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

Good morning, everyone, and welcome to the -- our Q4 report for 2022. Yes, what can we say about this? It's a very turbulent surrounding as usual. We see that inflation and currencies are a bit challenging for us. And for most of the companies around, we see that -- yes, everyone talks about the semiconductor crisis to be more or less over. And I will come back to a little bit upon that. But it's very -- how should I say? It differs a lot between different types of products. And in some areas, the availability is back to normal in other areas. It's almost the same problem as we saw last year already for 2022. We believe that it will continue to improve, but it's far from over, which is a bit surprising when you listen to all the discussions around in the media place where we see that semiconductor producers are actually laying off people and so on, but that's a lot related to what I call the -- yes, the handheld units are down, and that means that the ones that are consuming the biggest quantities on the smallest types of semiconductors, they see that the crisis is over and the availability is good. But for car industry and for industrial use, we still see a lot of issues with getting components. So I always start with being a bit pessimistic, which is I don't know why, but that's what keeps me awake at night. So if I put that aside, I would say that this quarter has been yet another fantastic quarter, I would say. It's -- we're up 13% or 12% in growth in sales up from Q3, which was the strongest quarter before that. And we managed to reach the milestone of SEK 1 billion in sales, a fantastic -- I think it's -- what we do have 28% growth in the quarter, big help from currency. We had some tailwind also on the acquisition part. We -- our acquisition in Herrljunga has been performing really high above expectation. We have 8% in growth on organic growth. This number can seems a bit weak. We should remember that we had, if I recall it right, 48% organic growth in Q4 last year. So it's a quite tough comparable number. But I would say that if you look at the trend, and I will come back to that as well. Our sales is going -- it goes a bit -- it fluctuates a bit. Some quarters, we have very strong acquired growth. Next quarter, we have good organic growth. It's a bit of which projects were delayed. And if you look at the fourth quarter, we ended that quarter with maybe SEK 200 million still delayed. All of those delays are currently coming from the old units, so to say. So if we would have managed to get that out, we would have been continuing on the 20% plus on organic growth. So I know that this number may seems a bit low and -- but I'm not nervous at all. We see that the demand is really strong. 40% up on order intake this quarter again. This number also do not include acquired -- the acquisitions. So this is purely the organic side, so to say. So we still believe that we have a very strong future also for 2023. Guidance, yes, we are -- as I heard that from -- I heard it twice this morning that you are always so pessimistic in your guidance. And I would say that we are not. We are always stating our lowest estimated number. So we believe that we will, of course, be above it. Otherwise, we would say that we would be around the number. Now we always say that we will be above it. And then we will, as usual, come back after first quarter and give you a bit more detailed guidance for the year. But at this moment, with the surroundings that we see that to guide higher than the SEK 4 billion, we don't want to do that, but we should always see this as the lowest estimate in our books. That's how we treat guidance. Yes. So we are really enthusiastic about this report. It is -- if I move over to the numbers, we are the best quarter we have had. I think we are 40% higher than that in operating profit, and we have some again, some tailwind on some one-offs. Also the first quarter for the year, we had some positive on the currency translations, not much, SEK 3 million, if I recall it right. But if we look at the underlying profitability in the quarter, we are -- I think we're up 41%. I think that is significant. And then we should know that the strong organic growth we had in Q4, it was also the best quarter we have had on OP. So it's not only the sales that were strong in Q4, it was also the best operating profit. So to beat that with 1 percentage unit, that's really, really amazing. I'm so proud of all the sites and the work that is done out there. We should not forget that behind all these numbers, it's actually actual work that is behind it. And it's very easy for me to stand here and talk about all these numbers. But for every SEK 1 million we sell, it's a lot of production and a lot of efforts that's done in the sites. And especially years like this when we have this extremely tight component market. So really impressive to see these numbers as I see it. Also very glad that we could see that the profit after tax came with us. And you should know that our profit after financial items when the currency -- Swedish currency loses moment or loses in strength to dollar and euro, we also lose some money on that conversion. So that has also been a bit -- yes, reducing this number. So Q4, very, very good numbers, all through this -- all through the P&L. We also see that our cash flow came in positive that this is the number that