Note AB (publ)

STO:NOTE

Earnings Call Transcript

[Operator]

Good morning, and welcome to the NOTE Q2 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to hand the conference over to Mr. Johannes Lind-Widestam. Please go ahead.

[Johannes Lind-Widestam, executive]

Thank you, and good morning to everyone, and welcome to this Q2 presentation. Before we go into the slides, I would like to have a few comments on where we are and what is happening around us.

As you are aware, we are in the middle of a quite turbulent times. We see component shortages still affecting us quite substantially. We also see that the war is pushing up inflation, and it also affects a lot of the transportations and so on. This quarter, we also see quite a big, how should I say, the currencies are playing some games with us. We see a few positive effects of the currency.

We see that our sales is up with roughly 5%, only through the currency. But also, we see a quite drastic negative effect of it, and that is when the dollar goes up against the Swedish krona, we are suffering on our operating result. And this quarter alone, it affect us with roughly 1 percentage unit.

So if you look at our results and exclude the currency effects, it's basically our, by far, strongest quarter ever. So we are performing on a run rate of just above 10% on operating profit, if we exclude the currency effects. So we're very pleased with where we are, and we see that this is -- that we are continuing on our path that we have been operating on over the last couple of years.

We also increased our guidance a bit. I will come back to that. But very turbulent times and what happens in the future is very hard to predict. What we see is that our order backlog in our customers' views of the future is still very optimistic, and we do not see any negative effects on the slowdown of the economy so far.

With that said, I jump into the first slide. Looking at the quarter, sales almost SEK 900 million, our best quarter ever. The last record was Q1 where we were at around SEK 820 million. Operating profit up roughly the same. We are on the same percentage level of 9.3%. SEK 83 million is the best quarter we have done so far, we did SEK 86 million in Q4, but that was positively affected by some pension paybacks.

Profit after tax. That's also a bit affected by currency. We also lose some on the financial side after the operating profit. So that's why we see that the profit after tax is not in line with the operating profit increase. We also believe that the currency effects will swing back, if you put it like that. So we don't expect the U.S. dollar to continue to strengthen so much more than where it is today.

Cash flow. We are minus SEK 4 million for the quarter. Still, we see inventory buildup. It's something that all of our -- of the companies in our industries are suffering from. And the reason why we see the inventory go up is that we're still seeing that we are missing the last component for a [ build ], say, that we have the first 250 components and then the last semiconductor is very tricky to find. So we are pushing out volumes also out from this quarter.

And we also talk about what is the operational delay, which means that we are seeing that the direct delay of this is about SEK 150 million, it's up SEK 50 million from last quarter to this. And this means that we have pushed out deliveries for roughly SEK 50 million more from this quarter than we had done in -- after Q1.

So we still see that the delays are increasing rather than declining. And this also tells me that what we see for the rest of this year and also for next year is that there is a lot of production to catch up. We also have delays, what we are calling as indirect delays, meaning that we have confirmed orders already when we receive them further into the future because we had [ or ] delivery times from our suppliers, roughly the semiconductor suppliers.

And here, we can say that there is a lot of discussion if the component market is opening up, many positive statements has been made over the last couple of weeks and months. Still, we see that the easing up of semiconductors is still mainly for consumer products, the smaller pack sizes and so on. And that has not came down to the industrial use yet.

We are expecting that to happen in the second half of this year but more in the fourth quarter rather than in the third quarter. And before we take any, so to say, positive signals that we are starting to communicate in this forum, we need to see that this actually materialize and not only being something that is discussed.

We will come back to that when we talk about the guidance where we are still netting out what we expect to get out rather than showing our -- or indicating that we will meet the full order backlog as our guidance. So we're still quite far below that when we guide for, for the second half.

All in all, I think it's a good quarter, very -- many issues that we have to deal with on a daily basis, a lot of discussions with customers and suppliers, and we are very pleased with how the cooperations with our customers are working.

We are chasing components shoulder by shoulder, and we do this in a very positive way. And we still see that this is a very fruitful way of working, and we get a lot of appreciation from our customers for our hard work of trying to get components in. This also affects our operating profit a bit because when we get components, the customers wants us to run production basically 24/7 to get the products out. And we are, of course, meeting their expectation on that. And -- but that also pushes up our operational cost a bit. So the result would increase even more if we would have a more stable supply chain in.

