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

Hello, and welcome to the NOTE audiocast teleconference Q4 2021. [Operator Instructions] Today, I am pleased to present CEO and President, Johannes Lind-Widestam. Sir, Please go ahead.

Thank you very much and -- for everyone. Very welcome to this presentation of our fourth quarter and the full year. How do you start to present this quarter? It's -- I would say it's an amazing quarter. We had strong expectations. And I would say that we actually -- we were overachieving our internal objectives. So with this quarter and this full year, we've taken a new step into the future. We have been during this -- the last quarter, we have had our Capital Market Day, where we tried to give you some kind of picture of where we are heading. And I think that we are on a very good position to achieve those objectives. And hopefully we can also do that a bit earlier than we have guided for. But we will get back to that later on in the coming quarterly calls. So if we look at the numbers, sales of the quarter, SEK 814 million, a very strong new record. I think that's more than SEK 100 million higher than what we have ever done before. 75% growth is also a number that is, for me, it's estimating to have an industrial company that can achieve. More than doubling the sales is fantastic. But what I'm also even more pleased is that we've managed to keep the margin that we have, the fall through effect that we are expecting and we managed to keep or to increase the profit 125% in the quarter. That's also remarkable. For those of you that have been following us for a while, we can also see that this quarter is actually stronger than the full year 2018, that is 3 years ago, and we are now reaching that level with just one single quarter. I think that's remarkable, and I'm very pleased to see that we can deliver these strong numbers. If we look at the full year, 41% growth, 30% organic. I think that's also remarkable. We are now well ahead of the trend we were on before 2020, where we only saw a 6% growth. So we have more than closed the gap and we're now ahead of the trend we had before. I will come back to that later, but we're now on an annual growth rate for the last 3 years of 19% organic growth, also fantastic numbers. Operating profit up 68%, also from the last record year, that was 2020. We're now reaching operating profit margin of 9.5% for the full year and 10.6% for the quarter. In the 10.6%, we have about SEK 5 million in a one-off, a positive one. It's some kind of a pension payback from the company that are handling our pensions. Most Swedish companies have benefited from that in this quarter. Looking at the cash flow side, sometimes I get the question, why don't we manage to get better cash flow out of these fantastic numbers. First of all, we have to know that if we grow 50% organically in one single quarter, that will tie in somewhere around SEK 250 million more in working capital that we are financing. And our profit after tax is just under SEK 200 million. So actually, we are -- we have a similar working capital performance this year, but with a bigger company we are and within -- so fast increasing working capital for the last quarter, we see that we are not managing to get the cash flow up to positive numbers. We're not concerned over this. We have a very strong financial position. Our equity rate is still just shy of 40%, and our liquidity position is similar to where we were last year. So it's not a problem at all, but the number is negative, and that's always a bit -- how should I say, you're never happy when you have negative cash flow, but it's not disturbing us at all. What can we say more? This quarter is also probably the most problematic one when it comes to component availability, and we have been spending even more time to trying to get components for our customers. And that was one of the reasons why we did not succeed better in guiding when we sent out the updated performance guide in early December, we were not expecting to close a few of the component gaps that we had, but somehow we managed to do that and it came up, but not stronger than we expected actually. So fantastic performance from all our sites and from everyone in volume in our operations. Moving on. If we look at the margins for the segments. And everyone that have been with us for a while knows that Western Europe is Sweden, Finland and U.K. Rest of the world is Estonia and China. We see that the growth in Western Europe, it's also where we have the acquisition, 47%. But what is more pleasing is that we see that our operating profit for the full year exceeds 10%. And also, if we exclude the one-offs, we're still above 10%, fantastic performance, I think, from everyone involved there. And we have also managed to get the performance in the rest of the world up to what I would say, a decent level, 8.1% would be for many of our competitors be a fantastic number, even though for us, it drags down our [ OP ] a bit. So very pleased to see that. And I always come back to this and saying that, yes, are we harvesting from everything we have done. I still believe that we are in some kind of development phase. We are not where we want to be. We will become even stronger. We have many efficiency programs ongoing. We have many customers that we have not been able to implement due to these shortages and so on. So my expectation is that we will see a very, very strong 2022 and 2023 also. I'll come back a bit to those when we look at the guidance. Moving on to our segments. I think this is a fantastic picture. If you look at this, our industrial segment, a lot of very nice, all traditional European companies in this bucket, and we grow that bucket