Note AB (publ)

STO:NOTE

Earnings Call Transcript

[Operator]

Hello, and welcome to the NOTE Audiocast Teleconference Q1 2022. [Operator Instructions] Today, I'm pleased to present CEO and President, Johannes Lind-Widestam. Please go ahead.

[Johannes Lind-Widestam, executive]

Thank you. Well, how do we start the presentation of this quarter? First of all, I think that we have done yet again another fantastic quarter. Sales is highest ever, and we also ended this quarter with the strongest month ever with more than 10% of the second best month ever in March, where we did over SEK 310 million.

But before we go into the presentation, it's -- if you take a look around us and we have had 2 years of COVID outburst that have been limiting a lot of the potential. And after that, we just barely came through that, and then we had the war in Ukraine. And on top of that, we see the component crisis, we see the freight restrictions or constraints as we have in the market.

And with all this said, it's -- I think it's amazing that the industrial production in the world is going in the speed and also that we as a group managed to get so much produced and sold every month. And when I walk around in our factories and see the level of production and the level of productivity and the enthusiasm that we see, I get very proud.

So with all the constraints and problems in the world that we can still deliver numbers in the way we do. I think that's just amazing. And I will come back to that. But looking ahead, I think that we have the best is yet to come. So we are not harvesting on things we have done. We're still making a lot of investments and where -- we are attracting new customers, we're attracting new programs to existing customers and we are supporting our customers throughout this very turbulent time.

So it's just remarkable to see how NOTE is handling all this surroundings. I just wanted to have that said. And for those that are not -- don't have the possibility to look into the sites and so on, it's yes -- it's fantastic, and that's, for me, extremely pleasing to see.

Okay. Moving on. First slide. Let's see. Sales, 64% up. In that number, we have somewhere around 5% is currency and 35% is organic, and 24% roughly is coming from the acquisition of iPRO. So solid numbers throughout all segments. I will come back to that. Also very pleasing to see that the operating profit is continuing to increase, 1.3 percentage units up. It's -- to be just remarkable.

First quarter is always a bit tricky. We have the Chinese New Year. And this time of this year, we did also have the first closing of our factory for 5 days due to COVID restrictions. And then we have the closing of the -- of our -- the Shenzhen area that also costed us some productivity.

We managed that lockdown very well since we have dormitories where about 90% of our staff is staying. So we run the factory throughout the lockdown with about 90% capacity. So the loss in sales in the quarter is less than SEK 10 million from the Chinese operations, probably more around [ 5 ] we had good recovery in that. But it cost us some and we will come back to that when we see the margin per segment. And when we look at the rest of the world, we see that, that margin is a bit down this quarter.

But still, overall, fantastic result. Profit per share, SEK 1.95. I think that's the second best we have ever done. We did a bit better in Q4. For those that follow up, as you know, that Q4 is seasonality, and better quarter marginal-wise than Q1. It has always been that way, and this year is not -- is also following that trend, but still very good.

Cash flow, at least, positive SEK 9 million, not so much to write home about, as we used to say, but it's still positive. Very pleasing to see we're still building inventory our direct delayed value has increased from SEK 50 million roughly to SEK 100 million. And what I mean with that is deliveries that we have scheduled for the quarter that we did not ship out.

Then we have the indirect delays, meaning orders that we have received, where the customers want to have delivered in the first quarter, but we have already confirmed them in maybe second or third quarter, those I often referred to as indirect delays.

And the value of the indirect delays is significantly higher than the SEK 100 million in direct delays. So our order book from what the customer wanted in this quarter is significantly higher than what we managed to get out. But still SEK 821 million is our best quarter ever. So very, very strong sales anyhow.

Moving to next slide, our margin. And here, you see what I mean. We got a new record for the Western Europe, 11.4%. And I think it's the first time we're about -- we were over 10% in Q4, but the second time were there, but the highest ever, 1.7% up. This is, of course, mainly an effect of the strong organic sales growth in especially our Swedish and Finnish site. So very pleasing to see.

Rest of the World, also very good, 43% up. Here, we have a bit higher currency effect. I think that is around 8%, 9% of the growth is currency. But we also see a decline on the margin of 2.6%. And this is, of course, China costed us a few million to recover from the lockdown and all that.

And we also saw that we had some lagging effect of price adjustments in our Estonia site. So we had a 1- or 2-month delay in getting the new pricing for the increased material cost in Q1. This is a bit of a one-off effect. So we know that March, we did not see this effect, and we are not expecting to have this push on the margin on the rest of the world for the rest of the year. So very, very pleasing to see.

