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

Okay. Welcome to NOTE Q3 presentation. My name is Johannes Lind-Widestam, and I'm CEO of the company, and I will try to give you some information about this third quarter and what happens onwards. I think the quarter went roughly how we expected. We ended Q2 with a really strong June. We had a fantastic order intake, and we saw that the speed was very strong. And what we can say is that the deliveries is a bit higher than expected. We are seeing these component shortages that everyone has seen in the market. We are forced to reschedule, replan and redo everything we are expecting on a daily basis. But despite that, we see that we get good volumes out through the factories. When I go out and visit them, I see that there is a lot of activities going on. And with all of them, we do all the how should I say, with all the customers with support, we are managing to sort out many of the shortages in a fairly good way. We are seeing that our delivery performance is going down a bit, but it's still -- it's still remarkably high. We are hitting somewhere around 90% on-time delivery despite all these delivery shortages that we have. And I think that is fairly good. We have customers that are suffering due to the allocation on the semiconductors. But yes, to me, it's a very, very good quarter and what we also see is that the future that we can foresee, which is basically the next 2 quarters where we have more or less firm orders for also look really, really strong. After that, we also believe that this speed will continue. So let's move on to some numbers. If you look at the third quarter in itself, we had a growth of 58%. Out of that, about 34% was organic. This quarter, we have basically 0 currency effects. So it's -- the growth is, so to say, really in local currency. Also profit went up with 78%. I think that's a record in profit increase that we have seen. 58% in growth is also a record, but this is even more remarkable as I see it. We should also know that even though we are pushing over a lot of the price increases that we get on components to our customers, we still carry some of that. So our underlying speed is a bit better than what we see here from a profitability point of view. If we would have had a normal market, I would say that we have that -- would have done even better than the 9.4%. Still, I'm really, really pleased to see these numbers. Looking at the year so far, we are up 30%. About 7% of that is acquired. The rest is organic, and we are facing about 3% in headwind when it comes to currency effect here. Last time we had a discussion also about how much is our sales increased by how should I say, increased sales on -- due to the price increases we have on components. And that effect is roughly 3% for the year. So it's basically the same as the currency headwind. What we also see is that the sales ended up at SEK 1829 million or SEK 1.829 billion. That is about the same level as we were for the full year last year, and we have our -- as we expect, the best quarter ahead of us. Operating profit, SEK 164 million, we're already SEK 15 million ahead of last year. We also see that the operating profit now is up to 9% for the year, and that is also a new record level for us. If we look at the cash flow, we are negative. We have SEK 30 million negative cash flow. You can say that, that is a problem. And in one way it is, but given the extremely strong growth we have, we are tying up more and more capital in our ARs. And also, we are building some inventory to cope with the high volumes that are coming in the next quarters. So those 2 effects are limiting our cash flow. We also have pushed over about SEK 50 million in sales from Q3 to Q4 due to component shortages. That inventory is sitting in our books and should have gone out so that is tying up. So we should have had a slightly positive cash flow if that would have gone out the door. But with the increased growth, we are seeing some constraints on the cash flow. Despite that seeing that we have a very good cash position. So we don't see this as an operational issue. It's more of a KPI that doesn't look so good, but it's more -- it's more that we have planned for having an increased inventory to cope with deliveries. So it's -- we're not surprised to see that it's negative with this strong growth. Looking at some margins. This is, in my opinion, also something that we are very pleased to see. We are now seeing that the rest of the world, China and Estonia are now up to 8.7%. This debt level would have been higher than the group's OP for last year. And if we go back 2 years, not only to 2020, we were down to maybe 3% in OP for these 2 countries. So the turnaround of these 2 sites has been remarkably strong. We also see that the states are up very, very nicely in these 2 plants, 27% up is really strong. Looking at the Western Europe, we are -- the growth is strong at 36%. But here, we also have the acquired growth that, in this case, would account for maybe 10%, 12%, if I would -- I don't have the number in front of me, but it's roughly that number. But also the operating profit is up to 9.9%. It's also a record for us. I think we were at 10% for Q2. So it's -- but this is a new record