with 25% or 26%. Communication, another area where we have been struggling for a few years with installations on the field. Now we see that the growth is there. We see that this segment is recovering in a remarkable strong way. Medtech is the area where I've been stating in the last 2 quarters that we will come back with strong growth numbers. We are at 14% in Medtech and I would say that, that is not satisfying. We had big delays of components to our largest Medtech company in the fourth quarter, and we will start to see good growth numbers in this segment as well. I will continue to repeat that until it happens, yes, given it will happen in the short time frame. But most pleasing is to see that the Greentech area is continuing to grow in this fantastic way. We're 153% up for the full year, and we are at 182% up in the fourth quarter. But looking at the numbers, it was our smallest segment last year, and now it's bigger than the 2 Medtech and communication. And those are still growing. So that's fantastic to see. And that also tells me that our hard work to be attractive and addressing those customers in this segment has been worthwhile, and we see the payoff is very strong. So I think this is really, really pleasing to see. My expectation is that Greentech will continue to grow faster than any other segment going forward. I don't expect us to be at 153% next year, but my guess would be 50% to 75% plus in this segment. Still fantastic numbers if that happens. And we should also say that we will talk about order backlog later on. Today we have roughly 80% of our forecast for the full year placed on orders from our customers. So we have a very good visibility of what we will deliver this year. And the order book also continues into 2023, and we can also see that our customers are expecting to grow also in 2023 based on those orders. So we are seeing very, very positive numbers in all these segments and especially in the Greentech segment. We will come back to that on the coming calls just to give you a flavor of how this is developing. But my expectations is that the Greentech will continue to grow faster, but I expect all our segments to grow at least 10% or more for the full year in 2022 and even stronger in the first quarter. I will also come back in this presentation to show you a bit of how our speed through the water has evolved during the year. It will give you a good understanding of where we will start 2022. Yes, some highlights. We are talking about quality and delivery performance. We still see that we are delivering this high and with better performance than our competition. It's a bit challenging today. Of course, we deliver performance when we have component shortages that are popping up quite late in the process. We have, this year, learned a new word that I hope I will never have to use again and that it's called decommit. That means that suppliers are just sending us a new message at the same day they are supposed to deliver components and saying that this component is now 6 months delayed. So decommit is a real problem in the industry at the moment and everyone working in the electronic industry have been forced to understand the meaning of this word. So hopefully this word will be discontinued during 2022. That would be a real improvement for the market. But this is a challenging part for delivery performance. Still we are delivering way above 80% on first confirmed delivery performance. Last year we were at 96%. This year we are somewhere around 88%, 89% for the full year. And it's still decent, but we are not pleased with these numbers. We also see that the market is recovering in all our home markets. Sweden is going fantastic. U.K. is performing better than expected. Finland is doing very, very well, if we include the sales coming from Estonia. And China is performing extraordinary well. I think we're up 50% to 60% in sales to China. That's fantastic. Our order intake, our backlog is up 70% year-over-year, excluding iPRO. And if I look at the full order backlog, it's up 110%. And I have to state that most of the industrial companies aren't still reporting the full order intake, not the order intake for the coming quarters or for the coming periods. So our number is 110% up in order intake, excluding the acquired iPRO. I think this is fantastic, but it has also -- we're getting orders further away in the future, and that is why the order backlog is going up. iPRO, it deserves a separate bullet. We're up 40% in organic growth this year. It's also strengthening our positioning in the Greentech segment. But also excluding iPRO, the Greentech segment is growing in this range, 50% to 75%, as I have been mentioning that I expect it to grow in the future. So I think that is the speed where these customers are growing organically individually at the moment. So we will follow those -- our customers' growth in this segment. We're still investing a lot, SEK 67 million for 2021. It was the same level in 2020. And the reason why we do this quite high level of investment is that we need to have more capacity. We need to continue our road to automation. That is the reason why we can still reduce our operating costs all the time. And we will continue with this. I expect that our investment pace will be even stronger in 2022, and that is in line with our growth. We have implemented new [ SMT ] in Torsby, Norrtelje and China for the year. And our capacity expansion in Torsby is now finalized. We took the premises in November 1. And it's an extension of 50% floor space, but I would say that we will be able to double the sales through the sites with this expansion. And with the order backlog that we see, this expansion was really needed. We will utilize