Note AB (publ)

STO:NOTE

Earnings Call Transcript

[Johannes Lind-Widestam]

2020 has been a very strange year. I've said it before, it's probably the most -- the strangest year I've ever been working. We started the year with a very, very, very full speed. We had a strong January, February, March, a very good Q1. We saw that pandemic was starting. We -- there was a lot of disputes, what will happen, how soon will it pass over and so on. But NOTE, we had very good speed in the first quarter. We had a strong second quarter. We are continuing to win new business, and we are growing with our existing customers. We were very pleased with the performance in the first half year.We were going into the third quarter with a very strong feeling. And in the middle of the quarter, we saw that we had some -- something were happening. And for those of you that have been with us for some years, we are often seeing, what we call, some kind of stock or inventory consolidation at our customers' end. So we did not really see that the customers' demand was going down, but we saw that they were doing some customer -- or inventory consolidations. And when that happens, they are very -- they're not that open when they do this. So we were hit by it in the third quarter, and we announced it in the guidance in the third quarter. And then when we presented a report for the third quarter, we also informed you all that we were seeing that the fourth quarter were going to be quite similar to the third quarter.So all in all, what happened was that we -- when we summarize this year, the fourth quarter came in, as we see it, quite well in line with our own expectations. And the year in full, we see -- actually, we see record on all our KPIs. The strongest sales ever, plus 6%, up to almost SEK 1.9 billion. Operating profit up 20%. We're almost at SEK 150 million. Let's go back to 2017, we were at maybe SEK 70 million. So we are more than twice as big in profit as we were just 3 years ago. I think that's amazing. Our margin, we have often talked in this forum that 7% or 7.5% is that -- maximum we can do. We see that we did 8% this year. And we also had a quite weak first quarter when it came to profitability, and that has basically burdened us a bit for the full year. So we're seeing that we're doing a bit better than 8% in run rate at this point.And some might say, "Okay, is this an effect of the pandemic? Do we have a lot of cost contributions and support?" But it's not -- that is not the case [Audio Gap] what we also see that our profit after tax went up 25%, and we also reached a new record in profit per share at SEK 4.11, also very, very good. We also saw very strong cash flow. We ended 2019 with a very good cash flow, and we are very pleased to see that this trend is continuing and that we can maintain such a strong cash flow, even though we have seen delays in several customer contracts, and that has put some pressure on our inventory. So we are -- in some cases, we have a bit -- we are a bit overstocked. But still, we managed to get to the inventory and cash flow in such a good shape. So we managed to do, yes, a bit over SEK 6 per share in cash flow. So that's -- I think that's very, very important for us going forward.If we look at the quarter as such, it's -- we had a slight reduction with 4% in sales when we measure in Swedish kronor. We had quite a big headwind when it comes to currency. The currency effects were quite big in the fourth quarter. We were just -- the negative sales in Swedish is balanced out with the negative currency effect. So our sales in local currency were quite spot on last year.What we also see is that our order backlog is up with 20% compared to last year. And I think that is -- this is what really are -- pleasingly to see that we are now getting the order backlog up. We also see that at profit level we were up 8%, despite that we were down 4% in sales. We see that the margin strengthened with 0.9%, up to 8.3%. And even though we see that negative currency effect on sales, that often have a positive effect on our financial items. So we see that our profit after financial is a bit stronger than the profit after -- than the OP margin.And also, this quarter, we saw a very, very good cash flow and ended the year at, yes, SEK 170 million and SEK 44 million for the quarter. We -- everyone that were with us last year, we know that the second half of last year, we had an extraordinary strong cash flow, and we ended up with SEK 96 million in the fourth quarter. So the comparing number for the fourth quarter was very strong at this point.So all in all, I think that the fourth quarter, even though it's -- we are where we expected on sales, we are not where we want to be at sales. But still, we managed to do quite a good profit improvement. We managed to safeguard our cash flow, and we had -- I think the business continued as we expected for the quarter.I will come back to you and give you some insight on what we expect for the year, but we are -- when we look at this year, we are not that disappointed. 