NOTE AB (publ) (NOTE) Earnings Call Transcript & Summary

Okay. I think it's time to start. The time is 10:00. And we are -- this is Johannes Lind-Widestam, and I will give you a short presentation about the second quarter and the first half year of NOTE's performance. [Operator Instructions] After the presentation, we will have a Q&A session. Please save your questions until we are done, and I will open the floor for discussions. And yes, give us all the questions you have. It's quite turbulent times, even though we see that a good stabilization has occurred in the market over the last, say, 4, 5 months. So with that said, I'll jump into the quarter and the first half year. Let's see here. If we start with the quarter, we managed to get the sales up to SEK 642 million, and that's our highest number ever. We should also keep in mind that last year in the second quarter, it was our best quarter ever in the group. We made SEK 500 million. We had an operating profit of SEK 42 million, which corresponds to 8.3%. And that was, before Q1, the best level we have ever seen. So we are comparing this quarter towards our best year ever in the history. And that means that the growth with 28% is, in our eyes, quite amazing with where we are. We should also keep in mind that this is in the light of all the problems that occur in the market. We see that transportation is a big issue today. It's hard to get -- yes, to get containers to the right places in the world and there is a big disturbances of airfreight and so on. So there is problems also in the logistics side. And on top of that, we have the component shortages on the market on this -- especially on the semiconductors. But that also spreads to other commodities as we speak. So we are seeing that the supply side or basically most of our components are getting a bit constrained. On the other hand, we saw this coming quite early. We started already August/September last year to see that they were -- yes, the market was a bit closing up and we saw that the lead times were starting to be pushed out. So we started already in Q4 last year to build up some inventory, to increase our order levels towards the main suppliers and so on, to try to put ourselves and our customers in a bit of a better situation when it comes to supply. And I've read some other reports and also what happens on the market and seen that other companies seems to have a bit more problems than we have on this side. I should not at all neglect this. We have some customers that want to have products that we have to -- that we have been forced to push out throughout this year, and we will not be able to supply them until next year. And that is mainly on new products where there has not been forecasts and orders placed. And with the current issues, we see that there are a lot of delays. But this is, as I see it, the reality and we have to live with it. So that is a bit on the negative side. If we look at the positive side, we can say that in the second quarter, we saw that the same trend we saw in the first quarter that -- in first quarter, we saw March as the strongest month; in second quarter, we see June as a strongest month. And so we see that demand is constantly increasing. So we are going into the second half of this year with very full order books. We are up more than 40% in order book and that only shows the order book that we see for the rest of this year. So it's not at all containing the extension of orders that we have seen. For example, we announced a big order just a few weeks ago where we have maybe SEK 100 million in sales for next year, and that is not included in this order book. So we are going after this year with a fantastic order book also for the first half of next year. But the 40%, this corresponds to the same comparable units, meaning without our acquisition of iPRO, and it means that it's only for this year. So we are seeing that we have a very strong position. On the other hand, we will come back to our guidance, it's a bit lower, and that means that we are taking some precautions when we guide and that is related to the [ big ] turbulence on the component market. But if we look at second quarter continuing, operating profit SEK 60 million. It's fantastic. We -- our best. Before that was SEK 40 million -- what was it in Q1, SEK 40 million? So say that SEK 42 million in the second quarter last year is still the best quarter we have seen for this. Operating profit (sic) [ operating margin ], 9.3%. That also includes our cost for the acquisition. We don't report them as one-offs, we are taking them straight off on our OpEx. Profit after tax, SEK 47 million and corresponds to SEK 1.66 in net profit per share, also a fantastic level. I remember when I started at NOTE, we were doing SEK 2.2 for the full year, I think. And so we are almost doing the same profit per share in this quarter as we did for the full year just 3 years ago. So remarkable. But what I'm most pleased with is that we still see that we do a positive cash flow. We did SEK 19 million for the year and SEK 15 million for this quarter in operating cash flow. And that in the quarter where we see 28%. And we see the strongest month in June, meaning that we tie up more and more capital in our balance sheet when it comes to customer invoices. So to be able to deliver positive cash flow with this strong growth and the turbulence on the market is, in my opinion, very, very positive. Then if we net that out with the acquisition, it still gives us a very healthy balance sheet. We'll come back to that later. But I think our equity is still around 40%, 39%, I think it was, even after this acquisition with this big increase in [indiscernible]. Looking at the first half year, we see our sales increasing with 17%. We should also mention here that this includes a negative currency effect of roughly 5%. So our sales increase in comparable currencies excluding iPRO, I think, corresponds to 19%, if I'm correct, which is very, very healthy. Operating profit, we're now seeing our margin is up to 8.7%. And I have to say, sometimes I get the question are we increasing prices, but that's not the reality. Our industry is not so easy to do. So we are seeing that the increase is coming strictly from our efficiency gains that we do internally. And this is something that I encourage everyone at work in this industry to continue to work with efficiencies, continue to work with leverage on your fixed costs, be restrictive in adding cost that doesn't add value to the customers. And I think this is, for us, a very winning concept. And it's highly appreciated by our customers that we continue to invest in our operations and invest in efficiency gains. So this is something that we will continue to gain on going forward. So what I would say is that we are not in, what I would call, harvesting mode. We're still building up our operations to be top