more than half of this expansion already in the coming 12 to 18 months as I see it. Moving on. Some other highlights. We have talked about the component market. But I would say what is happening here? How long will this continue? If you read this semiconductor association, they have -- they're giving monthly reports of how the progress is. And we see that the production pace from the total global semiconductor production is growing 20% to 22% in a monthly pace year-over-year numbers. So there are a big increase of capacity and a big increase in components that are reaching the market. I read this morning that Apple is expecting that their component shortages will be of less disturbance already from Q1. I hope that they are right because if the larger ones are getting the full plate of components that they need, then this will fall down to the smaller companies like us in the next quarter or so. But this is something that we'll monitor a lot, and we will keep very, very -- we will keep this under very, very tough surveillance and see how we can cope with this and deal with it. But my expectation is that it will be problematic for the first and second quarter, and then I hope that this will start to ease up a bit. And all the numbers are pointing in that direction if the global production of semiconductors can continue to increase with this high pace, then eventually, this problem will be more of a -- it will heal itself over time. But this gives us a negative cash flow effect. We have pushed out more than SEK 50 million in direct delays. Direct delays is something where we mean that we have tried to -- where we have been forced to push out the orders from the quarter, then we have what I call indirect delays, meaning that the customer wants the product much earlier, but we have already from the start told them that we cannot do it in this quarter. So if this -- when this component market is up, I would say that we will see a few extremely strong quarters when we are going to produce the backlog that we have in our books. Return on operating capital, 28%, another new record level. We have never been above 25% before. I mentioned before, our equity rate, 38%. We are, as always, involved in several acquisition opportunities. The market is very, very open for this, a lot of smaller companies are up for sales. As I said before, this is an area where we are putting a lot of our efforts in, but we are not going to buy restructuring cases. We're not going to buy any company that we don't see add value to our strategic objectives. But as always, when we have something to inform you about, we will do that. In December, we presented new financial and sustainability targets. I guess you have all read them and I will not repeat them. It's very important to say that we are -- our objective is to reach SEK 5 billion and 10% in margin at latest in 2025. Given the pace we have, we might be there earlier. That's the indication we see now, but we will update this when we see that we are overachieving in a longer period of time. And yes, for the sustainability targets we have already stated where we are, and we are expecting these to be fulfilled during the coming year as we have previously guided. This is what I mentioned before. If you look at these 2 lines, the red line is the sales of 2020, and the blue is 2021. What we see is that 2021 started basically where 2020 ended, we had sales of SEK 150 million to SEK 165 million a month, and then we started in January and February to be at the same level. Now we are ending the year with 4 months in a row with SEK 265 million or more. That is a significant increase from 2020. I expect that we will start 2022 where we end 2021. And that means that we will be at a completely new level when we go into 2022 compared to 2021. And when you look at these 2 lines, you see that the gap has increased. We have been telling this in these calls that it's -- that we have been able to continue to grow much faster than we did in 2020. And as I said before, we will not be able to continue this trend, 6% Q1, 28% Q2, 58% in Q3 and 75% in Q4. It would be easy to say that we should be at 100% in Q1, but somewhere this extraordinary growth will flatten out a bit, and I will come back on the next slide where I expect us to be. But I think this gives you all the same picture as we have that we have been continuously going up to a new level, and we are expecting to continue from where we are, not where we were last year. Moving on. Coming back to our guidance or our outlook. We are expecting '22 to be very strong. If I look at the order book, it would be easy to say that we should be at 30-plus percent growth, which would be somewhere where our customers expect us to be. We are not -- when we look at the order book, we're also trying to give some kind of balance between our expectations of component availability and also given where our customers want to be. So our guidance is that we will have an organic growth that will be at least in line with our long-term objectives, meaning 15% to 20%, and we will be significantly stronger in the first quarter, where we are expecting growth to be around 50% or more. We are a bit concerned of the wide spreading of the COVID. We have sick leave that are also on a record level, but in negative terms. But we are expecting that to be short-term and that we will recover well and we will be in line with 50% growth or more already in the first quarter despite all of these problems. We are also expecting that our earnings will continue with better utilization of our fixed cost base and our efficiencies. My last slide, I think this is also something to reflect upon. This is -- on the left-hand side, we see the blue graph, we