page 2 in the presentation deck we summarize up the third quarter for the group and our sales totaled to 2.3 billion Swedish kronor and that is a 15% decrease if we adjusted for currency and acquisition. We saw an increase sales for medical and industrial solutions but markedly lower volumes within the integrated solutions business area. Operating profit amounted to 193 million excluding a non-recurring item of 60 millions corresponding to our changes in our Chinese operations. That will give a margin of .2% if we exclude a 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 3 summarizing the three business areas and the group. So the 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. 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 EBITDA 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 focus 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 the situation right now of the COVID with some adjustments. Cardiology it's a long term it's 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. Continuous care approximately 11% of the total market. This is a high volume market with huge quantities. Endoscopy and general surgery approximately 22% of the business area sales. It's a market that we've 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 IVD sector. We saw somewhat lower volumes in the surgical area but that is due to the variations of the supply chain after the COVID situation. We ended up at an EBITDA margin of 9.5 in the quarter and we had approximately 10 million in electrical subsidies within the Sweden. So sales ended up at 1.3 billion operating profit 126 millions 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 8 we can see those areas. So the heavy decrease in sales was within the BHP 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 hand held 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 9 looking into the integrated solutions third quarter we saw a 56% decrease in sales during the quarter. Of course there 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 investments in new telecom infrastructure. The EBITDA 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 is 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 2 we summarized 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 had risen and supply chain disruptions had led to less of an impact than previously. We also saw that demand for product and consumer discretionary sector slightly lower due to a weaker economy condition. The quarter ended up just shy of 700 million with an operating profit of 64 million giving us an EBITDA margin of 9.3.

Good afternoon, Per Olaarnström commenting on group financial highlights on page 13. Net sales decreased by 15% adjusted for currency to 2.3 billion. Operating profit EBITDA excluding a non-recurring item was 193 millions compared to 214 millions last year. The non-recurring item of 60 million SEK is for concentrating the Chinese operations and was announced 24th of August. The EBITDA margin excluding the non-recurring item was .2% similar to last year. The EBITDA margin includes 20 millions in electricity subsidies from Swedish authorities. That was received in Q3. We had good cash flow in Q3. It was 188 millions excluding acquisitions. We had favorable change in working capital and comparatively low investments in the quarter. The fourth quarter this year is expected to have lower cash flow as a big part of the non-recurring item will be paid out in that quarter. We have a sustained strong financial position. The equity assets ratio is 54% and net financial liabilities was about 1 billion compared to 1.2 billion end of June. We expect capex to be between 450 millions to 500 millions for the full year 2023.

Turning to page 14 on the current situation for our business area. Starting with medical solutions we have a maintained growth strategy focusing on margins and margin improvements based on innovation and sustainability. Of course with deep and long-standing customer relationships. Within the integrated solutions business area we have established position in new product areas. We have success in the automotive area that is positive for EMC but lower volumes within the telecom area. This business area is then of course affected by geopolitical concerns. Industrial solutions we have advanced our market positions, emphasize a lot on sustainable solutions but we see generally a weaker economy. We will now open up for questions.

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

Hi, can you hear me okay? Yes. Hi, it's Adrian here at ABG. A couple of questions from my end. First of all on medical the margin came down quite a bit on a sequential basis. I understand there is some seasonal weakness in Q3 but 60 basis points down from Q2 is still quite significant. Can you just elaborate on what drove that difference?

Yes, to start with it was an increase in margin compared to the same quarter last year. But as you say in comparison to earlier quarters this year it was a decrease. And volumes and sales were lower than these quarters and we did see a vacation effect this year which was bigger than last year. So those are the underlying changes so to say and explaining the lower margin as well.

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?

We commented that after the press message August 24 and we do see some effects during Q4. And we should be able to increase the margin within integrated solutions somewhat. We will see gradual improvement of margins in Q4 and Q1 next year. And long term we have the group target for margin 10% for consumer electronics as well.

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 the coming quarters.

We expect that to come down. This quarter had a negative currency effect within the financial items. And that was almost half of the finance cost in Q3. On the other hand, it was a positive change in Q2. So it was a high number this quarter definitely.

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 NoRisks, Wigobi. 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?

The customer in this discussion is a long term customer of ours. And of course, we are not commenting on new things, but we would definitely be in the position to compete with this kind of contracts. Of course, it's a long term thing to set up production for this type.