What we also see is our growth in head count. If you look at the Western Europe, we're growing with 38% in head count. More than half of that growth is coming from the acquisition, but still 38% growth in head count and 73% growth in sales. This is the reason why we are increasing our operating profit quarter-by-quarter, that we managed to increase the sales significantly faster than we are adding more people.

And this is not that we are using the people more hours or pushing them to work harder. This is simply because we are managing to get more efficient machines in place, we're automating warehouse, we're automating workflows, we're doing all these activities that we are supposed to do to continue to grow without adding head count.

Headcount is not a bad thing, but we should utilize them in the best way we can, and automation is a fantastic way to continue to increase our margins. And this is partly why our CapEx is quite high at the moment and will remain on a high level for the coming -- for numbers of years to come. But I still believe this is fantastic.

And despite the decline on the operating profit in the rest of the world, I still believe that our operations in China and Estonia are at the best shape ever when we enter 2022. So I would be surprised if we don't close the gap, and we'll close the year with a positive margin development also in the rest of the world group.

Next slide, Customer segments. And I got a question from a journalist earlier today. "Okay, what are you -- which segment are you most happy with?" And I have to say that the answer is all of them. If I look at this picture, the slowest growing segment is Medtech with 48% growth. Just look at other business.

If you have 48% growth in 1 segment, you're super happy, and this is our weakest segment. Greentech, 90%. We were expecting this to be strong. Medtech, I've talked about it for a number of quarters that this is going to come up very strong and it is strong. I expect it to continue to grow. Medtech is where we have significant new wins that are in ramp-up.

Communication. We talked about it also in the last calls, 69%. It will most likely remain on a very high level for this year, at least.

Industrial. Our -- bulk of our business growing 56%. And this is, as you know, a big variation of different customers.

So all in all, extremely happy to see that all segments are growing. All segments have an order backlog that are indicating continued growth in similar numbers to what we see. So fantastic start of the year. So I don't want to highlight any segment, but I want to highlight the -- all 4 of them because there are fantastic growth and extremely strong opportunities in all of these.

But I would say that Greentech will most likely be our fastest-growing segment also this year when we summarize the year.

Moving on to next slide, some highlights. Steel quality is very, very strong. We are reaching below 500 PPMs quarter-by-quarter and month-by-month. We have -- and this is a number that we are constantly improving year-over-year. We have -- since I started, we have not seen a year that has been weaker than the year before. So very, very strong numbers delivered quarter-by-quarter. And this is one of the parts that the customers are appreciating.

We have supply challenges. We have pushed out more than SEK 100 million in sales that were scheduled for this quarter. This means that our delivery performance is still in the numbers of the mid-80s, not in the mid-90s as we are expecting. But we still believe that this is in line or better than any competition that we are looking at.

So we are still managing to get good deliveries out. And here, again, I have to say that all our customers are extremely supportive in the chase of components in trying to reschedule to make the best out of the component availability that we have in our factories.

So I think that the cooperation with our customers has strengthened throughout this crisis. So I'm very, very pleased to see all the cooperation between us and the customers and how we try to close these gaps.

And recently, I think that many of the suppliers have also stepped up and are doing good activities to close gaps in the supply chain. So I'm very hopeful for the future. I still believe we will have a really tough situation throughout this year on the component market. But so far, I think we're coping with that. Overall, a very, very strong level.

Order intake. It's very easy to look at this and say that it's fantastic. I mean we're up 100% in order backlog year-over-year, if we don't take in the timing. This means that our order backlog is now about 5- to 6-quarter long. So we have very good visibility in what the customers want at least for 1.5 year ahead. After that, we have another 6 months where we have forecasts that are indicating similar growth numbers as we see.

The order backlog for the shipments in Q2 to Q4 is up 46% compared to last year, excluding iPRO. And still, we're guiding lower than this. And this only means that we're not expecting that we're getting components for all the shipments that our customers are expecting. If we get components, we will grow much faster than what we are guiding for. This is how it looks.

But I also want to highlight just how does this look when we look at our home markets? Sweden, 45% growth. Very neglectable effect on currency. So this is pure organic growth. Western Europe, 39%. So U.K. and Finland are growing a bit slower than Sweden.

China, 53%, extremely strong. Estonia, 35%. And here we have seen some delays. So here is one of the sites where we have more pushed out orders than in other sites. So the order intake in Estonia is even higher than the 35% that we're indicating here. So really, really strong.