we have been talking a little bit about in this year that it has been weak. We're still not where I want it to be, SEK 39 million in cash flow with SEK 83 million or SEK 99 million in profit after tax, that's a bit weak. Should know that the growth is eating cash flow. That's just how the nature of the game. So we will see that our cash flow will be a bit constrained also going forward as long as the growth is there. Now I believe that our stock buildup has ended. So we will see much better cash flows for this year than if it comes in Q1, it's very tricky to say it's a bit of lagging effects. We know you have quite long payment terms, both to customers and to suppliers and how that will affect the cash flow is always tricky to give guidance on. But for the year, we expect the cash flow to be a lot better than the SEK 2 million we did operational this year, of course. And it's very important because we are still looking at acquisitions, we're looking at continuing our heavy investment plan for capacity improvements and efficiency gains. So we need the cash flow to continue to invest in the business and also to invest in acquisitions. So for us, this is a really important number. It may sound that we are a bit reluctant and that we're a bit -- yes, we don't really care about. We don't talk so much about it, but this is what is financing our growth. So it's really, really important. And therefore, it's good to see that it's turning into black numbers and so on. If we look at the year, 39% growth. I remember last year, I think we had 41% for the year, if I recall it right. And everyone said, you cannot repeat this. And we are -- we didn't, but we were very close to it -- to doing it. So yet another fantastic year. It's amazing that we could reach this number. Then in this number, of course, we have some effect of both the weak currency and also that we have been selling some spot purchase material, which we call extraordinary material costs that we have invoiced over to our customers. But still, if we exclude those 2 items, we're still at just shy of 30%, which is still, in my opinion, a quite impressive number. So were really eager to see how this -- will take us going forward. Not so much to say we ended the year at SEK 345 million in operating profit. 9.3%, we have some one-offs in that number and some other -- how should I say, one-off or numbers that we should exclude when we look at the underlying performance. If we look at the underlying profitability, we are up to SEK 372 million, which corresponds to 10.6%, if we also exclude the extraordinary material sales. So if you look at us going forward, I would say that this number is more representative from where we are rather than the reported operating profit. I'm very against reporting one-offs. That's not really what I think we should do because it's -- you always have issues. It's very few businesses that you run without having any one-off items. And for those that follow us, we have not reported that in the past. We -- normally, we do acquisitions and we take that cost on our P&L directly because we don't see that it's worth mentioning, say that in acquisition costs something -- somewhere around SEK 1 million to SEK 3 million in consultancy fees and so on. Normally, we just see that as an operational cost because we believe that this is part of our business. Now with this customer loss that we saw in -- yes, very late in Q3, we had to report it because it was so significant, and it's something that we rarely do in our business. So it's -- yes, this is how it is. And we will see if we have more of those, but if there are, what I call, neglectable, meaning that if it's less than, say, SEK 5 million, we will never report that, that would -- that's not relevant in our business. We always have those kind of things. Again, order backlog up 40% for comparable sites. I think that's also impressive. We're starting to see that the industry are reporting that the order backlog is actually starting to be reduced. We don't see that in our order books. And I have said that we will start to see it when the delivery times on semiconductors becomes shorter than our customers will start to reduce their order backlog in length. So our industry will also see this. But so far, we have not seen it. And therefore, we take this order backlog, we try to transform it into something that we believe in. That's why we always guide. We -- often, we guide a bit under our order book value. We know that it can be some late changes of orders when we come closer to that. But if we look at our sales numbers, we have a pretty good picture of at least Q1 to Q3. If we get the whole of all the material, we could quite detailed, say exactly what -- where we would reach. We are confident that we will reach the SEK 1 billion in Q1. And for those that follow us, you know that we are often growing sales over the year. If we look at last year, we started with, I think, SEK 820 million or so in Q1 and ended at SEK 1.40 billion. Then of course, we had an acquisition but we had that in 2021. And we are also quite hopeful that we will reach some kind of acquisitions also during this year. When we do, we'll come back to you on that one. But yes, we see optimistic about up on the year. I will come back to the guidance later. Looking at our segments. Rest of the World, China and Estonia. We ended the year at 7.6%, a bit down from last year. We had some one-offs