performance, to be best-in-class. We are very close to be in that level if we can say it ourselves, but we still have a long way to come to where I'm -- to where we are, where I want us to be. So we still have a lot of improvements to make going forward. If we go into our segments, if we start to slice it Western Europe and Rest of the World, we have been seeing that Rest of the World has been struggling. We have put a lot of efforts in our factory in Estonia and in China to try to improve the performance, to get them up to the level as we are in Western Europe. We are now seeing that for the last quarter, we did 10.3% in Western Europe. A lot, of course, is coming from the recovery we have done in the U.K. where the market is, yes, recovering in a fairly good way. But also the Swedish and Finnish sites are still performing at a very high level. But what is very pleasing is that we see that the Rest of the World is climbing up, and we were above 9% for the quarter. And we are continuing to increase that level for the year. So we have also spoken about how far can we get when it comes to margin, and we don't guide in how far we can get. We should also say that in these numbers, we have the cost for acquisition and some currency losses in the quarter has meant that we dropped down to 9.3% for the group. But I still believe that we will do double digits in an individual quarter in the, say, next 12-month frame if we can be at that level for the group continuously. If we continue to improve the way we do, I don't see that as unrealistic. If we continue to invest in our operations and in our equipment park, we also believe that our customers will see that we are using the profits in a way that are gaining them when they grow and we can continue to deliver cost savings for them. Then they are not that concerned that our profits are increasing. So this is not a big problem for us that we're seeing that the profit is going up in the discussions with the customers. So I think that we are -- we have a healthy balance between investing in the industry or investing in our operations and delivering good results. And the growth that we have seen over the last couple of years has not -- would not have happened if we wouldn't -- wasn't interested in investing in our operations. So I think this is very, very -- this is one of the keys for our strong performance as we see it. Moving on, if we look at the customer segments. And as you remember, last time, we changed the way we report and we are now reporting in the 4 segments of Industrial, Communication, Medtech and Greentech. We start with the largest one, Industrial. We were basically flat after first quarter, now we see a big increase here. And for those that remember last year, we saw that the dip in our demand came a lot from the Industrial segment. And therefore, we see that now we are getting easier comparable numbers. So we are expecting Industrial to continue to increase with very good numbers. So the 10% will be significantly higher when we end the year as I see it. Communication, our weakest segment today. We are still seeing that the customers here have some issues to get the products out on the market. We have flattened out here, and I expect that this segment will also start to recover in the third quarter and onwards. This is a segment that should be in 150 plus for half year without that hesitation. Medtech, you might see that strange that we don't grow here. But you also need to remember that last year, our largest Medtech customer they had a factory move. So they ordered 10 months of material for -- in the first 6 months. So our comparable numbers are very strong here. So if we would put like-for-like, we will see that it's still a good level. But we are expecting that to also recover and we will run into easier comparable numbers for the second half. So I expect that Medtech will also start to show positive growth Q3 and onwards. We also have a few large wins that we are getting into production. And those will, of course, add on to the positive trend for the Medtech segment. If we look at Greentech, our new area, and we see an increase with 120%, if you round that up. We were at 100% after the first quarter, so the second quarter is even stronger. And here, we should also mention that iPRO, the new acquisition is -- in their segment, we see that 70% of their sales is in the Greentech area, which means that Greentech will continue to increase stronger than it has in the past. So if I would make a guess, I will not be surprised if Greentech would, in the second half, be growing with 150% or more. So it's a very, very strong segment. We have been very focused on it for several years and we are seeing that this focus is paying off. And the acquisition will, as I said, add on to this. So I think going forward, Greentech will continue to be our fastest-growing segment without hesitation. Some operational highlights, I mentioned most of them, but quality and delivery performance still, as we call it, in top class. We are seeing supply chain issues and we are -- when we measure this -- last year, we were hitting 96% in on-time delivery. This year, we are down. We are at 90% -- just below 94%. And I think that is still a good level if we look at all the constraints that are in the market. We have some customers that are struggling a lot. But overall, we are, in a way, continue to deliver fairly okay. We are, as everyone else, sitting in escalations meetings. I personally take part of many of those. I work with several of our largest suppliers to ensure that they are focusing on us and getting our most critical components in time. So this is an area that I put a lot of time on. And also we have a very good functioning sourcing organization that are taking active part of this. And this is their, for sure, most important area to work at these times. But what we see is that we will say the market has normalized. It's a strong market. We are in a strong economy for electronic products. And we also see that our old traditional customers are growing fairly well. On top of that, we have all these new wins that we have been talking about for the last couple of years that are coming into production. And some of them are in the new Greentech areas, and they are growing fantastically. But we also see a lot of these old traditional Industrial customers are coming back with very strong demands. We're winning new products towards them and those are adding on to our top line. What we see is -- and this is still a surprising me bit, we see that our order intake and our new wins that we do are on an enormously high level. They are almost at the same level with wins for the first half year as we were for the full year last year, which was the second best year ever. So this is also make us very confident that what we do is appreciated by the customers and that we will continue