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

Good morning, everyone, and welcome to NOTE third quarter presentation. How do we -- what is the overview of this quarter? If we move to my first slide, we can see, okay. Sales came in at SEK 830 million. That corresponds to 6% organic growth, where we had a 3% negative of currency effects. Our profitability, 9.3%. I think that's very good for the third quarter. Normally, third quarter is our weakest quarter, both in terms of sales and in terms of profitability. I think that is -- if we stay on that number for a while, we are running now at 9.9% for the trailing 12 months in underlying OP. Our target is 10%, and we managed to do that in a flat environment. I think that is really, really strong. And I have to be clear with what we do internally. It's what we call it a daily fight about costs, how do we continue to be cost efficient? How do we continue to ensure that we deliver the results that we are targeting. So I'm very pleased with that number. I would have liked to see a bit more sales, of course, 6% is in the lower end of what we stated when we had this call 3 months ago. But still positive to see growth. What is also good is that if we look at the earnings per share, we're up 26% compared to last year. So what we see is that we are constantly generating good -- our profitability and the operating profit goes down all the way to profit after tax and profit per share. And I think that is very important to keep in mind because that is what gives us our cash flow. When we talk about cash flow, we generated SEK 121 million for the quarter. And just out of curiosity, I looked in what has our cash flow been for the last 24 months, and that is SEK 1.024 billion in 2 years. I think that's fantastic. That is driven by our ability to generate our profits that goes down to profit after tax, but also our ability to release the inventory levels that we had when the component crisis ended 2 years ago. So I think all of that is proving that we are running the business in an efficient way. There's always a lag in this process. I mean it would be very good if you see, okay, the inventory levels goes up in the component crisis while everyone is buffering up stock and that, that would come down very fast. But it never does. I mean 2 years is a long time. We have released somewhere around SEK 400 million in inventory. That is a round number. I don't remember the exact number. But I still believe there's more to come. I think we still have about SEK 100 million left that are in what I call an imbalance in our inventories. With that said, that means that I foresee in the coming, say, 2, 3, 4 quarters still a cash flow that will be higher than our profit after tax. So we still believe that there is much or significantly more to come from that way. And that's very good because, as you know, we announced our acquisition of Kasdon Electronics in 2 weeks ago. We are still waiting for the final approval by the British authorities. We expect that to happen in the next coming days. But that is done all through our own cash flow. And I think that is very, very good in this market that we have done. I was going to say 5 acquisitions, but this is actually 6 acquisitions since I started, and we have done it. And at the same time, we have actually reduced the number of shares. So we have bought back more shares than we have issued through incentive programs. And I think that is also something that we are very proud of that we are generating our own cash to build our future. That does not rule out that we might end up in a situation where we acquire something rather big and that we would issue shares. But that's another story. We think this is the way we want to run the business that we generate our own cash. We generate our own profits, and that builds our group stronger. And I think that is something that we work very hard on. Our equity, 50%, very strong. Net debt, I hope to say that we were debt-free, but we have SEK 27 million, excluding the leases in the IFRS standard, but still very low debt. Also after the acquisition, I think our balance sheet will look very strong. This is prior to the Kasdon acquisition that was done after the quarter. So all in all, really pleased with what I see on the performance. We are -- we struggle on the top line. I think this quarter is a good step forward, but we want more. I mean those that have followed us for many years, you can see that we still have a CAGR on the last 5 years that are exceeding 15%, but the last 2 years has been slow, and we want to get out of that position. Some highlights. This slide becomes more and more worded, so we need to start to de word it because we have so many things we want to talk about. But we are investing for the future and for continued profitability. As I said many times before, our profitability comes from our operational performance. It's not that we are increasing prices or pricing our customers in that way. We simply try to be more efficient than our peers. And that is why we are making a few percent higher than the industry standard. All that comes from investments. It comes from using more modern tools, using AI agents to be more smarter in how we produce. We try to decrease the number of workers compared to our sales and so on. But all that comes with the price, and that is, for us, investment in both equipment and in building. So we can facilitate more production in the current, how should I say, frame that we work from. And this work continues. And it's also good that during then when -- I mean, we have built up Torsby. We will move into the new premises, I think, in the end of November. And then we will start to move production in there in the first quarter next year. That has happened. But in the meantime, Torsby is still generating very good business. And that do not interfere with our ability to be operationally efficient. So we are quite good in doing large projects. Now we are approaching 2 moves in the next year, while Lund is moving to new premises and also Hyvinkää will move to new premises. But we are confident that, that will be a smooth transition because we do this quite often, and this is part of our DNA to be efficient and strong in these kind of activities. And for those that follow us knows that this is one of my most important topics that our production is our engine. It's our heart, and we are proud to say that we're good at it. And that's what we see on the market that the customers really appreciate that. On top of that, we invest for future growth, the acquisition of Kasdon. We have talked very little about it, but this is one of the -- how should I say, one very, very strong company in -- especially in the defense sector. They are very good in production in the early phases. They're good in NPI. They are good in pre-series. They are good in small series. They're very strong in production with big variations of products. And I think their ability to generate new customers and new leads will be a strength in our U.K. operations. But also, we expect that with a new ownership structure, we can continue to grow this facility quite nicely in the coming years. The outlook for growth in this factory is really strong. It's stronger than what we see in the rest of the group. They also -- how should I say, they're also deepening our position in the defense sector, which we are very proud of as well. So we welcome