level. Our employees, we are now up to almost 1,300 employees for the group. We were about 1,140 when we started the year. So we have increased. iPRO, the acquired the company have added somewhere around 95, 98 person and the rest is growth in our sites. And this is to cope with the increased volumes that we are seeing. If we look at the segments in the second quarter, I promised that we would have growth in all 4 segments. And luckily, we managed to get there. What we see is that the trend that we saw already then that Greentech is growing faster. That is still valid. We also saw that the Industrial were growing very nicely, still at. We expected that the Communication would have flattened out in the reduction. Now we see that also that segment has turned around very nicely. Medtech, we were flat at that time, now we're up SEK 10 million. So also that segment is growing. We should remember that we had a few Medtech customers last year in Q3 and Q4 that had what should I say, COVID-driven remarkable high sales levels. So we are still beating that even though it's not that impressive, this 5% growth in this segment. But we are expecting that to continue to increase over time. I also put in the third quarter, just to give you a flavor of how it looks when we only look at the near history. Here, we see that the Industrial segment is really strong. We see that Greentech even stronger growth is almost tripled in 1 quarter. But here, we also see that Medtech and Communication, we see that this strong trend that I talked about in the last slide is even stronger when we look at the short time frame. Here, we see that Medtech is up somewhere 17%, 18%, not only 5%. So we see that this trend is stronger than we see it when we only look at the year so far. Continuing -- looking at some of our highlights. We still believe that quality and delivery performance. That's our key. This is so important for us. And with these conditions that we are facing, this is even more important. I would say that our complete organization is now working to sort out all the supply challenges that we see. And we see that -- for example, car manufacturers are closing their factories just to try to get the supply of the electronics in some kind of same speed as the rest of the production. So it's not us -- this is a marked problem for all companies that are dealing with electronic components. And the expectation here has been that, okay, second quarter would be the worst then it would flatten out, and it would bounce back. It's very hard to say. What we see now is that suppliers are more frequently keeping their promised dates. So that's 1 good thing. On the other hand, the lead times are really long. So we still see some gaps in supply when it comes to demand from our customers. And this is a daily challenge for many of us. When we guide, and I will come back to that, we're doing that based on what we expect to sort out. So it's not the hope from our side, it's more of what we expect to get out. Our orders are significantly higher than what we guided for at the moment. This is also very, I would say it's probably the first time ever in my career that we have had in this situation that we have a significantly higher order book than we can get material for. But that's just how it is, and we have to play this as good as we can. If we look at our order intake, our order backlog for shipments in the next 2 quarters is up 70% year-over-year, and that is excluding our acquisition of iPRO, including that it's almost 100%. So really, really strong order book. We should also mention here, we talk a lot about how the speed in Sweden and in Western Europe is going, but we also see that that the transition that we have made in China is really impressive when we look at the numbers. We have managed to more or less change the customer base in China. And today, we're running China at 54% growth year-to-date, 89% in third quarter. That is just fantastic, and we were a bit troubled with the speed in China about a year ago today with -- it has changed very, very fast. China also suffered a bit more from the COVID outburst than the rest of our operations combined with the U.K. But this year has been really, really strong, and we are -- we are expecting China to continue on this path, maybe not growing 89%, but we will still see some decent growth numbers moving ahead. We see that these new cooperations like Plejd, Charge Amps, Ferroamp and many, many with them. Those are the ones that are growing faster. But we should never forget that industrial is also growing very nicely. We have -- I think we have 30% growth in Industrial segment in the third quarter, and that is really, really solid. So it's not only driven by these new cooperations and new industries. It's all over the line that we are growing. And I would say that when I look at our customer list today, I get a bit amazed myself when I look at all these fantastic companies that have chosen to work with us. So we're really, really pleased to see that. If we talk a bit about iPRO, iPRO is a company that are not doing boards they are only doing assembly and their customer portfolio is quite much built up around EV charging solutions. They have 3 customers in this segment for cars and 1 