to develop on this going forward. I expect that the coming years are looking very interesting for us when it comes top line. Of course, acquisition of iPRO, extremely interesting company. They are doing EV charger -- charging solutions for 4 different customers. They are active in that part. They have a factory and competence that are -- that have gradually built up to deal with this kind of customers and products. But this also adds on to our Greentech area, that we will continue to see an extremely positive development on. If we look at our margins, 10.3% in Western Europe, new record. As I said before, also China and Estonia has had a very strong first half and second quarter. So very, very good levels. And I don't see them as a one-off. I see this that this is a new level for NOTE that we will continue to deliver on going forward. And my expectation is that we can continue to improve this. As I said before, CapEx or investment is very important for us. We are up to -- we are going through a big expansion of our Torsby plant. With a 50% expansion, I would say that this expansion will enable us to grow with 75-plus percent in Torsby. It will be the largest EMS factory in the Nordics. I don't have any facts around that, but that's my view on it. It's a fantastic site. And we are seeing very strong growth, and we are taking on this area in a very fast way. So extremely helpful for our ongoing business. But we still continue to invest in capacity, automation, quality improvements. We are connecting our systems and equipment in a good way. So we get more and more automation. We can grow much faster than -- with sales than we're growing with our headcount. And we see that in several numbers, that our sales per employee is now up to almost SEK 2 million. Also, when I started, we were at SEK 1.3 million or something. So this has been a fantastic development over the last couple of years. I talked about the challenging situation for electronic components. We are seeing an inventory buildup. This puts some constraints on our cash flow. This is how we want to act. We are not hesitant to invest in our customers' business. We are doing these kind of activities, we do them earlier. We are discussing with customers how to minimize the problems that will occur on these turbulent situations. And if that means that we will carry some extra inventory, this is part of our job as [ as that sits ]. So this is a good dialogue that we have with customers and something that we are building on and that we are investing in going forward. So I don't see this as a big issue. We keep this on a close monitoring, of course, but it's not -- currently, it's not a problem for us. It's more of a way for us to help customers to mitigate this critical market. Return on operating capital, we have talked about it before. We had 23%. Also with this, working capital increase that we see, so a very good number. Balance sheet, equity rate is now 39%, which is far above our long-term objective. I still think that 40% is a good number to be at because that gives you a lot of flexibility when it comes to investments and acting on these changes in the market situations and so on. So if we would have been at 29% today, I would be a bit surprised -- or not surprised but a bit troubled because that would mean that if we have a weak cash flow quarter, that would put a lot of constraints on our balance sheet. Luckily, we're not there and we don't expect to be there. We are trying to run the business with a good equity and a strong balance sheet. That is very important for our way of doing business. Yes, we are still -- have a lot of focus on acquisitions. We still believe that there is a lot more to do in consolidating the market. But as I said before, it's not about buying a lot of companies, we want to buy customer -- or buy companies that will add on to some of our strategic views. iPRO, for example, added on to our Greentech segment in a very good way. And we believe that their focus on this segment will help the group to become even better in this segment. And we might benefit on other -- from other ends of that acquisition. But -- so that helped us in that strategic area. So yes, very, very good first half year from an operational point of view. If we look at 2021, first half year is in the pocket. Very happy with how that developed. And it has developed a bit as we hoped and expected when we had the Q1 review. We saw that the recovery was coming. We saw that it was strong. And as I said before, this -- I talk a lot about momentum. When we see the recoveries coming, it often comes a bit stronger than you expect because the momentum is there. And we also see that what we have delivered so far is not where we -- it's not the full end of this recovery. We are still growing in this moment. And we expect the second half to be even stronger than the first half. And we expect that, that trend will continue into 2022 as we see it. So we are in this positive momentum where we attract new customers. The current customers we have, we gain more and more business towards them. And we will leverage on that. So second half of this year is very important for us. It will bridge us into 2022. And we are expecting us to be on yet another level in performance at that time. So yes, it looks very, very good. If you look at the order status, we talked about plus 40% in our order backlog. We have tried to put this into some kind of outlook where we are taking consideration of the cost range on the market, and we are saying that we expect to end the year on at least 20% organic growth, meaning that we should have something around 25% for the second half in organic growth and then we add acquisition on top of that. So we expect to reach at least SEK 2.45 billion in sales. And we are expecting that our margins in percent and in money will continue to increase for the second half of the year. So we are expecting to continue this very strong journey. So going to my last slide here, we are, as I say, we're talking a lot about trends, and we see the graph to the left, where we show the sales, we had a bit of a dip in the fourth quarter last year, as we have talked about. But the curve now looks where we wanted it, it goes quite far up. And we are expecting that we will have to continue to update our scale on the left-hand side of this graph. And the same goes with our margins. We're up to 8.7% for this year and up to 8.5% for the trailing 12 months. And I think that, that is also at a very good level that we are -- that we have -- came into. But we are expecting these margins to continue to increase, if we look at second quarter, also including some one-offs and only 1/3 of the iPRO acquisition in the book. So we are expecting these graphs to continue to increase also over the near future. So with that said, I will open the floor up for questions. [Operator Instructions]