Moving on to our margins. We see that our operating profit in the Western Europe are at the highest level ever, 11.1%. But we also see that the Rest of the World where we suffered a bit in the first quarter from, first of all, a delayed effect of material price increases in Estonia and also from the lockdowns in China, the Rest of the World is now up in the quarter at the same level as they were last year.

So it's -- we're seeing that the margin outlook is still very positive, and we are expecting that we will be back on track and we will continue our journey with improved operating profit, both in terms of percentage, but more importantly, in terms of numbers. So we still see that this is going in the right direction.

Looking at our segments. Here, we see that we have a very strong growth in all 4 segments, and that is very pleasing to see. What we can see that is sticking out a bit is that Communication that we have suffered quite much in the past is now getting back on track. We have some new wins here that we are moving into production, but we also see that the installation in the fields are much easier in 2022 compared to '20 and '21.

So that's -- we're getting back where we should be on Communication, and we see that the growth there will continue as is. In the Greentech area where we have grown in higher numbers of the last year, we are at 62% for the first half. Here, we have seen that in the U.K., we have had a bit of a slower market. The U.K. government took away the contribution for private persons that installed charging box at their home. And we see that the sales of charging boxes in U.K. have been quite drastically reduced over this quarter. This is something that we believe is, how should I say, it's a short-term lower level. And we see that the sales of electric cars and so on are moving in the same direction as it has over the last few years.

And this means that there will be -- the demand for charging stations will come back in U.K., and our position there is very positive. So we are expecting that the Greentech area will remain at a high growth level going forward.

Now we should know that also in this area since iPRO has roughly 70% of the sales in the Greentech area, the acquired growth as we have seen in this segment will, of course, go down to 0 in this area. So now we will only report the organic growth in the Greentech area as we have been talking about in the past.

But mainly all the customers are performing fairly well. In the Swedish customers, we see that the sales here is very good. We are also seeing that this -- that the order booking, and the customers' outlook is really strong. So we are expecting that this segment will continue to be strong over time.

So it's -- even if the percentage number is lower than it has been over the last year, we still expect it to continue to increase very strong. You can say that all the customers in this segment are indicating that their targets are growing anywhere from 30% to 100% year-over-year for the coming years. So we are expecting that our sales will be in line with our customer sales.

Medtech, an area that I have been talking a lot about that we are expecting to go up. Here, we have delays of 2 main programs that are entering production. It's very complex products. So we are struggling a bit to get the production started, but we are expecting this segment to also show a stronger and stronger growth. 41% is not weak at all, but we are expecting this segment to be even stronger for the second half of this year.

Industrial, a lot of very nice customers in this area. And we also see that the mix here is favorable. We also see that we have fast-growing customers in this area as well. And we do not see that the order bookings are reduced, even though we are seeing that the economy is going into some kind of slower mode or the expectations [ are that ], we don't see that in our order bookings for any of our segments as of today.

Moving on some highlights. Quality and delivery, our focus area. And we see that our quality is at the best level ever. Even though we are often forced to run production in a stressed way since we are -- have the supply chain challenges. This is very pleasing to see that even though we are running over time, we are running weekend shifts, we are doing all these activities that we have to do to catch up, we're not jeopardizing the quality, and we see that the quality performance is at the best level. Very pleasing to see from my side.

Yes, supply [ chain ], we have talked about it. We are now up to SEK 150 million in direct delays from -- out of Q2 and it's hard to estimate, but I would say that we have maybe [ 500 million ] that we should have produced if we would have had components, and this is something that will come into production in the coming, say, 4 quarters.

So we are -- and this is part of our order backlog. So that's one part of why we're not guiding up to the full level of the order backlog. Order backlog up 50%, roughly. And now we're starting to be measured into our longer order horizons as we have been talking about for the last year.

We are seeing that the order backlog for shipments in Q3 and Q4 is up 40%, and that does not include the recent acquisition. So it's -- if we would have availability of the components, we would see growth that are in line with the first half year, also in the second half, even though we -- with the acquired growth will be lower. The recent acquisition is about half the size of the iPRO acquisition. So the acquired growth will be significantly lower than what we have seen for the last year.