see the sales over the last 5 years quarter-by-quarter or the 12-month trailing quarter-by-quarter. And we see the trend starting in this year, where we have had a fantastic development. We ended last year at SEK 1.8 billion, now we're ending at SEK 2.6 billion or just above that; fantastic growth. And we see that this is how it looks when you put it into a graph. We also see that our earnings are going up very, very nice. We're up to 9.5% for the full year. If we exclude the one-offs, we are at 9.3%, also very, very strong. And why can we continue with this growth? I think this is a very important question to answer. If I look at the EMS market in Europe, the expectations now from the latest publications that we have read is that they are expecting the growth to be 7% to 10% per year for the coming 10 years. That is massive growth in this industry. And this is the electronic manufacturing that is expected to grow in this rate. I expect the EMS companies to grow faster. So still I believe that if we grow less than 10% organically, we are losing market share. If we grow more, we are gaining market share. That's how strong the markets are at the moment. And this is driven by electrification, Internet of Things, a lot of smart applications and so on and so on. We also see that the outsourcing trend is really strong. All the new companies that are starting up, they are not producing on their own. They are using contract manufacturing for everything. Most of the customers we have in the Greentech area are buying complete box build products packed into the shipping boxes that are going to their customers. So they don't even touch the material until it reaches their installers or the customers. If we look at the industrial segment, we have a much higher degree of bare boards production or assembled boards. So a big change between these 2. And since this segment is going much faster, we are expecting our box build part to continue to increase a bit. But we also see that this, what I call resourcing trend, is very strong. Many companies do not want to have their board production in China and the assembly factories in Sweden. They want the boards to be proved in Sweden to have a safer supply chain. I think this is something that the COVID pandemic has learned, a lot of our customers the hard way is that political decisions will affect their ability to support customers and they want to close those gaps and use suppliers that can do that and supply them from much nearer location. This is also very, very important for us, as I see it. If we look at the margin, I think that if we continue this trend, we will reach the 10% much faster than we have guided for. I don't expect us to have the same strong performance as we have had the last 2 years, meaning that we go from 9% to 11% in the next 2 years. But I am expecting that we will continue to increase our operating margin. And when we hit the 10%, we will update our long-term objectives given where we stand and where we have been successful with acquisitions and so on. But I still expect this to continue to increase. We also see that our CapEx speed is giving us much better utilization of our head count. With the new equipment we have with much faster production speed, we can see that we can increase capacity much faster than we need to expand in floor space. I often get the question, how much can we actually grow in the current footprint? My expectation is that we can still deliver 2022 and 2023 with the current floor space. After that, we are -- we will need to continue to extend the factories. But we're not sitting back and waiting for this. We will continue to increase floor space already this year, and we will add more facilities, if needed, to be able to support our customers in a good and sustainable way. So we're still building upon our performance. We're not harvesting for what we have done. We're still investing in even stronger performance going forward. So with those -- with that said, I think that we have positioned ourselves in a very, very strong position, and I'm expecting that we will continue to have a steeper growth than competition and a better operating margin improvement than competition. That is my prediction for the future. We have started to get some questions from the web. The first one is from Richard. Who do you see as your biggest competitors? If we look at the listed companies, I would say that Kitron and Scanfil is our biggest competitors. We are sometimes meeting Hanza on sometimes for the smaller customers who are meeting Inission, but that's our competitors. We're never meeting companies like Incap and others. They are dealing with customers in other segments than we are doing. Then there are a few that is not listed like [ ANX ] that we also see sometimes. Second question from [ Sand ]. Do you have a sense of how much of your growth is due to European companies moving their production back to Europe from offshore locations such as China? Very good question. I would say that this growth is maybe 5% to 10% of our growth this year, not more than that. The rest is new wins and extensions of products that we do for current customers. So not that much. Then again, this trend is quite strong. So it will probably continue to increase over time. We can say that we have -- internally, we have moved production for maybe SEK 40 million, SEK 50 million from China to Swedish and Estonian production due to this trend. And China had, at that time, maybe SEK 400 million in sales. So say that we moved 15% of the Chinese operations back to Europe for meeting our customers' expectations of resourcing. Those were 2 questions I've got on the web so far. So I will open the floor for discussions. So please.