This is Thomas Tang from MediumInvest. I have a few questions. First of all, congratulations on the amazing results. It's very impressive by you and the entire organization. You did manage to answer most of my questions, so I'll try to just get a little more color on some of the questions. You talked about constraints on the component market and price increases, not only on the electronic components but more general price increases. Could you try and maybe quantify how that has impacted sales growth if possible?

Yes, we can -- this is a very good question, Thomas. And I will repeat myself a bit from the first quarter. We are -- in our industry, we are pricing our BOMs, our bill of material, on a continuous basis. And if those changes, we are updating the sales price. So we see that we are getting good compensation from the customers when it comes to price increases. So we are not -- still not seeing any margin shrinkage based on this. And even though they are significant in some areas, I would say that the cost of increased pricing when you compare it to the full bill of material and what we have added on top of sales price is marginal, maybe it's 2% or something. So it's not something that is impacting the numbers in another way.

And what about the transportation cost increases, how are those -- who will bear the burden for those?

The same goes for transportation, we have that as a part of our price model. And if the transportation costs are going up, we are getting a good compensation for it. So that has not -- it could be in the rare cases where we might be late for something that we have to carry it. But not in -- as a general rule of thumb, we are getting a good compensation for this as well.

All right. And the growth in your order stock which you started to adjust for time, which makes it more consistent, I guess, when you want to try and make a guesstimate of the growth going forward. But could you give us the old number for just order stock growth without this adjustment for time?

Yes. I would say that if you go that way, we would be -- it's more than 60% up, if you would take old the version of looking at it. But it's -- I have to say that this -- I don't like to change how we report and how we look at this. But you have to keep in mind that with these constraints, we have material that we have lead times of more than 1 year. And for the customers to get products, we have to ask them to place orders for up to a year in advance to be able to chase material in a good way. So this is an unnormal situation, and therefore, we put that limitation on it. Otherwise, it would not make sense. I don't expect our organic growth to be 60-plus percent for the coming quarters. That would be -- it would give the wrong picture. So therefore, we have adjusted it with time when these market condition has changed so drastically.

Yes. I'm completely in line with you and I agree, I'd just like to get the old number also. And a final question, maybe you could add some more color on the M&A going forward after the iPRO acquisition, which was to me surprisingly attractive, with a low price and a good customer base. What do you see going forward in the M&A space?