Looking at our home markets. It's -- basically, it's strong growth all along the line. We see that China-Estonia is very strong here. We have a bit higher currency effect than we have in Sweden and Western Europe since we are more affected by the euro and dollar in these countries, but very strong growth also excluding the currency effect.

Also continuing here, CapEx, very important for us. We are growing faster than we have expected. So our CapEx is on a very high level going forward. We are investing in ensuring capacity. We are investing in automation. We have a few new lines installed. We have more robots and automated coating lines that are installed to keep the cost level down and also to balance the need for more headcount if we can automate and save money and also, we are reducing the need of increasing the headcount. And here, we have some challenges in some of our locations where there is a bit of a constraint to get the staff, and therefore, we can ensure the growth by investing in better and faster equipment.

And as I said before, our target is always to be able to deliver the next 12 months of forecasted volumes through our sites already today because we need the extra capacity to ensure that we can cope with swings in demand and so on. And we have seen over the last year at least that the demand has been significantly stronger than our first projection about a year or 1.5 years ago.

Yes, we have talked a lot about the component market. What we see is that especially consumer electronics is going down in sales that will put some ease or ease the pressure of supply to those customers and then the volumes of semiconductors towards this segment will eventually fall down to also easing up on the industrial use that is significantly lower in use, but very important for us, of course. When I talk industrial, it means that basically all our products are in a way, industrial use, even though there are different segments.

Return on operating capital, 28%, second best we have presented where we were better in the first quarter. Equity ratio of 41%. I think we are still very solid. Our cash position is very, very positive. Even though we have not been seeing a very strong cash flow over this year, we are expecting that to change over time when the component market is up and then we get -- where we will ship out all the delayed production.

Also, acquisition of Herrljunga, a quite small one. It's a profitable company. They have a sales plan of roughly SEK 140 million for the full year. So roughly half of that will end up in our books. We also see that the order bookings in this company is significantly stronger than the projected sales. Also very important for us is to grow the capacity in Sweden, which is our largest home market. And this also gives us a footprint in the western part of Sweden where we have not had any presence.

It's a very strong industrial market in the Gothenburg area and now we get the footprint that is significantly closer to what we have seen in the past. So we are very positive for this acquisition. They have a number of very nice customers that we are now expecting that we can address, and hopefully, we can provide more production capabilities for them also in the low-cost areas where they have not been able to run in the past.

So this we see very, very optimistic about them. And we will come back to you in the Q3 presentation and let you know how this is performing in our books, but we have high expectations. Profitability in this site is in line with the NOTE group, as we see it.

Outlook. Yes, this is as always, the most tricky part to show you. We have -- in the last year, we have underestimated our ability to deliver. So we have always guided a bit below what we have reached. We have a fantastic order situation. It's better than ever, and we do not have any negative discussions with customers where they are seeing that their demand is weakening.

It's more on the opposite side, where they are having more production that they want to get through our facilities. We see this as very positive. And what we also see is that the length of orders are not increasing any longer. We have 4 to 5 quarters where we have very good visibility of what the customers are expecting both in -- and the majority of that is in fixed orders. And a part of it is in committed forecast from the customers.

So we have a good visibility, at least, for the first 2 quarters next year as well as the last 2 quarters this year. So we are seeing that this trend we are in, we are quite optimistic about the level of production that we will get out for the coming year, at least.

And we have no indications that the period after that will be lower either. So we see that it's -- the committed time is very strong and the outlooks that we see beyond that period is also very strong. So therefore, we are increasing our target for this year from 30% up to 35% for the full year. And that means that we are indicating growth of the second half for 25%.

Now we are comparing our numbers towards the very strong second half as we had last year, but we still expect to beat that with 25%. If we would get better availability on components, we are also expecting to beat that number. But given the availability as we see, we are -- this is our best estimation of the rest of the year as of today.

We also expect that with this sales level, we are expecting that our operating margin in percentage will be the highest ever. So we are also expecting to beat 2021 for this year. Yes, and with these sales, we are, of course, a bit ahead of our communicated sales target of SEK 5 billion latest in 2025, where we will be maybe 10 percentage units ahead of that when we close 2022, as it looks today. So we're very pleased to where we are in terms of sales.