that we carried with us from the first quarter that we reported on why the margins were very low in Q1. I think reported 3% to 4% in Q1 for Rest of the World. And that is -- we have carried that deviation with us throughout the year. Western Europe, 10.7%. It's amazing, 11% on underlying OP, I think that's really, really strong and proves that what we have done when it comes to efficiencies and the way we think about multi-sites in our strong markets, I think that strategy really pays off. We're really pleased to see that all our 4 sites in Sweden are growing fantastically. And all sites are also improving the profitability year-over-year. So the investments and the activities we do in this area is really pleasing to see. We see Finland starting to come back or come back. We had 1 year that was a bit weaker in 2020. And then we have seen growth '21 and '22. We're also seeing that we expect that growth to continue. Estonia, fantastic year. I think I come back to that, about 55% growth or something. Extremely good then we should remember that there is some currency effect of maybe 7% for that, but yes, really impressive. Moving over to our segments. Last year, if you remember, we had a fantastic growth in Greentech. I think Q4, we reported 180% growth in this area. Again, that number is a bit tricky to beat. We should know that in, especially U.K., we have seen a slowdown of EV shortage units for the year. We saw Q4 last year and Q1 this year, really strong. Then the U.K. government took away the governmental grants for installing these units. And after that, the market has still not recovered in a good way. We believe that the position we have is really strong. So we do expect that the market will pick up and that our sales will pick up very good when that happens. We also have a few new projects there that are really interesting that were delayed over year-end and they will come back in the first half of this year. So Greentech, a bit pessimistic for the quarter. For the longer run, we have fantastic cooperations we're ramping up heavily with, for example, Ferroamp, a Greentech company here in Sweden. I believe that their sales is enormous at the moment. So we will see about their quarterly report. Medtech, I've talked about it for many times. Now we actually reached 100% growth. I would have said, plus 50%, but the quarter was even stronger. A lot of lagging effects here, some component shortages that have been hard to solve that has been delaying the sales increase of this segment. But that also means that for the coming quarters, we believe that we will have a really strong growth numbers for Medtech. They were pushed down for the first 3 quarters in 2022. So the comparable numbers will be really favorable for us in this segment. So strong growth are expected in this segment. Communication, we -- I've talked about it before, some new wins, strong demand, but we also see that 2020 and 2021 were quite weak years in this field. So these strong numbers with almost 80%, I don't expect this segment to be at that number for next year, but we'll still see growth. Industrial, our fantastic backbone for our business, a lot of different customers, a lot of different underlying segments, really, really strong growth. Again, fantastic. We're pleased to see that this segment are continuing to deliver these fantastic numbers. And if you look forward, sometimes we believe that okay, Industrial will be starting to become lower in the importance for the group, but still we delivered these strong numbers. So it actually balance out the growth in the other segments. But again, if you look at this, we have 4 segments where the weakest one have 18% growth. And there, we know that we have some trends that have been really unfavorable for our quarter. So I'm really, really pleased to see these strong numbers. And I still believe that it's the balance between the segments that are our biggest strengths. And this comes from that. We have very low single customer dependency. I've said it before, but our largest customer is roughly 6% of our sales. That's many companies in our industries. They have won customer dependences and it can go up to maybe 40%, 45%. And for those companies, if that customer would have entered the same problems that we have seen for the EV shortages in U.K., for example, then that company would have lost significantly. For us, we can still deliver really strong growth numbers even though one of our biggest segments in 1 big market has been suffering. So I think the -- what we call it, the different -- all the different customers and the different segments that we can grow this well in all that is what I believe is our strength, and we will see that going forward. So the full picture is the strength. I don't want to highlight any one of those. Some operational highlights. We talk about it, quality and delivery performance, top class, I would say we've got our Customer Satisfaction Index continued to grow, a really strong number. Order intake continues to grow. We have some -- we call it timing consideration. So I think that's a very vague terminology. But what I mean with that is that a lot of our customers that we win, we have a start-up time of maybe 6 to 12, 15 months. And that means that we may get order, but we may get orders in the Q4 that we will actually deliver in Q1 2024. That's how long time it takes, given the complexity of the component market. We believe