Okay. I guess one small follow up on that. As you mentioned, Novo, they are a long term customer of yours 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?

That is a customer which is on the top 10 list of our customers, but it's in the end of that list, so to say. So we have a long relationship, but it's not one of our largest customers. And just to be clear, we have no ongoing business with that kind of product you are referring to. And maybe, Chris, you can explain what we do for them today.

We are working within the 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 Carl here from Nordea. Can you hear me? Yes. Okay, very good. Just a follow up on the medical margin here. I mean, of course, buying that Q3 seasonally is a bit weaker quarter, a smaller quarter, but looking at it, it's touching an all-time low, adjusting for the electricity subsidies. Is it really just seasonality? Because looking at, for instance, Q2 last year, you had raw material headwinds right 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?

The mix effect is not positive, but not a very big thing, I would say. Instead, it was a quarter with lower volumes and also volumes lower than we expected. So, we had lined up a bit too much resources in this quarter and vacation came in a bit more than we expected. And all in all, that did that. The margins together with the lower sales was a bit disappointing, as you say.

And taking the second part of that question relating to the IVD and the changes, the thing is we have, there is a large tier one player in the field that the OEMs tend now to be a bit more They tend to find new ways to supply themselves and rather go directly to the producer, which is then affecting short-term some of the volumes in the market.

I didn't really catch that. Could you please take it once again? 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?

No, it's one of the big tier one players within this field that has been supplying a lot of the cuvettes for the IVD to the OEMs. The OEMs are now gradually changing that and rather buy directly from the producer, changing the market dynamic a little bit. Which means that ramping up capacity for the OEMs at the same time reducing for the tier one is affecting our volumes.

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

I don't think we will see a worsening effect going forward, but it will take some time to put the new capacity in place for the OEMs directly.

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

I think it should rather be seen as a temporary thing where we have some swings after COVID and we had a strong surgical quarter in comparison 2022. So it's more that than anything else. There is no changes in the total market, more a comparison number. Q3 2022 compared to Q3 2023.

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

We had specifically a strong surgical quarter Q3 2022. So that thing specifically is a quarter thing and not something that we see going on.

Okay, and also finally, perhaps, you're talking about achieving synergies between industrial and integrated. Could you talk a bit more about that? Is it just the cooperation between the segments or are you actually merging plans? Sure. And also have you achieved any interesting sales leads from that so far? Is it toward on?

Yeah, integrated solutions is mostly working with integrating electronics into devices and industrial is mostly working with the pure mechanical. And by addressing the same set of customer bid with both offerings and combining them, we see good synergies. And we have seen good opportunities that we have sort of built up together with customers by cross selling and working together with the two parts of our businesses.

Okay, very clear. Thank you. 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 SUV. Yes, going back to the medical segment again. I mean, yeah, I was also a bit surprised by by the lower growth here. And I'm just it doesn't really sound like it's anything that should should last that long. But I'm just curious here. Your thoughts on next year? Are you Danny? Are you? Are you afraid that scope will be a bit lower for next year for the medical side or should we expect normal 78% organic growth in medical nectar as well?

You know, our long term ambition is to outgrow the market, but we will have periods with higher growth rate and some periods with a little bit lower growth rate. And this quarter was lower. And it will vary between different quarters.

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 than right? Right. On the organic growth year over year.

I think on the on the surgical side specifically, we would not have that effect in Q4. But then generally speaking, we are not giving prognosis on our growth quarter by quarter.

Yeah.

Okay.

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

Our main automotive market is the Scandinavian truck and car manufacturer. And we see, of course, there will be changes, but we see continuously stable demand.

Okay, that's good. And just on integrate that again, did you say that you expect Martin to increase gradually from from Q3 level going forward here? That's correct. Yes.

Step by step. That

was all for me.

Yeah. Thank you. Thank you.

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

Hello, this is Johan from the Indy Markets. Just a detailed question on the cash flow. So cash flow from financing came in at negative 265. Could you please break down the components of this?

Could you repeat which cash flow you meant? Cash flow from

financing in the quarter, please.

Yeah. Financing. Yes, thank you. That is coming from repayment of loans that we have made in the quarter, mainly from that. Okay, 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 our questions today.

Thank you. And thank you all for being interested and listening to the presentation of the last quarter. We wish you all a very good rest of the day. Thank you.