for scooters. And all these 4 companies are developing stronger than expected. So we are seeing that iPRO is progressing stronger than expected when we acquired them. Our integration is, as we call it, fairly soft. So we are doing it. We're not forcing that. It's happening on a 1- or 2-year time plan, and that is going according to plan. Cooperation between the organization, iPRO and the rest of the group has been stronger and more, how should I say, less problematic than expected. So really, really good. It also helps if you're overachieving as a company than the integration is much simpler than if you have problems. So this has been a really good position to be in. I think also, we have also talked about CapEx and how we invest in our operations. When I started, we were investing somewhere around SEK 15 million -- SEK 20 million per year or even less than that. Now we're up to SEK 55 million for the year -- year-to-date. You could say that we are over investing. I think it's completely the opposite way. How should we have been able to grow this nicely if we don't do it. We have -- the last 12 months, we have invested in new SMT lines in Torsby, Norrtelje and China. All these are really needed when we grow this fast. We are just about to take on our capacity expansion in Torsby. It's 50% more floor space. I would say it's 60% to 80% in more capacity because this is more or less only production floor that we'll increase. So this will be really, really needed in the growth that we're seeing in that side. So this is a trend that I believe will continue. For me, it's -- if we can continue to invest in new equipment and faster lines, more advanced equipment, more automation, we will continue to reduce our cost base in relation to our sales. That will be very nice when we sum our P&L because we are -- we will add less cost compared to the growth that we are adding. So this will be a very good equation going forward. So we expect that this trend will continue and remain strong. Yes. We have talked a lot about the component market. It is challenging. It will remain for at least a few quarters to come. But also here, what -- I always see things in trends. And when this trend is broken, it's going to be quite fast from when you go from undersupply to oversupply. If we look historically, this has always been the case that today, everyone is trying to build up inventory. The larger ones like Apple, Google and these guys, they are buying more than they need. Suddenly, they will realize that their inventories are too high and then they will stop to overbuy and then the market will get that extra volume out. And at that time, we will see that supply and demand will be in balance. And then a quarter later or so, we will see an oversupply because then more companies will start to release their buffer stocks that they haven't bought. So it's going to be challenging for a few quarters, then it will change quite fast. That's my prediction. And you can call me on that when we see that, that is happening or not. But if you look at the historic shortages and allocation periods, they have all been solved in that way. Now we see that many of the suppliers are increasing capacity. It takes 12 to 24 months to be there. I think half that time frame has passed and so -- this will change. It's going to be challenging until it changes, but it will be resolved. So what can we do? What we do is that we are working together with our customers. We are building up inventory. We are trying to mitigate as much as we can. We chase component on the spot market and try to solve the short term gaps in supply. And that will continue, and we are basically having good dialogues with all our customers. So this is -- this is something that has happened. It will happen or will continue to happen going forward. Despite all that, we're seeing a new record on our return on operating capital, despite this capital increase were up to 24%. I think last year, this time, we were at 20%. And this is also something that we are increasing over time. Our equity ratio is still around 40%. We were at 38% in September. So this means that we are continuing to look for new acquisition opportunities. We are a bit running out of some production capacity. I would say that the next acquisition might be one where we have good free capacity in terms of floor space. That would be a good addition to what we do. But we're also a bit opportunistic. There are several opportunities out there, and we are following through on several others and see where that leaves us. So this is an area that is still in focus. We are not guiding when or where we will close anything. But it's an area for us where we are putting a lot of focus. So with all that said, what does this leave us. I think our operational momentum is really strong. We are -- If we would get components, we would have a few fantastic quarters with more or less double sales. I don't expect that to happen, but I expect the coming quarters to be really, really strong. We also see that we have a very strong trend of winning new customers. After August, we passed 2020 in terms of new wins in terms of money. And that trend is continuing. We see September was also strong, and we're expecting to end this year strong. So