that it might be shorter, and then we will see steeper growth in the second half of the year. But we still -- we are placing the orders when we believe we get components and together with the customers. So some time in consideration, which is why we are guiding lower than the order intake supports and the order backlog is telling us. Again, some numbers. Sweden, really strong. China, 31% domestic customer, but we also have -- quite a significant part of this is actually currency growth. I would say it's half of the growth. I don't remember the number in the back of my head. Estonia, 50% also. But I think here, we have a 7% currency growth, but still really strong numbers. Our CapEx reached another record year last year. If I recall it right, it was just below SEK 80 million invested in new equipment. We have a plan to invest more in 2023. We are growing. We need more capacity. We are a bigger company, meaning that we have more sites to support. So this is a -- yes, it will continue to grow as long as we continue to grow. I think here is one of our strengths. We are using CapEx to reduce the labor content of our products. For me, this is a given. This is how we should run business. But I know that others are still running with quite old equipment because they are still functioning. We are investing in new equipment even if we are having equipment that works because we believe it's more efficient. So we always look at this, how can we become better? And one number that I often try to mention is that during the last 4 years, we have tripled the company in size. And during that time, we have increased the head count with 40%. So 200% growth have been -- and we have increased the head count with 40%. That includes also acquisitions. So really pleasing to see. For those that missed it, we acquired our property in Torsby. It's not more than that we believe it's easier to extend the building when we own it. We were the municipality's largest tenant or what we call it. And we had long discussions with them how to develop the site, and we believe that this is better for both parties. So also, this is also to support future growth in this site. Yes, what should we say more, we are -- yes, our return on operating capital is something I often get the question of it. It's now up to 25%. This number will, in my opinion, continue to grow. And when we see that our -- that the balance between supply and demand is getting more and more in sync. We also see that the increased profitability will, of course, drive this number up. So funny. When we had this as one of our objectives, no one asked about it, and everyone asked about our operating profit now and we don't have this as one of our key objectives. Now everyone asked about it, but -- so therefore, we try to highlight a little bit. Also, good equity, 40%. I think our target is to have at least 30%. I think 40% is a better number. It gives us flexibility, it gives us strength. It gives us a good solid relation with the bank. We also see that we have enough cash to run the business. It's -- yes, it's very -- it's important and give us flexibility and room to maneuver. A few words about Herrljunga. It's one of these fantastic stories. We thought they were going to do around SEK 140 million in sales for the year. They did SEK 154 million for the second half of the year when we owned it. Then you can say how -- what will happen in the future. Yes, I think that when we took over them, they get a little bit more access to material and so on, so we could close some of the supply gaps they had. So I think the run rate is going to be a little lower than what we had in the second half, but significantly higher than what we thought they were going to be. Yes. So that's where we are. Outlook, what should we say about that? There's all -- is, you can stand here and say, all this -- the megatrends, you have the component shortages. We have the inflation. We have the weak Swedish currency and all that. But I still believe that this will be a really strong year for NOTE. If we exclude all these negative surrounding areas, I think our operations still look as good as it has the last 2 years. Our new wins when it comes to customers who are at a record level, I think we're 25% higher than our second best year, which was in 2021. So we know that there's a lot of new customers that we have in our pipeline that will start to be implemented in the coming year. That quantities are going to add up to what we see. So despite all the challenges we see, and I know that everyone perceives that NOTE as an EMS should have a really high dependency on how the world economy goes. We don't see that at the moment. When I look into the books, it looks really, really solid. Then you start to read about what all other companies are saying, and then you get a little bit cautious with what you say. So -- but it's -- we don't see that. We see -- yes, fantastic. So with this, we have guided with stating that we should reach SEK 1 billion also for the Q1. Q1 last year were a bit over SEK 800 million. So this corresponds to 25% growth. For the full year, we guided at SEK 4 billion, and we are -- that would correspond to some 8%, then we should also remember that we had about 5% of the sales in this year are actually our extraordinary material costs, and we expect that, that will actually start to go down a little bit this year. It will not disappear, but maybe it's going to