6% overall, 20% in increased profit for the year, I think that's very good numbers for pandemic year. So we are quite happy with what we achieved this year.Looking at the margins, and I think that this is also -- we see the shift. I've talked about it before. And we see the shift moving from low-cost manufacturing into more regional and local production. And we see that we are growing significantly stronger in the Western Europe, and we saw a reduction in the rest of the world. The reduction is basically in China and we -- because we saw some growth also in Estonia. But the trend is very, very clear to us. We are seeing that the sales are much stronger in Sweden and Finland and Estonia. Estonia has -- the majority of the customers are Swedish and Finnish customers. So they are quite comparable to what we see in Sweden and Finland.And we see that U.K. has been a burden. We will come back to you a bit about that. And we also see that China has been a burden for us this year. And China, due to 2 reasons. First, we see that the trade tariffs has had a negative impact, of course. And we also sell quite a big part of the Chinese volumes to U.K., and U.K., as such, has been a very weak country for us this year.But we have shown this before that we are -- the operating profit is creeping up quite nicely in the Western Europe region, and we are closing in on the 10% in this region. But what is also pleasing to see is that we see that the rest of the world is also improving. We are up to 5.6%. And for those of you that have been following NOTE for some years, it's not more than 4 years ago that 5.6% was the average for the group. So we are -- even though in the light of what we see here, it looks a bit weaker, it's still a fairly good level. We're not happy with it, just to be clear on that, but we are seeing that we're getting -- we're closer to where we want to be. So this is, in my opinion, very good numbers.And what -- the reason why we managed to come to this level is that we're very focused on keeping our promises. We are good at delivering on time. We have improved the quality into very strong levels. I will get back to you on that.But what we also see is that we are investing in our production. We're increasing our automation, and we are -- through that, we are building us away from a lot of labor costs. So our internal cost is continuously going down in relation to our sales, and that is why we are continuing to improve our operating profit. We expect that this trend will continue. So we are -- we have not reached the final target, if you put it like that, but we're seeing that it's -- the initiatives that we take and the increased investment speed that we have has enabled us to improve our profit quite significantly. And we are only quite early in that journey, so we see a lot more to come from these initiatives.Moving over to our customer segments. We have -- we see that the trend that we are seeing for the year continues. We see that our industrial segment is continuing to grow fairly good. We see that we are 12% up in this segment for the year. And to me, that is good. We have seen some customers in this segment going down, but we have also won a lot of new customers, and we see a few of the customers we have here doing fantastically. We have informed the market about the growth, for example, for Plejd as a customer. They are in the industrial field, and they have been growing extremely good for the year.We see medtech continuing to grow very well. We are 48% up for the year. Medtech is now, by far, the second largest segment. A year ago, it was not close to be that.We see that our defense has reduced a bit. We know -- everyone that works with defense knows that it's project-oriented business. If you have -- if you get an order, you will have good sales, and then you can have a half year or a year where the sales is fairly low. And then suddenly, it goes up again when our customers receives new orders that we are producing. That's the nature of defense. So we are expecting that, that will actually go back up a bit in the coming years.But what we see is that our second largest segment in 2019, communication, that is the area where we have been seeing the reductions for this year. And this is not so surprisingly. It might look like that on the surface, but if you -- this is mainly telecommunication products. And what we see is that when the economy is slowing down, when we have restrictions in how you move and how you can work in the field, we see that the installations of telecom equipment has been really suffering throughout this year. We also see that when you look at their reports.So if you would see that the communication area would have been at the same level as last year, then we would have been above the 10%, that is our annual target. So for us, it's clear that this is an area that we have been seeing the -- that this is why we have not been able to deliver on the 10% growth rate that we are planning for.The good thing is that even though this segment goes down quite quick, it goes up very quick because it's also installation business. So as soon as the markets are opening up, we will see that this segment will increase fast in orders, and we already see some signs of that. So this is just how it is. It's very -- this is the area that we still see that we are quite much -- how should I say, we are suffering from a lower economy in this segment. But the rest is fairly strong, also in the lower economies as we see. So it's going to be very interesting to see what we are delivering on -- in this segment going forward.But if we look at this, we have also just announced a new win in the medtech segment for this year. So my expectation is that medtech will continue to grow. Say that it will grow with 50% 2021, I think that might be too much, but we will see very good numbers. That's my expectation.Industrial segment, we are winning new business, and we have a lot of interesting new opportunities there. So we are expecting that to continue to grow as well. We are expecting communication to rebound and get better in 2021. So we are quite optimistic for the year to come. That is my feeling.Looking at some operational highlights. We still deliver very, very good at quality and delivery. We are hitting the 96% in delivery performance. We have reduced our [indiscernible], and we are down to just about 600 [indiscernible]. And in our industry, that is considered as world class. So we are very proud of that.We are also winning new customers. Even though this year has been a bit tricky to do the customer acquisition, but we are winning new customers. And the wins that