Yes, looking at this growth both from a sales and operating margin; sales, very, very strong. Trailing 12 were a bit above SEK 3.2 billion, and we are expecting the second half to be strong. We are seeing that the long-term trend of electronics manufacturing in Europe is very, very optimistic. And we see that all these trends are in our favor. We also see that many of the new companies are looking for fully outsourced box-build production, meaning that we will not only do the electronics, we will also do the box-build and often distribution to our customers' customers, so to say. So this is very positive for us.

Looking at the margin, it flattens out in this quarter. I mentioned it before, the underlying operating margin is significantly stronger than what we are showing. We are seeing a negative effect from the currency of roughly SEK 9 million in the quarter alone. So if -- with that excluded, we would have continued a positive trend there.

We are expecting this to be of -- we're not expecting the currency effects to remain at this level, so we are expecting it to flatten out or also gaining back some of it later this year or next year. So we are optimistic about this as well.

Also, the new wins for the year so far in terms of new programs and new customers is at a similar level as in 2021, which is our best level ever, and we are expecting that we will benefit from that going forward.

With this said, I open up for questions.

[Johannes Lind-Widestam, executive]

I've got some questions from the web. I don't know if I should start there or if you should start with and -- over the phone. I can start here, and then we'll take it from there. We have one from [ Peter Hermanrud ]. Your net financial expenses increased from SEK 5 million in Q1 to SEK 11 million in Q2, is some of this currency losses?

Yes, it's -- the majority of this is currency losses. So when the currency changes this much as it has and the Swedish krona is weakened, especially towards the dollar, we have quite negative effects of it. We hedge for this effect for roughly 50% of the effect.

So what we are presenting is the net effect. And if we would not hedge the currency, it would have been even higher. So this is, I would say, purely an effect of the currency losses.

And then we have one question from [ Mattias Montgomery ]. Could you give a quick comment on the M&A pipeline? Could we see another acquisition already this year?

This is an area that we're quite active in, and we are also having a few more detailed discussions with other companies. But as always, it's a matter of -- we need to agree on the price, we need to agree on timing and so on. But it's -- I would not rule out another acquisition this year, but I would not state that it will definitely happen either.

So we are stepping up our activity in this area. But if we will manage to get one more in this year or not, it's hard to predict, but it's an area that we feel is very important. With the fast growth as we are expecting, we are seeing some weak spots in our manufacturing footprint. And I mentioned it before, Eastern Europe is an area where we are actively searching for good acquisition targets.

Regarding the Dynamic Precision earn-out, reasonable to expect the full SEK 50 million to be paid, during what time period?

Here, we have an earn-out that is quite short. It's this year. And it's hard to predict. Yes, we are expecting that we will -- that the earn-out will, if not complete, it will be close to the full payout. And as we see it, the more earn-out the better it is for us because this is 100% driven by operating profit.

So if the operating profit is improved, then the earn-out will be higher and multiple of the earn-out is very favorable as we see it. So we -- the best outcome that can be is that we get this -- the full earn-out paid out. And we have a very well performing company that we are having. That was also from [ Mattias Montgomery ].

[ We have a question ] here from [ Henrik Milton ]. Any possible acquisition in the Nordic region? And have the price come down due to the higher interest rates?

I would say no to that. The price or the multiple did not go up significantly in 2020 and 2021, when the multiples were very high on the listed companies. We did not see that the multiples of the single factory acquisitions went up during that period.

And so far, we are not seeing that they have went down either. This could, of course, happen and we will always pay as little as we believe is possible. That's a given, as I said, but still we haven't seen any true changes in that.

We have one question from [ Peter Helmerut ]. we have several from [ Philip ], but I'll start with one here. This is in Swedish. I will translate it a bit when I -- so give me just a second here.

Okay. We have -- the question is from [ Philip ]. Several product companies reporting that they are expecting to reduce their purchase and inventory levels now when the economy is getting weaker. Do we see any trends of that in our order books? The last year, the trend that companies are placing orders further in advance. How has that developed basically?

What I would say that the customer behavior is still fairly aligned with how it has been looking for the last, say, 2, 3 quarters. Many customers are placing orders roughly 1 year ahead to be within the lead time of the semiconductors. We have not seen any pushouts where customers are wanting to delay their production.