thus continuing to build on our customer base. And this is what I've told before, all these new wins will happen in 12 to 24 months after we win them. So we know that the next year and the year after also looks very, very strong based on those wins. So we are filling up our pipeline for deliveries also for 2022 and '23 in a really good way. And this -- when you look at the EMS market, we have to work that way. If we are failing in winning new accounts both with new and existing customers, that's when we know that the next 2 years will be weak. So as long as we continue to win and have a positive trend here, we know that the growth will remain. So we are very happy and pleased to see that this trend is so strong and is kept up at this high level. We're never getting tired and exhausted here. This is the most important area for us, combined with our operational deliveries. We have also talked about that the megatrends is a bit in our favor. We see that closeness to customers are getting very important. We see that our sales is -- I would -- I was almost going to say stronger in Sweden than in China, but that was last year. And now we see the recovery in China is so strong, so it's surpassed with fast growth in Sweden and Finland. But this trend, we will -- we are expecting it to remain. We also believe that the position within the Greentech is really attractive. The growth in percentage is very strong, but the growth in the all -- in the 3 other segments are actually bigger in terms of money. So we should never neglect the old more traditional parts of the market because those customers are really important and are forming the base for our operation. If we try to summarize this. We are seeing that our order book for the next quarter is 70% up, excluding iPRO, but we are believing that we will not reach all the way on the component side. So our best estimation for the next quarters -- and we say the next quarter is just not to give you a bit longer insight more than the next than just the fourth quarter. So we are expecting us to be at the level of 50% growth. We also know that growth is enabling us to continue our strong earnings trend, and we believe that we will be able to also continue the positive trend when it comes to margin, both in money and in percentage. So with that said, if we look at the trends that we always like to end this presentation with, we see that on the left graph, we see the sales, we're up to SEK 2.3 billion in trailing 12-month sales. If we would restate the iPRO sales for this period, we would be a bit above SEK 2.5 billion. And with the strong outlook, we are expecting that this strong curve that we see here will remain. And we can also see that we have gained back more than the lost growth that we saw in third and fourth quarter last year where we had flat or -- and also a bit shrinking sales in Q4. So all that loss is now regained and regained with more than we lost. So our annual organic sales growth over the last 3 years is now in excess of 15%. So we are delivering very strong on that target that we have. If we look at the margin, now we're up to 9% for the year. We're up to almost 8.8% for the trailing 12 months. And we are expecting this curve also to continue to increase. And how far can we get and that is the remaining question to answer. I would say, as I've said before, we will be seeing quarters where we see double digits. We're not in a position where we expect us to be that on a full year level yet. We are hoping that we can reach that level. But on the other hand, we're trying to have a good mix between sales growth and margin growth. We could probably grow margin faster, but that would be on the price of less sales. So we believe that the mix that we have between these 2 objectives are working very well in parallel. But we are expecting to increase the margin, both in terms of money and in percentage. I think that, that was what I intended to go through with you. In summary, we can say it's fantastic first 9 months. The growth is increasing by the quarter. We saw 7% in Q1, 28% in Q2 and now 58% in Q3. If you draw a line, we could easily say it should be about 100%, but we are we are capping it at 50% -- around 50%, that's where we see it. Margin continued to increase. What we can say that before we end there, we see the cost increases that we incur from our suppliers. We are mitigating most of that to our customers. We are carrying some of that cost. We also see that the freight cost is going up. We are probably getting, I would say, 90-plus percent coverage on the component cost increases. We're probably getting somewhere between 60% and 70% of the freight cost increases. And this is something that we will add into our annual price discussions for the coming years. So we are getting compensation for that as well. But overall, we are -- our operational momentum, our growth is overcoming the negative sides of this. So the overall picture looks very good despite that we are not getting full compensation for those 2 parameters. But in summary, we are really enthusiastic. We are really optimistic and we are expecting to end this year in a really good way. So with that said, I will say thank you and open the door for a discussion or for questions.