we had in 2020 were basically at the same level as 2019, which was by far the strongest year ever in the group's history. So we are expecting that we will benefit from those wins in 2020 and on -- or 2021 and onwards. So we are quite optimistic.And we are -- last year, we announced 2 very big deals. We had 1 medtech win. That is in serial production. We also announced our biggest win ever. That is in the NPI phase, and we are expecting that to start in this year. But we also see that many of our recently won corporations are growing very nicely. We have talked about Plejd before. Plejd is developing fantastically. You should follow their journey on their own web page. They are a very, very good company, and we're proud to be their supplier. Charge Amps is another customer that are growing very nicely and also DeLaval, Maven Wireless and others. All of those accounts are fairly new. We did not have them in production some 3 years ago, and those are one of the reasons why we are growing fairly good in our industry.We should also say that 2020, despite all the issues that we saw, we had record sales in Sweden, Finland and Estonia and record sales by far in many of our sites.Going back to U.K., we know that our U.K. business went down with roughly 20% in 2020. That is the reason why we couldn't reach our 10% growth. U.K., as an economy, has suffered quite extensively in the COVID-19, and now we are going into the Brexit year of U.K. What we expect from U.K. this year is that it will be on a lower level. We are also looking at the overall economic development in the country, and the expectations are fairly low in U.K. for 2021. But we are seeing some signs that we have at least reached the bottom, and we are expecting the sales to be a bit higher in the U.K. also in 2021 compared to where we have been in the last 3 quarters in U.K. We're not going to see records in U.K. in 2021, but we expect it to be slightly better than 2020, at least. So it will not be a burden to our sales in 2021 as we see it today.And we have tried to estimate how much we have lost in sales due to the COVID-19, and our best guess is that it's around SEK 200 million in sales that we have lost due to the COVID-19. We have had some customers that have been increasing, but the overall number is a loss of SEK 200 million in that effect. And we are expecting that to come back in 2021 and '22. And on top of that, we see that we are winning new accounts. So we are looking quite optimistic beyond this year.Brexit, we did not put it up here as a bullet. For us, our customers in the U.K. are mainly British. So we are not selling so much outside of U.K., and we are buying most of the material within U.K. So we're not getting hit by any tariffs or any increased delivery times that maybe other industries are seeing. So we are expecting that our journey in the Brexit will be fairly smooth as we see it. We don't expect any major material disturbances. We don't expect that our customers will have any duty or customs issue when they export. So we're expecting that it will be fairly much business as usual for us in Brexit.Then again, we don't know how much the Brexit in such will affect the U.K. economy. That is something that we cannot affect at all. So we are not speculating in that. But the business, as we see it, will run fairly smooth, and we don't see any major disruptances around that. So that's how we see upon it. We don't have any expats or any foreign people working in our sites, so we don't see any issues related to any changes in that. So for us, it's pretty much business as usual.What we have seen is that we have also increased our CapEx level quite much. The reason why we do it is, of course, that we are growing and increased sales are needing more capacity. And we are also growing, and we are not -- we don't want to build new factories. So we want to increase the throughput in our facilities we have. And that -- because if we do that, we will get a good fall through, and that means that we will continue to improve our margins.Despite that, we see that in some sites we need to expand our footprint, and we have started an expansion in Torsby, which is our largest site in Sweden. And we're building out the production floor with roughly 50%, and we are expecting that we can produce maybe 75% more after the expansion in the site. And we are seeing that we would have outgrown the factory during 2021 as it looks. So this was really important to get it done now.Also very important is that we have doubled our clean room capacity in Norrtelje. This is also for a medtech customer that is growing very nicely, but it's also in our microelectronics field. So it's something that is a bit more complex. And we see that we're one of the few that can do this in the Scandinavia for these types of customers. And now we have outgrown the capacity we had, so it's also showing that we are winning more complex customers, which I think is very, very good.Our return on operating capital, we reached 23%, also a new record for us. Our long-term target is 20%. We are -- however, we are expecting that this number can also improve going forward. So we have not reached the roof there either. We are at 50% or 51% in equity. I think that's very good. We are almost debt free, if we exclude the right-of-use assets, which is also something that we are very proud of in this kind of turbulent times that we see. We have proposed that we don't give dividend. We see that there is a lot of attractive opportunities out there. We see that there is some companies that are struggling a bit, and we are taking active part of that. And we are hoping that we can get back to you and show what we're doing in this area in the near future.For 2021, what do we expect? As I said, we are expecting that we have a good operational momentum. All our sites are active. We are -- we have adjusted our capacity and head count in U.K. to the level where our demands are at the moment. This means that we have significant growth opportunities in U.K., of course. We have taken further initiatives in Estonia and China to strengthen the margins. As you saw before, we are growing the margins, but we are expecting more, and we can do better. So therefore, we are trying to expedite those projects a bit, so we can get -- yes, reach higher margins quicker.When I talk about higher margins, we are not increasing the prices or raising the prices. We are improving our internal operations, and that gives us better margins. If we would go the other way and starting to raise prices, we would lose the customers, and this would be only a gain in the short time frame. So we are improving our internal business, and that is what is supporting our margin strengthening.What we also see is that we are continuing to win new customers. We are very proud of the new medtech win we announced last week. This is a customer we have worked with for basically 2 years, and we have done maybe 5, 6 different prototype runs. It's very complex production. So this is something that we are proud that we can actually achieve also in Estonia. This proves that our Estonian factory can deliver complex products at the same level as our more advanced Swedish sites. So very, very good.And we are remaining and continuing very positive dialogues with several global OEMs. We are not -- we have not yet signed a contract, so we cannot announce them, but we will when we can. We have also seen that we have been postponing several of our bigger projects as we have talked about before. So they are now in ramp-up phase, and we are expecting quite strong sales in those projects when they go into production.Yes, all in all, we can say that we are expecting that we will come back to our growth of minimum 10% for this year, and we are expecting to continue to strengthen the margin, both in real terms and also in percentage, of course. And we are expecting that we will have some currency headwind on top line. We are expecting that the stronger Swedish krona will affect the sales maybe 3%, 4%, but we still expect that we can be on top of the 10% for the year.So we look quite optimistically. And what we can say in general is that when our industry is slowing down, it goes a bit faster than we are expecting. And we, as a company, have decided to -- we could have pushed out more business in the fourth quarter. And because that's -- in the contracts, we can basically force the customers to accept deliveries because they have forecasted an order. But then we will suffer from it the quarter that comes after, and it would also be pushing them a bit away from us. So we are quite willing to go a bit beyond the contracts and support the customers when they see swings in demand. And therefore, we might go a bit more up and down. So to have a flat quarter is, in my opinion, quite weak, and we are not at all happy, but what it means is that we will have a stronger -- how should I say, the recovery will be stronger than it would have been if we would have pushed out those volumes.So this is a bit how this industry works. And if you have, like we have today, a very strong financial position, we can allow this to happen because that means that the customers will rely more on us, and they will grow closer to us, and they will put more faith in us because we are supporting them when they have a bit of tougher times. So for me, this is very important. This is a big strength in our business model. And I know that not all of our competitors out there are thinking in the same way. This might be one of the reasons why we are growing faster than the market. I don't know. But this is something that many of the customers that I talked to are putting up as one of their references that we don't try to push out the business if they don't need it. So they are thinking that we do this in a way that they are happy and that we can help them also in their weaker times. So for me, that is very important.My last slide is -- we are showing this, and this is the first time in 3 years that we are showing a slight reduction in sales in 1 quarter. I expect that it's going to be this quarter and not anymore. So this reduction of 1 quarter will end at 1 quarter. We are saying that our annual growth has been 11%. And if we look at the last 3 years, we are actually growing 14% organically, including 2020. So we are delivering quite substantially above our long-term target of 10%, and that's where we should be.Looking at the margin, we are now up to 8%. We are expecting that we will have to change the scale on the operating margin side going forward. So we are expecting that to continue to improve. We are not giving a margin objective because sometimes we take customers with high volume, but with lower margin, and that can put some limitations of how much we are improving the margin. But overall, we are expecting 2021 to continue the margin improvement trend that we have been seeing for the last 6, 7 years.So that's basically what we are seeing. So all in all, I would say that 2020, problematic year. I think we were very quick on adjusting to the new surroundings around us. We managed to get the costs out of our business in a good way. We managed to also work quite well with our inventories. So we've safeguarded a good cash flow throughout the year. And we are continuing to win customers. We are well positioned for the future. So we are -- even though we've summarized this year as a bit below on our sales level, we see it as a strong year. We see it as a year where we continue to position us in a favorable position for the future. So we are very happy where we stand, and we are proud of how we manage this year.So with that, I leave the floor open for questions.