We are rather seeing that they want to push them forward, meaning that they want to have the deliveries earlier than we can facilitate. So we have not seen that this has affected our customers' order behavior so far. If this happens, it will -- we will see it fairly soon, I will say.

But with the dialogues that I have with the customers, it's more that they still want us to increase our output and get more availability of components. So we don't see that this is happening so far.

I think [ Philip ] that, that was basically your other questions, [ something ] before the meeting, so I will not answer that. Then I have one from [indiscernible] is that the 2025 revenue target too conservative? If not [ chip ] shortage run rate Q2 more than SEK 1 billion already?

Yes, as it look, the revenue target might be too conservative. We have to know that we communicated this number in just 7 months ago. And at that time, we were at SEK 2.5 billion in run rate. Now we are at SEK 3.2 billion roughly in run rates.

So we are -- we have been overachieving so far. Our expectation is that we will run another Capital Markets Day in late 2022, where we will review this number and see how we update it. But as it looks, we are delivering significantly higher than our expectation when this was communicated. So the answer is yes.

And if we would have a good availability of components, we would, as I mentioned before, already now be at SEK 1 billion per quarter.

Let's see here then, we have one from -- question from [indiscernible] What's your current production utilization footprint in Europe and Rest of the World? Do you have plans to build capacity organically or will this all be in via acquisitions?

So far, we still expect that the majority of our growth will come from organic growth, meaning that we will continue to use our capacity in terms of footprint better. We are investing in reducing the footprint for the machines and so on, so we can push more volumes out through the same area.

But we are also increasing our factories. We have in the last -- we took on the 50% more production capacity in Torsby just in November last year. We increased our floor space capacity in Haddenham with maybe 20% in the fourth quarter last year. We are doing several more projects to increase the footprint in the current locations. For me, that's the best way to grow because you have a lot of -- you have all the fixed cost, basically. So the growth will have a good fall-through and will build very strongly on our profitability.

So we are trying to push more and more through organic growth. So this is our -- we have higher expectations from organic growth than from acquisition, even though we believe that acquisitions will come in and play a very important role for us.

But as I've said before, what we are hoping to find when we do acquisitions is to find factories that also have a good plan to grow organically after the acquisition. Herrljunga is one good example. We believe that we can at least triple the sales through the factory or the floor space there if we do this in a good way. We don't have orders for that growth yet, but we are expecting that this will be very important for the growth in Sweden. If we are to keep up with the 30% that we see this year, we need more floor space definitely, and this is one way of doing it. I hope that answers your question, [ Paul ].

Then I have one from [ Henrik Milton ]. Do you see any changes in the trend to bring back production to Europe, Nordic Sweden? Any weakness in the outsourcing trend you are already?

No, I wouldn't say no. I mean, several positive discussions with large industrial companies that are expecting to increase the outsourcing from there and also all the new companies are basically not interested in investing in building their own factories. So several of the all industrial companies are expecting to increase their outsourcing.

And basically, all the new ones are expecting to only do outsourcing. So I don't see any weakness at all in this trend. I'd rather see that this continues to build rather than decline.

Let me see here if there's any more questions that I have not answered. I think that was the last question I have got in from the web. Is there any questions on the phone?

[Operator]

[Operator Instructions] There are no questions on the phone line.

[Johannes Lind-Widestam, executive]

Okay. Then some closing word from my end. A very good start of 2022. We are also seeing that the order trend is continuing to build rather than decline or getting pushed out. Second half, we're very optimistic towards it. We are hoping and expecting that component challenges will start to decline somewhere during the second half. Very hard to say when.

We have seen that with the availability of some of the tricky components has actually been a bit better in the later part of Q2 than it was in the earlier part of Q2. It's too early to say that this is a trend, but a lot of signals are indicating that this will happen. So very optimistic to the second half. We are hoping that a better flow of components will allow us to be a bit more efficient in our production and use our resources in a better way than we have been for the last, I would say, year when this has been really problematic. So we are in a very turbulent time, but we are also expecting that we will continue to manage and cope with the challenges in a similar way as we have for the last couple of years.

So we are looking for 2022 and onwards with very optimistic view. That's our best view as of now. So thank you all for listening and paying attention to us on this very report-heavy day.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.