[Operator Instructions] We have our first question from Mr. [ Martin Edward ].

It looks as if you're managing the shortages with the components better than some of your peers. And so I'm wondering, what are you doing, in particular, to manage the situation? That's the first question. And second question would be, as you alluded that Apple Corporation hinted that maybe the component shortages is about to ease now in the first quarter, going into the second quarter. So I wonder, how would the sales figures for 2022 look, if not for the component shortages, if you would comment on that? Then the order backlog situation, if not for the shortages, I would appreciate it.

Okay. First question, how do we cope with component shortages and are we doing this better than peers? I think this is a very tricky question to answer. We are spending a lot of our efforts in this. How should I say? We are discussing with our customers how can we overcome the shortages. Should we go on the spot market to buy it? Should we do redesigns to ensure that they can open the bill of material to have more than one supplier available for all the positions on the boards and so on? But it's a daily work. We are involved in this, basically everyone in this company. I'm taking part in several of these escalation discussions together with our customers just to ensure that we fully understand what is needed to do. But looking at the numbers, I would agree that we managed to deal with the situation a bit better than competition. I cannot really say how and why, but the numbers are indicating that. Second question is how would this year look if we had full availability of components? Last year we did SEK 2.6 billion, and we are ending up with 1 quarter in the fourth with SEK 814 million. I would say that if this component shortages would suddenly end at a given time point, we would probably have several quarters exceeding SEK 1 billion in sales in a row. That's how strong our order backlog is at the moment. Is this scenario realistic? I don't expect it to be. I think that this -- the situation will gradually improve. But we -- if it improves fast, we will have a few extremely good quarters and also a few very good years as I see it. Did this answer your questions, Martin?

Thank you, Johannes. I have one more question I would like you to comment on. And I think that perhaps some investors are a little disappointed today, not with the numbers, but with the dividend policy because you had the different framing in the report today. One year ago the Board suggested that a dividend could come in 2021 if the circumstances allowed it. But now that phrasing is gone. And I guess -- I would like you to comment on that change and also how that fits into your acquisition? How likely is that we will see another iPRO like acquisition already this summer also?

Okay. I think that last year, we ended it with a very, very strict COVID restrictions. And once again, I would -- I said at that time, we were -- we're looking into a market that were really unpredictable and we could not really see how this was evolving. And we also, at that time, we had some early discussions with iPRO and we knew that, okay, if this comes through, we will need the cash for this transaction instead of issuing new shares. This year is a bit different. We have a negative cash flow this year, and we are -- our expectation is that we will come into sharp discussions with acquisitions during this year. When and for how big companies? It's going to be something that I would have to come back on. But this year, we are seeing that -- we have a strong need of the cash. We have to continue with our strong operations and to be active on the acquisition market. We have done the last acquisitions without issuing new shares. And I think that is something that the shareholders really appreciate to not get diluted with new issued shares when we acquire it. So that's one way of looking at this. But last year, we were more concerned about the future. This year we are seeing that the strong performance and the strong growth that we are seeing is consuming some cash at the moment. And therefore we are a bit more restrictive on the dividend this year than earlier.

I have one more question that just arose. And I know at the Capital Markets Day, you explained quite clearly what you had done in Torsby Turku and you repeated that 50% number today. But 50% extra capacity in Torsby doesn't sound that much, given the order backlog. You're saying that you will be able to cope. So that's the first question. How is that really enough? And the sub-question to that one is that I would like you to explain a little, what you have done, for instance, in Torsby and Norrtelje and how that fits into the capacity expansion?