I think we have to -- we are active in this. We have dialogues with other customers or other companies. We don't have anyone that is close in the pipeline that we expect to be closed in the next quarter or so. But this is an area where we constantly try to be active, and we are addressing some companies that we think is attracting in one or other ways. So we are expecting to get back there in the coming quarters to give more flavor on this. But we are not happy or satisfied with where we are. We -- or wrongly put, we are very happy with where we are, but we are -- we still have a lot to do. So this is an area that we will continue to work with. I also -- when I have this opportunity to comment on the iPRO acquisition, that it seems to be very attractive. It is -- an acquisition like this takes time. And iPRO has had a fantastic growth over the last, say, 6 to 8 months, and therefore, the price was based on numbers maybe 4 or 5 months ago. And that -- and therefore, the strong spring has not really given the lift-up in the price. And so it was a bit historically evaluated, and therefore, it seems much more attractive than on the first surface. It was still attractive, but not to this level that it came in. But also, it's a good -- I think that we are [ happy ] with this.

This is Johannes Møller from MW Compounders. Congrats on good numbers, and thanks for giving an updated revenue guidance. I have a couple of questions. Firstly, can you give some more flavor on iPRO? Now you have been closing the deal and been able to talk to employees and customers and suppliers, is there any positive or negative surprises that you have experienced now that you're inside the company?

I would say no. I think the process was very thorough and we are -- still were seeing what we expected. But just to -- I think that we -- iPRO doesn't do any boards, they buy the boards assembled. So we are seeing some opportunities to also quote on some of the boards for the rest of the group, and that is going to be one. It's going to add on margins, if you put it like that, if we manage to do it. And some of those cases has occurred quicker than I expected. So there are some positive actually consolidation effects that are coming quicker than I expected. But otherwise, I think it's a very strong team in iPRO. They are what I call entrepreneurial-driven, meaning that they are very good in business. And I expected that, and that expectation has been fulfilled, if I put it like that. So very, very good. We are extremely happy with this acquisition and the possibility to start to work with iPRO and see if we can get more momentum out of that.

Okay. And then I have just maybe an initial question on next year, because there are so many moving parts right now and a lot of orders received. How do you see the possibility of achieving your 10% growth target -- organic growth target next year? Because you have a tough comp this year, but then you also have a lot of orders received, so how does these 2 balance out?

I still feel very comfortable that we will deliver at least 10% growth for next year. I don't hesitate in that.

All right.

Thank you. And just to comment on that, Johannes. We also know that next year, we will have 5 months of the acquired growth that will come on top of that. So that will be acquired growth. So don't get me wrong there.

Yes.

Okay. Any other questions?

This is Johan Högberg from TTI. I have also a question on the M&A strategy. Are you looking at specific geographies or product types by business areas? Or is it a general thing where you're looking for good matches to the existing portfolio? What's the strategy there?

It's a diverse strategy. What I say is that we should look for acquisition that adds on to any of our strategic targets. And you can say that the iPRO deal ticked into 2 boxes. One was that we want to be stronger in the markets that we are present in. We believe that it's easier to be good in a market where -- that we know a bit from the past. So they ticked in the U.K. box and they also ticked in the box where we have -- where they have products that are growing on our Greentech area, which we believe is a future strong area. So that acquisition made a lot of sense. Secondly, we're looking at growing in markets that we feel attractive. And we have talked about a few of them, maybe Germany or German-speaking part of the world would be interesting. It's a big economy, but also it's hard to become strong only with one acquisition. So that is a bit of a mixed emotion there. But we are looking at that geographic market because we want to be strong or we want to have a footprint in that market. But here again, we need to find a company that are not so dependent on automotive, that are not so development-oriented and so on. So there are -- we have looked at maybe 5, 6 companies since I started in Germany. But we have passed on all of them because we didn't feel the strategic match was where we wanted it to be. But we also see Sweden as a very attractive market to be strong at. It's the market that we are growing fastest in -- over the last, say, 3 years. Finland would be interesting. And then again, maybe we have to go into U.S. sometime, but that's probably further down the line. So we are looking at, first, do they have products and customers that are in market areas that we feel that are growing. We also look at the product, how should I say, life cycle. Are they in the earlier half of the life cycles or do they have products that are in the later part of life cycles? Then if they are then you know that you have to regain new customers or new business from those customers. So we're a bit concerned if that's the case. Or are they a company that have a history of good growth or they have -- I mean that have, over the last, say, 5 years been flat. And we know that the culture has to change to be a good match towards how we work and so on. So we are quite open, but it has to fulfill at least 1 or 2 of our strategic objectives when it comes to profitability, growth, customer segments and so on. Does this answer your question?

Yes.

Yes. Any other questions? If not, I will thank you all for listening, and I wish you all a very nice summer. Thank you.