[Unknown Analyst]

Can you hear me?

[Johannes Lind-Widestam]

Yes.

[Unknown Analyst]

This is [indiscernible] in Denmark. Yes, first of all, congrats on good numbers once again. Two questions from me here. Just firstly on the guidance, is it fair to assume that it will be a little back-end loaded now with the better growth in the second half where the comparables are easy? Or should we also expect good numbers in the first half where we had a quite good first half this year -- or the last year?

[Johannes Lind-Widestam]

Naturally, I would say that it looks stronger comparable for the second half, of course, because the comparable numbers are lower, but we are expecting to see decent growth also in the first half year. But in percentage, I would say that the second half looks better in percentage.

[Unknown Analyst]

Okay. That makes sense. And then just another topic. It's something you talked about several quarters back, but how does the M&A landscape look now? And you have a quite good equity and cash positions, and you did this in U.K. that maybe has not turned out quite well now because of COVID and Brexit. But is there an appetite to do more M&A?

[Johannes Lind-Widestam]

Of course. I think that is one of the reasons why we are proposing that we are not giving dividends because we want to have the opportunities open, and we are keeping some dialogues in this area. And it has been a bit problematic where we have not been able to travel around to visit these companies. So we are hoping that we can speed up the process here.But as I said before, we are also looking to buy quality companies, not just companies. That is something that we are keen on. We know that if we buy companies that needs restructuring and so on, it will be 1 or 2 or 3 years where we are going to see that our margins will be a bit lower due to this. So we're looking to buy quality companies. There are a few out there, and we are pursuing those dialogues, and we will increase the speed in this area.

[Unknown Analyst]

Okay. That makes sense. And then the last one for me. Can you maybe explain a little bit again the [ correlance ] between the backlog and the actual revenue numbers? So as I understand, the backlog is both fixed orders and some forecasts that you are about to deliver in the coming 6, 12 months or how does it work?

[Johannes Lind-Widestam]

Yes, it's fixed orders and then it's forecast for the coming 3 months.

[Unknown Analyst]

3 months, yes.

[Johannes Lind-Widestam]

Yes. And what I said before is that now we are saying that it's 20% higher than last year. That is part of fixed orders, and they are going up. And the forecasts are -- our customers have a tendency to over forecast, and we have not really captured that. So 20% on order normally means that we will hit the 10% increase or more. I say normally because this year has been quite far from normal in many ways. But we are expecting that it will pay out and materialize in a good way in the first quarter as well.

[Unknown Analyst]

Okay. But even on fixed orders, you are still ahead on last year. It's not only forecast. You're also better on fixed orders.

[Johannes Lind-Widestam]

It's actually more on fixed orders that we are ahead.

[Thomas Tang]

And this is Thomas from MediumInvest. I have a couple of questions. You very briefly in the report mentioned that you are actively participating in the green technology shift, and I also noticed one of your customer is Swedish Charge Amps that makes chargers for electric vehicles. Maybe you could put a few more words on this area and what you expect from it.

[Johannes Lind-Widestam]

Yes. Of course, we have Charge Amps as a customer, and they are growing fantastically, I would have to say. And we are, of course, trying, as everyone else, to take an active part in winning customers in this segment. And our expectations is that we will, in one way or another, start to visualize how much of our sales that are going into this greentech area throughout 2021. So we will get back to you on that.But of course, we are looking at how much can we get into our sales from this segment for 2 reasons. One is, of course, that it's good as a company for us to support the change from old technologies into new green technologies. But also these customers have a tendency to outgrow the market and outgrow our growth by far. So we want to win them so we can benefit on their fantastic journeys. So this is a high focus area for us.