be half that number or something if I would just take a number from the back of my head. We also believe that we are where we want to be when it comes to margin development. We had a lot of discussions about this after second quarter and third quarter last year. We try to make this picture more clear to everyone that follows us that we -- even though the reported numbers were a little bit below expectations, the underlying numbers were actually above expectations. So we will see where this leaves us for the year, but we believe that we are in a positive earning trend and we expect that to continue for 2023 as well. Yes. And of course, this puts us in a really good position to reach our long-term objectives that are SEK 5 billion at least in 2025 and to reach 10% in operating margin at latest in 2025. I got some questions that underlying, you're already above that target. And I still say what I said then that I will come back to this to where we expect us to be when we are at 10% for a full 12-month period on a reported number. But yes, we are expecting that the number will be strong for this year and that we will improve the under -- or the profit both in terms of money and in terms of percentage. Yes, I've talked about these slides many times before. But what we see is that we try to -- with these dotted lines show where we would have been without these effects. And we are at almost SEK 3.7 billion, underlying, it's SEK 3.5 billion, still really good. Operating margins, we are at 9.3% reported. And I think that we also -- if we exclude that the SEK 50 million in write-off were at 9.6% million or something like that. So really, really strong numbers also if we look at the reported numbers. Long-term trends or electronic manufacturing in Europe, really, really growing. 7% to 10% is the latest information I saw -- I listened to -- I think it was [indiscernible] had some Capital Markets Day, they were talking 6% to 8%, so you can basically pick your number, but all the numbers we see are around twice as high as they were about 2, 3 years ago when China was a more important part of the supply chain into the industrial customers in Europe. So I still believe that this is really going to be strong for Europe. This also puts in place if we talk about acquisitions, where do we want to become stronger. I mean Europe is a really good place to be. We still see that U.S. are an area where we get a lot of questions if we can put something up there that would be favorable. Again, I'm as you know, it's much more tricky to run an operation that is further away from your home office. So it's easy to run a business in Nordics. We're very close to it. We understand the business climate. U.S. is a bit more tricky than we -- it's more that we have to be more relying on the local management to be really strong and also strategic positioning and so on. But sooner or later, we will be there. I think that's not a bold statement as I see it. Yes. Again, we believe that this is -- we will continue on these trends. But yes, you see, there are some swings up and down also on both on sales and profitability, even if the curves look very, very positive, but I believe that we will see that. We will have quarters that are a bit weaker. We will have quarters that are a bit stronger. But under -- or the trend going forward is still going to point in the right direction, then we will see how far we get on that. I would not be surprised if we reach 10% in operating profit this year, if I put it like that. Yes. I think I end my presentation there. For those that are on the web, please send in your questions, and I've got 2 questions here. For those that are in the room, we will have a microphone circulated. But I'll start with the questions I've got from the web here.

I've got from [ Tor Egil ]. What about energy costs, bringing in Europe versus other places? Yes. This is -- energy is one area that is really, how should I say, problematic. We're not one of those companies that are using a lot of energy. If I recall it right, we are using maybe 10 million kilowatt hours. I think that normally, it's a cost of roughly SEK 10 million. This year, it will be higher. But not significantly. So even if this number would double, it's -- it will cost us some money, but it's not going to be something that will tip us over into some kind of negative result development. But of course, energy cost is something we put a lot of effort in. We -- I would not be surprised if we start to see solar panels and so on in our buildings. That is something that we have in our plan to do. We are not alone. So there's lead times also on those kind of investments if I put it like that. But I believe that trying to be -- if you can produce your energy by yourself, that's going to be a very good investment over time. That's how I see it. Then we have a question from [ Elvin ]. What's the main reason behind the discrepancy in operating margin between Western Europe and Rest of the World? Could we expect the operating margin for Rest of the World to rise with time? Very good question. We run high -- normally run a bit higher volumes in our Rest of the World units. They are set up for that. That means also that we have a lower material margins, we have less money to work with after we have, so to say, taken away the material. I don't expect that Rest of the World will reach Western Europe margins. I expect them to be a few percentage