IPRO still performs fantastic, 40% growth in local currency, and they are serving several of the EV charging customers. However, if you look at iPRO, we are going to see a bit slower growth in the second quarter. The U.K. government is discontinuing the contributions to install EV charging stations, and this will have an effect in April as we see it.

But in the overall pictures, you will not see it, but it's something that everyone that works with EV charging stations should be aware of that. This will have some kind of effect in the market. But overall, the expectation is that the EV charging market in U.K. will grow 50-plus percent or even higher. So it will be a month or so that we will see some lower numbers.

Moving on. CapEx, we were talking about it earlier. I think our budget for investments are roughly SEK 70 million and SEK 60 million last year, and we have been just shy of SEK 60 million in 2020. And what we do is that we are investing in new equipment to increase capacity. We are utilizing more automation, and we are investing us out of quality sensitive processes.

If we have processes that are delivering a bit lower quality, we try to invest our way out of that because that eats capacity when we're not getting full yield when we produce. Floor space is something that we talk very little about. I see some others are talking about it, but we have increased the floor space capacity in Sweden, Estonia and U.K. in this quarter.

So we are doing a lot of activities also here, and we are expecting to continue to increase floor space in several sites. But as I say, we always have capacity to cope with at least 4 or 5 quarters growth ahead, that's where we are standing. So we could fairly easily to do 1 million -- or SEK 1 billion to SEK 1.1 billion per quarter if we have the component at the moment.

So we still have spare capacity given the current mix that we have. We have talked about global component market. What is fascinating is that we still see that the semiconductor suppliers are increasing their production. Last year, semiconductor in volume grew with over 20% and still we're not seeing an ease of the market and electronic industry only grew with 7%, 8% is the last number I saw. So there are inventory buildups somewhere in the world, unfortunately, not where some of our customers wants it. But this is the reality that we are facing.

So sooner or later, we will see that all this production capacity that they are -- that the semiconductor companies are investing in and getting out will come to us. So this is -- this will be yet again the topic of the year in the electronic industry. I hope this is the last year we will talk about the supply shortages.

Again, return on operating capital. We discontinued that as an objective for the group. But I want to highlight it. We are up to 30%. Until last year, we had 25% as our target. Now we're at 30%, fantastic. And also a new record with big margin. So this is also a KPI where we are improving a lot.

Balance sheet, strong equity, 41%. Good liquidity situation. We can easily cope with 1 or 2 acquisitions in the iPRO size for the year if we find the right targets. And this is, of course, one of our focus areas.

Outlook. Yes, what can I say that has not yet been ]. Very strong order situation. We see that all customer segments are growing. There is basically no change between the market segments, except for that -- for sure the Greentech segments are having a bit stronger growth potential. We are expecting that our working capital levels will be stabilizing. Our inventory has grown. It has doubled, I would say, in the last year.

But we also have advanced payment and so on from customers. So our exposure to bad inventory, we see that is fairly low and our auditors are seeing that we're doing a better and better job with that. And we have not seen big write-offs in the recent years. So we are not that nervous about it.

And we have a strong balance sheet to work with. So for us, this is just the way we are serving our customers in a strong way.

Again, there are some positive megatrends that are in our favor. We have talked about them before. But I think today, to have a solid footprint and an increasing footprint in Europe is going to be very important in our -- in the eyes of our customers.

Supply chain constraints are very, very challenging for our customers. I don't expect that freight will be in balance in the short term. And I also see that political decisions are affecting company's ability to serve their customers. If you have a very diverse supply chain with shipments from many different countries, in many different regions, you will see that political decisions like the Chinese very strong restrictions on COVID, that will affect your ability to meet your customers' demands.

So my view is that we will see more and more companies moving their production or the suppliers closer to where they do -- where they have their end market or where they have their final assembly sites. This will play in our favor as we see it, and we have many good dialogues with the customers in this area.

Yet again, 2021, our strongest sales year ever. Our wins were up like 30% and all that volume is still yet to be implemented. So we know that within this year and next year, we will implement SEK 800 million, SEK 900 million more sales in our pipeline that has to be produced. So a fantastic opportunity also here.

The only constraint here is that we see that the component availability is pushing out the start of production. For those of you that are not so involved in this industry, there are for unforecasted demands on semiconductors. You have 1 to 2 years lead time. So if you develop a new product and you want to have components for it, you will have to wait at least 1 year to start production. This is just madness in my opinion, but this is how the market is working.