This is Thomas Tang from MediumInvest. And I have a few questions. First of all, as usual, congratulations are in place. It's a really impressive results that you and the entire team delivers again and again. So yes, I'm really impressed.

Thank you.

On the components side, this is the first time you start commenting on sales being postponed to the following quarters. I'm sure it's happened before, but it is the first time you commented this SEK 50 million of sales being postponed. And you also sound like despite the very, very good record order backlog, your organic growth expectations are very high, but does not one-to-one follow your backlog increases. Is there some change in the component market? Have you you run through the inventory, you managed to build up early? Or why are you more cautious about being able to get the components and convert the order backlog into sales?

I would say it's 2 factors on that. One is that we -- as I said before, we try to build up some inventory already when we saw that this crisis was coming, that inventory is, of course, consumed now. So we are -- we are basically starting off from a lower level. So that is 1 factor. The other 1 is that we are seeing so strong increases on our customers' orders and increases are much harder to source against. If we would have been flat on sales to the customers, that volume, we can -- we we can often deliver. But if they want 30%, 40% increases, that increase that has not been forecasted, it's really hard to get components for. So we get the orders, but we are -- we are facing more problems to solve those because we have allocation for the initial volumes, but the extra volumes is much harder to get components for it.

And you talked about that delivery of components you have bought is getting better, but there's a very long lead time. What kind of lead times are we talking about when you place orders for new components?

If we would be a customer and say that they have components from these like SC or Texas or some of these suppliers that are most, how should I say, affected with allocation, we would probably see a 52 weeks lead time on those components, give or take. We could be lucky and have them from a bit shorter, but that is the average lead time on semiconductors today for orders without forecasts.

And does that mean that you will actually place same orders 1 year ahead now to make sure you have the components? Or how do you act in this situation with these long lead times?

Yes, we do. We can comment on that, Thomas. I know that we -- I got the question last time, how much order intake did we have, if we are comparing it, what you call it like-for-like as we have reported it in the past. And now we have an order backlog that is in excess of SEK 2.6 billion, and that is also excluding iPRO. And that is for deliveries for the next 15 months or so. So -- So the order backlog is up 125% if we compare it as we reported it last Q3.

That's a lot. On the Greentech segment of your business is obviously growing and now is a little bit more than 1/4 of your business. I was wondering if that segment is different from the others in terms of customer relationships buildings, margins? Or is it basically business as usual in all significant areas?

Very good question. I would say like this, it's basically business as usual. The difference is that many of these companies are young companies, and they don't have the production culture in the companies. So they are more likely to outsource the full box build and also hand over like shipments direct to their customers. So it involves a bit more steps in the supply chain than than the traditional customers that are buying more board or box build of a lower level. So it's a bit different, a bit more -- the products are younger. There are more revision changes in the first phases and so on, but quite much business as usual.

And can you help them with all the steps or are some of the steps that other people have to help with like distribution?

Yes. Yes. What I mean here is that normally, we are shipping products for -- if we have to take traditional customer setup. We are making boards and sometimes we put them in a metal box that are then plugged into a bigger product later on in the production line. These customers were often packing them in the consumer packages or the parcel that will be delivered to their customers. In most cases, we ship these products to our customers' warehouses. But in some cases, we also handle the logistics where we would ship these products to our customers and the customers.

Okay. And do you have a competitive setup for that logistics challenge?

It's very hard to say, Thomas, as it looks we are -- we seem to be doing this in such a good way that we are attracting new customers in it. And this is an area that we can always be better at than we are looking into how to do that. But it's fairly new to us to do this in this bigger scale, but it's -- it has been appreciated by those customers that have chosen to work with us in this way. And those relations are working very nicely. So I would say that we are managing in a good way, but we can most likely become even better at this.

All right. And a final question from my side. On capacity with the current growth rates, I assume you are starting to run out of existing space. And you also mentioned that you are expanding floor space and a good acquisition would likely be accompanied with free capacity in their plants. You say if you don't make an acquisition because that's kind of if it happens, great, if you don't, then it's also good. How do you address it going forward with the current growth rates? Do you need to build entire new plants? Or can you just continue expanding your current plants and keeping up with the growth. So we won't be capacity restrained.

I would say that we are -- with the order backlog that we have, we don't see a problem to manufacturing from a capacity point of view. What we do if we are a bit late with extending our sites, we are often leasing in or warehouse spaces to get some of the more bulky stuff out from our sites, and then we can extend the production floor space a bit. So there are always ways to overcome a short-term floor space squeeze, if you put it like that. We also work a lot with reducing our footprint on our customers' production sales. So we are continuing that process. So we are -- we can grow at least 38% organically with the current floor space, probably more when we get there. Thank you, Thomas. Any other questions? If not, I will say thank you all for listening. And we are looking forward for the next quarter and the coming year. Thank you very much.