[Thomas Tang]

And then do you have any specific thoughts on automotive, in particular? I guess it's going to grow a lot. But typically, if you are in the automotive industry, you will have very low margins.

[Johannes Lind-Widestam]

I would say that automotive, we have to divide it in a few different buckets. We're not doing much in the car industry. We are more in truck and off-the-road vehicles. And we are seeing that the margins are climbing for every step you take away from the actual cars. If we are in the car manufacturing, we are often doing electronics for -- how shall I say, for additional equipment, so not for the boards that are needed in any car. Maybe for like [indiscernible] or someone of those, we could do some parts for their maybe high-end products in the vehicles, but not more than that today.When it comes to trucks and off-the-road vehicles, it's a bit different because there you have -- there's another margins that you can reach there, but there's also bigger swings in demand. So it's -- you have to take it better. If you want to go into the car electronics, then you have to design your factories in a way that we have not yet done. So that is an area where we might go in there in a few cases, but it's not our target area. But we like trucks and off-the-road vehicles.

[Thomas Tang]

A couple of weeks ago, there were some new stories of shortages of semiconductors in car manufacturing that led to reductions in activity in car manufacturing plants. Is -- you experiencing any shortages of components?

[Johannes Lind-Widestam]

What we see is that the component market is getting a bit tougher. It's -- 2020 has been a very strange year. On the component side, if -- it has been fairly easy. If -- in the spring, there were some manufacturers that were closing sites due to restrictions from the governments in the countries where they were. But if you exclude those, the market has been relatively good.Now we see that, especially as you say, semiconductors and programmable devices are getting a bit tougher on the market. We see lead times are increasing. We are -- we believe that we are quite well on top of this. But there is, of course, risks even for us to get delays, but we have not seen that we have been forced to push out orders yet due to this, but we are following this very, very closely, of course.But this is also a signal that the electronic industry will grow faster than it has been during the last years. So it's a mixed bag. It's more tricky, but it's also good because that tells us that our industry are growing.

[Thomas Tang]

Two more questions. As far as I'm aware, any companies that received support from the Swedish government COVID-19 support is restricted on dividends and share buybacks and other payouts to shareholders. Are there any restrictions for NOTE? Or are you free to do as you see fit?

[Johannes Lind-Widestam]

We have been receiving some contributions. They are on a level that are very low. So if we want to do this, we could easily pay that back, if you put it like that. It's less than SEK 0.5 million. So it's not -- Swedish. So it's basically at the end that we -- that is insignificant. That is not the reason why we choose not to give dividend.

[Thomas Tang]

All right. And...

[Johannes Lind-Widestam]

And I would say the period after you receive it is 6 months. So we have not received it this year. So in any cases, we would be free after the first half year.

[Thomas Tang]

All right. And a final question from me. Last year, you started giving quarterly revenue guidance, and now you've set some targets on full year growth this year. Could you explain what your thoughts are about what kind of targets you set? And why you have changed them over the last year?

[Johannes Lind-Widestam]

Basically, what we did last year was that we saw that it was a very, very problematic year, and we tried to give us good guidance as we could for the coming quarter. And we basically made -- how should I say, we started it last year to try to provide better information for a year that we expected to have a lot of swings.This year, we are going back to where we were before. So we are where we are guiding on a longer time period. If -- so that's why -- so it's more that we have moved back to where we were, not that we have taken away something that we have done in the long run.But if I look at the first quarter, I mean, that is, of course, important. We are expecting to see decent growth. We are expecting to have negative currency effect of at least 5%. So that will, of course, be a bit problematic for us. But in local currency, we are expecting us to hit 10% or better. But how much it will be on Swedish, it's very tricky to see due to the currency effects and all. But we are seeing good growth, and we are seeing increasing orders and increasing forecast and all that. And normally, which is what I said before is that the reductions are a bit deeper than we expect and the increases are a bit faster than we are expecting, if we look back on the big swings that we have seen in the past. Today, we are seeing that we will see some fairly okay growth for the first quarter as well.