So therefore, we will see that, yes, implementation of these wins will take some more time, but I still believe that we have a very good possibility to meet or exceed our growth targets that we have communicated. Here, we talk about that we are expecting to have sales growth of at least 30%. When we started this year, our guiding were 15% to 20%, now we're up to 30%.

We had a very strong first quarter where we exceeded our outlook, and we are seeing that the order books are getting even fuller than we saw when we started this year. So we expect that our sales will continue to increase stronger than we expected when we started this year.

We also believe that with growth, with the automation initiatives, with the new equipment that we buy, we will have a good possibility to continue our positive earnings trend. And we are getting very close now to our long-term objective. I think we're at 9.5% or 9.6% on the trailing 12-month operating profit level. So very close to the 10% we communicated.

And also, if we look at the long-term objective of SEK 5 billion in 2025, I would say that currently, we are a bit ahead of that plan. And with the guiding that we see and the order backlog that we see that it may be possible to reach that level earlier than communicated rather than later.

Next slide. And I always end with this slide because I think it's just fantastic to see how the link between sales growth and profitability is. For those that have listened, I always refer to 10% growth, then you will, by definition, see a positive operating margin development if you handle your operations properly.

So I'm very pleased to see that this link is so stable and we see that when the growth has increased in the last 3 years, we have 20% organic growth year-over-year and 26%, including acquisitions. This is just fantastic in my opinion. And I also see that our order backlog indicates that we can continue to be in line with these numbers, which is also fantastic to see.

But also if you look at the operating margin, how well this is corresponding to the sales growth. If we take the last 3 years, we have gone from roughly 7% up to 9-point -- what do we say, 9.5%, I think or 9.6%. So fantastic. But how can this happen? What is driving this? We see the long-term trends of electronic production in Europe is now forecasted to grow 7% to 10%.

And a lot comes from electrification, smart applications, but also from reshoring where many companies wants to move back their supply chains. So I expect that Europe will be a very, very good place to be when you are producing electronics in the coming decade. So this is very important for us.

As I said, we are investing in ensuring that we are operational, well-functioning supplier to our customers. That is the cheapest way to maintain as a supplier. If you deliver good quality with a reasonable number of deliveries on time, we will get the opportunity to quote on all the new products that our customers are launching.

So this is something that we're very proud of to see that our retention rate on new generations are significantly high. When we measure it, we are up to 98%, 99% on this. And I think if you are below 90%, it's going to be a problem. And many companies are running this at maybe 80% or even lower. Then you have maybe 10% of your volume is going out every year, and then we have to replace that, and that is really tricky and eats up your resources. So for us to be reliable and trustworthy supplier is so important and this is where we put a lot of our focus.

So what can be said more? If we look at the future, and I think this is -- I think what is -- what the quarter is -- what it is, as I say, it's very good sales that are pushed a bit on the margin due to some lagging effects and some political decisions in China. But all in all, we are managing to get 1.3 percentage units up. And if I look ahead and I would say that the global economy is now predicted to take a bit of slower turns than it has in the last years. So what will that give us?

My view is that this will lead to somewhat more that the component market will ease up a bit when the level of production is slowing down. And how strange that may sound, this will be positive for us because then we will get more components to eat off our big backlog that we have. So the best that can happen, as I see it, is a bit of a slower economy that will ease up the component market that will allow us to get more component availability in the near future, meaning the next, say, 4 to 6 quarters.

That would increase our sales, how strange that may sound. So it's a very unique situation that we are in with this fantastic backlog and the high win number that we see. So despite all the issues that we see in the world around us, our operations and our customers' operations seems to be coping very well in this turbulent surrounding.

So with that said, I don't have so much to say. Maybe I should touch the subject of acquisitions. I've only touched about it very briefly, but we have -- we always have, say, 1 to 3 acquisition targets that we are discussing with, and that's the situation today as well. We have -- yes, we are in close dialogue with at least 2. We will see how those materialize.

And we will come back to you when we have anything new to say, but it's a constant dialogue and we are very attractive as a buyer. We are financially stable. We are often expecting that all the management are continuing to run the operations. We are helping acquisition -- or acquired company to get better availability on components and so on. But they are still allowed to run their operations in a fairly similar way as they have been in the past.

So therefore, we are expecting that we will close at least one for the year is, it would be a good guidance. That's at least our expectations internally. Okay. With that said, I think it's -- I can stand and talk forever, but I would open the floor for discussions and questions. So should we start with the ones that have been sent in, and then we move over to the ones that have verbal questions.