lower, but I expect both areas to continue to improve. That's how I see it. Then we have -- from [ Philip ]. Do you see any risk of oversupply on the EMS market since almost every EMS is investing heavily? Currently, I would say no, I don't see that as a risk. We are -- I would say that the market is still in balance or I would almost say that there's a relative undersupply at the moment. It's also very expensive to set up a new factory. So my view is that the situation we have today, it will be fairly well balanced for at least 3 to 5 years to come. That would be my best assumption. This has actually became -- I would say the balance is actually more favorable for the manufacturers than the customers at the moment, and that has also changed over the last, say, 2, 3 years. So if I would grade it, it's in the process of becoming more favorable than less favorable for manufacturing. Then again, if the economy slows down a little bit, it might become more balanced, but I guess that if the economy slows down, it will be a short slowdown and then it will bounce back. That's how I see it. A question from [ Karl ]. Please discuss how much your increased production capacity could lead to attracting new bigger customers? Is there a potential inflection point? Yes, I think that our capacity is well balanced. We have in, for example, in Torsby, which is our largest site, together with Norrtelje. We have in Torsby, our 3 quite brand-new lines. Everyone has set up to be fast and set up, but also have high capacity. Norrtelje, we are -- we have one new line. We get the second new line coming in, in I think, week 5. So this week or next. Then we have capacity in those 2 sites that will be sufficient for the next year, at least, potentially 2 years. We can probably do almost SEK 1 billion in Torsby supported from these 3 lines. So I think we have plenty of capacity and those lines are very fast. So we could almost do handle units and be competitive if you put it like that, which is the most margin squeezed business in the world in the EMS area. We're not focusing on those customers, but just as a reference. So we believe that capacity and capability are in place to have larger end customers and longer series and still be competitive. Yes, then we have from [ Staffan ] How far in the future do you see demand still being strong? Would you say 30%, 40% growth is sustainable for the years to come? I think 30%, 40% is very high. We need some acquisitions to reach that number. We don't see that the market is slowing down. We have had a few very strong years. If we can continue with the, say, 40% growth, I think that would be stretch. I still believe that we will outgrow the industry. I still believe we will have very good growth, but 30%, 40% is a high number. So let me put it like this. Let's close Q1 and we'll get back to you and see where we are heading for the year. But we expect the year to be strong. Then we have from [ Peter Hermanrud ] There was a large merger of Nordic EMS peers in Q4. Will this have a strategic implication for NOTE? Very hard to say. We haven't seen it yet. I would say the effect will be marginal. Both of these 2, should I say, colleagues or competitors were still there before they merged. So the difference is very slim. So I don't see this as something that will affect us, but it's -- I think it's a good sign. It shows that there is genuine interest for our industry, which has not been the case, if you go back some 5, 6 years. So this is actually good that there is big players that are entering the market and there's big players that are acquiring each other that will strengthen the industry as such. So I still believe it's good. Yes. The last question from [ Turgel ], [Foreign Language] Keep up. I will say thank you, and we will. That was the easiest question I got today. So thank you for that, [ Turgel ]. That was the last question I had from the web. Yes, we have one here.

So first one on how do you think Herrljunga, is it possible to give a more of a comment on what is driving the strong growth? You mentioned that they got a bit more supply, but is it any specific industry or where is growth coming from?

Very good question. I think Herrljunga has products that are in a very -- in a fast growing area. We're not allowed to talk about the customers, but it's -- the customer has a strong position in the market. So we believe that they are well positioned to have very strong numbers. Then again, it's -- we have to remember that it was over-delivered this year. So -- but I expect it to be a very good year in Herrljunga this year as well. So we are looking at investing in more capacity to meet that demand. We are increasing the headcount to meet this demand. So we have high expectations for Herrljunga this year as well.

Okay. And then on the margin side, I think you mentioned that you should improve the underlying or the margin at least, are you -- could you say anything about that? Do you think you could increase the underlying margin in 2023 versus '22 or from 10.6%? Or is that a stretch?

If I look at our numbers internally, we're, of course, looking at numbers that I believe is going to be in that -- aligned with that or better than -- again, it's business has a tendency to all it's come in with some surprises. So if you take those into account, I would say that if we reach that margin for -- as reported, I think that would be a good way of looking at it.