Okay. Looking at capacity, capacity is a very -- it's a wide word. What we mean, we have 3 ways of looking at capacity. The first is capacity when it comes to floor space; that is a fiscal capacity restriction. What we have done in the last couple of years is that we have invested in floor space, reducing activities, meaning that we utilize the floor space much better today. And I would say that we can still continue to grow with our existing -- within our existing floor space with another 50% for the full group after the expansion of Torsby. Torsby a bit -- we really needed more floor space because we have gained a few box build customers that are consuming more floor space than in the past. Today, we are discussing to extend the Norrtelje facility. We are ongoing with the floor space increase in our Estonian operations, and we are doing several of these activities. We just took on one more building in [indiscernible] for the iPRO growth. So we are doing a lot of activities to extend the floor space as well. The second capacity thing that we're talking about, that's the machine capacity that we have. And here, we are continuing to invest to ensure that we are prepared for the volumes to come. So we don't want to be in a situation where we are underinvested. So we have to delay the customers' demand. So we see that today we have capacity to cope with the sales even if the component shortages are closed. So if that happens, we will be ready to deliver very, very strong and high numbers, and that's our promise to our customers. And then we have the third way of looking at capacity; that is people. If we look at how we have grown over the last couple of years, we have -- with this doubling in 3 years when it comes to sales, we have increased our head count with roughly 30%, including the acquisitions we have done. So we are much better in utilizing our head count. And therefore we're not that concerned that the shortages on the labor market will have that high effect on us. Of course, we are also struggling to get a few of the expert positions filled. But in general terms, we are not seeing a problem to recruit people. Also with companies like NOTE that are performing better and better, we are seeing better traction from people that are interested to start to work for NOTE. So this is a bit of, we get help from the performance to get that -- that makes our recruitment life a bit easier. But I would say that all these 3 capacity parts are well in balance within NOTE today. So that's how we see it. I have 2 more questions that came in from Thomas on the web. The first one is, you have previously described how you see the shortage in the component market change. Do you see similar dynamics for your customers? For example, customers giving more orders than they really need and building inventory. Yes, I would say, Thomas, that this is a fair statement. When we look at -- and that is why we are always guiding a bit under our customers' order intake. We are expecting that when the component market is opening up, we will have a few quarters that -- where we will over deliver a bit. And then with maybe after, I would say, 3 to 5 quarters, customers will start gradually to reduce their inventories. But I would say that this inventory buildup will be less than 10% of our annual sales. So it will -- with this speed we have, I think that this will not even be noticeable when we report the numbers. But yes, this is a factor that we will see. If we would have much lower growth, this would have been a much more complicating factor. Second question from Thomas. Can you talk about the gross margin development? Is all of the increase permanent or are there some positive temporary gains? Yes, we are -- when we look at margins, we're looking at it in a few ways. First, we have the material margin. The material margin we have seen over the last years to be shrinking or our contribution margin of the material are declining a bit in percentage. And this is something that we have been seeing, and this is something that we have planned for. We are taking bigger customers, we are taking bigger accounts, and they have a bit lower margin. But we are offsetting this roughly with twice the speed with our cost reductions in relation to our sales. So if we reduce the material margin with 1%, we have been offsetting that with roughly 2% lower nonmaterial cost within the company. So we have been able to offset this in a good way. We are seeing that this year is not a fantastic year, as I see it. We have been forced to do a lot of overtime shifts. We have been running weekend shifts. We have been utilizing more buyers than normally, just to cope with the component shortages. So we would see that this -- when the component market gets into balance, we will be able to have better utilization of our resources and that should continue to increase on our gross margin. So this is not the year where we have had temporary gains. It's rather a year where we have had temporary losses. Okay. We have one from [ Bull Egel Holmen ]. Do you expect to close an acquisition during first half or second half of 2022? Congratulations with fantastic numbers. First of all, I would say thank you. We are agreeing that the numbers are fantastic. This is -- the first one is a bit tricky. We are involved in some processes. We are expecting to see them through. In the fourth quarter last year, we were bidding on a company that we didn't get, and that can happen here as well. So we will be involved in several acquisition processes. If they will turn out in a positive way for us or not, we will see about that. But our expectation is that we will be active on the acquisition market, and we will see how that will pay off during the year. That was the last question I have on the web. Is there any more questions from the phone calls?

We have no questions on the phone, sir.

Okay. Then I would say thank you for listening. I hope you had an enjoyable 45 minutes, and we are expecting to continue with this good performance, and we are looking forward to a very good start of 2022 despite all of these problems that we are seeing with the pandemic increase and so on. But we are optimistic and we are expecting to continue to deliver good numbers. That's at least what we see when we're looking into our order books and in our planning systems. So with that said, I will close this call. Thank you very much.

Ladies and gentlemen, this concludes the conference call. Thank you for your participation. You may now disconnect.