[Johannes Lind-Widestam, executive]

Okay. We have one from [indiscernible] how is the current lockdowns in China and especially Shanghai impacting you in April?

According to our Chinese staff, we don't see that the Shanghai lockdown will impact our April at all. And what we are seeing is that the lockdown in Shenzhen in March will affect the first 2 weeks of sales in April because we had a hard time to get material into our site. That we will gain back during April and May, so it will not show on the quarter, but we have some delays of incoming material. But -- so for Shanghai, it's not impacting us as we have seen it so far.

We have a second one from [indiscernible]. How is the market for EMS services? Is there any signs of oversupply in the market or is the picture rather the opposite that supply is too low in Europe right now?

This is a very good question. I have earlier said that today, we have a situation where I would say that supply and demand of the EMS market is fairly in balance, and I still believe so. We have capacity to take on some more production. Our peers also have the same situation. So we can take on more, but there is not a huge oversupply as there were 10 years ago. So a very good balance, I would say. And I think this is healthy both for us and for our customers. So that's how I see it.

And we have a third from [indiscernible]. Can you talk a bit regarding how the longer lead times impact the ordering pattern from your customer? Is it clear -- it's clear you have a long -- have a longer order book right now versus 2 years ago, but is there a risk that some of this demand is driven by preordering versus normal ordering?

Yes, of course, it is. And I would say that our customers are a bit over ordering, and that is one of the reasons why we are constantly guiding lower than our order book is indicating. So this is -- we try to -- when we communicate to you in the market that we are -- we try to balance out the over-ordering versus what we expect that they are actually wanting.

But in the near future, they would rather have more than less, if I put it like that. So -- but yes, there is -- there will be an over-ordering situation for some of our customers. Still, we are not in that shape. We are not building inventory at the end of our customers as we see it. We are rather eating off their inventories, and there are shortages in supply due to the component shortages.

So this will -- even if they are over-ordering, I would say that the overstocking that may occur will not happen in 2022 at least. This is a scenario that may happen in 2023 or later, as I see it.

Okay. Yes, then we have one from -- I think that was the last one from [indiscernible]. And this was the last question we have. We got one more here from -- we take [ Mattias ] Montgomery. When market research says EMS market, 7% to 10% growth per year is that before or after a roughly 2% price reduction customers have over time?

I would say that this estimation is on volume. So yes, you will probably have to reduce the price reductions from that level. So say that it's 5 to 8. But I would say that in the current market scenario we're rather looking at price increases rather than price reductions. And if we take, say, 2020 as some kind of baseline, I would say that it will take several years until the component pricing will come back to similar levels if ever. So I see that there will be a price push upwards rather than reductions over the next coming years. Maybe 2022 will be some kind of peak on component costs, but there will not be a fast reduction, as I see it.

Then we have [indiscernible]. Congratulations to a fantastic report. You are not worried that order book is inflated due to component shortages?

Yes, ], I think, I have touched upon this subject a few times. I think that it is. And that's why we're not guiding up to the full value of our order book. So -- if we now have 46%-plus iPRO in order book, and we're guiding at 30-plus percent growth in total. And I think that we are netting out more than the over-ordering that we see because we are expecting that we will not get everything out that the customers want.

So we are seeing this, but we are always trying to balance this by giving netted value to you guys what we are expecting that we can deliver. I think this was the last question we have on the -- that have been sent in. So is there any questions on the phone?

[Operator]

[Operator Instructions] And there seems to be no questions on the phone, so I'll hand it back to you, Johannes.

[Johannes Lind-Widestam, executive]

Okay. Thank you. Yes, I think I'd said it all. Yet, a fantastic quarter and very, very strong outlook. We will -- as always, we will update the outlook per quarter. And -- but in overall terms, we are looking at a very strong year, as we see it. And also, if you look at this in the longer picture, we are not losing any customers. We are attracting several new customers, and we are expecting that the customers we have will continue to grow within their own business.

For example, look at customers like Plejd and Charge Amps and these -- they are growing very fast. And we know which position we have together with them. So we are looking at a very strong order intake situations in the quarters and years to come as we see it. And as long as we continue to deliver strong operational performance, we are expecting that this trend will continue. So we are very, very pleased to the situation that we are in at the moment.

And with all these fantastic customers that are allowing us to produce their products, I think that makes me very proud. So I have to say thank you to all of those. And I think those will be my closing remarks for this call. Thank you for listening.