Kasdon and the Kasdon team to our group, and we think that will be a good asset for us going forward. We talked a little bit about our ability to deliver our operational excellence. But the last couple of years with the component crisis and so on, we lost some on-time delivery. I can now say that we are back above 96% in on-time delivery performance. And 96% is -- I often refer to it internally. That's when my phone stops to ring from annoyed customers. If we're below 90%, we have a lot of annoyed customers. So I think that is one key KPI that those of you that follow us and other peers should be really keen on looking at because the satisfied customers are -- have a tendency to not leave us. And we have very strong retention. We don't lose customers. That is also something that we are very proud of. Yes. We come back to some guidance and so on, but these are my operational highlights from this quarter. And I can say it's -- we talk about basically the same topics every time, but they are -- that's because they are so important. What I didn't mention is that my other big interest in this is the customers and how customers are doing. I think I have 2, 3 customer meetings every week at least and are involved in how we deal with customers on a much more deeper level than that when it comes to internal decisions on how we quote, how we price, how we work with efficiencies and so on. So I think that is also one of our assets that this goes all the way to our management team that customer orientation is so important for us, and that should be something that we -- that are reflected throughout how we work. So that's very, very important for me. Going into some numbers. This we have presented. I think what I would like to highlight of this is, of course, the strong profitability. 9.6% underlying, and we have our best quarter that is yet to come. Q4 is by trend, always the strongest quarter. We are guiding for 10% to 11%. We are -- we need to reach 10.9% to reach 10% over for the year, and we still have an internal objective to reach 10% underlying OP for the year. I think Kasdon will positively affect our profitability, both in terms of real numbers, but also in terms of percentage. So that will be a good asset for us. As I said before, profit after tax, really important for us that generates our cash flow that generates our ability to act on the market. And what is also very interesting is that even after the acquisition of Kasdon, we still have room for more acquisitions. I've been questioned that we had a big dividend. Would -- did we give out our ability to grow and acquire? I think the answer to that is no. We have proven that we can do it, and we are determined to continue with this journey. And then we have not even tried the route to issue shares for this. But -- so that's how we deal with this. Cash flow, very important. I talked about it before. I think we have SEK 100 million to SEK 150 million that is left to take out on top of our operational cash flow coming from reduced inventories. And also the effect of when we start to buy according to our sales, we will increase our APs, and that will also have a positive effect on our cash flow. So we see very positively upon this going forward. Our reporting segments. I talked about it before, Rest of the world, that means Bulgaria, China and Estonia, 8.3%, I think, is our record. We have been at 8% before, but 8.3% is a record. And we have very good operations here. We did a cutback in China about a year ago. We have been very cautious with adding people in Estonia. Bulgaria is gearing up. I think Bulgaria has, what is it, 30-plus percent growth, even more even from a low level, but that has a good impact of the results. So this is 3 very well-run sites, and I'm very pleased with the management of those sites. Then we shouldn't forget Western Europe, 9.9% is not our record. It's still a good number. We know we can do better. We have some sites, especially in the U.K. that is not performing according to expectation. That is something that we are working on and that we believe we will sort out in the coming quarters. So we have good expectations. On top of that, we talk about what is the realistic profitability going forward. I would say that if we continue to quote and price products the same way we do, I would expect profitability to increase in percentage. We are now targeting a bit slightly bigger customers. That might mean that we will remain on around the 10%. We will see which customer contract that we win and that will have an effect. But if we continue with the current operations, we will end up in a higher profitability when the growth is coming back. But we will come back to you with more details either in the Q4 report or in the Capital Markets Day if we choose to have that in December. But all in all, I think it's really good numbers that we show in both areas. And I'm pleased to see that the rest of the world is doing better than last year. If we do 5% in that part, that part represents -- I'm trying to add up in my head, but say 25%, 30% of our top line. And if that doesn't perform according to the group, that is a burden to the group. But now we are seeing that this is a good level. And I also think that we should be -- when we look at the rest of the world, if we can keep them at 8-plus percent, I think that is a level that will together with the Western European profitability that will add up to the 10% or higher. I don't have the same profitability expectations of these factories. They are naturally lower-margin customers that are in these factories, and that is something that we are dealing with, and that is something that we are planning for. So I'm happy with the performance there. I'm happy with the performance in the Swedish sites. The Finnish sites, we struggle in U.K. and that is reducing our OP in Western Europe. We come back to that a little bit. And you can see that we have 34% negative growth in U.K., and that is our biggest challenge at the moment for the group. Segments, our big industrial segment as our engine, as I always call it, we are seeing 10% negative for the year, but it showed 1% plus in the third quarter. I still believe that we are not in the good growth in this segment. It's a lot of customers. It's a lot of -- it's a big mix of customers there. Some of them are coming back to good double-digit growth. Some is still struggling to get back on track. Security and Defense, we show growth of 8% for the year. This is what I call a bit -- it's a bit disappointing. We're decreasing in this segment for the quarter. I've talked about it in the previous calls that defense is an area that year-over-year, we will see a constant growth. I think that we will see at least 30% CAGR in this segment if we look at the 3- to 5-year period. We had 90% last year. We will have a slower growth this year. Next year, we believe that we will be back on numbers that are in that range. And this comes basically from that ramping up electronic manufacturing is significantly easier than to ramp up like I often refer to if you build like an Archer, I mean, the guy that is doing the launching equipment and that is for them to ramp up is much more tricky than to ramp up electronics. So we are a bit in the hands of our customers' ability to ramp up and scale up their own production. So that means that we might be a bit ahead of some of the deliveries into some of the systems that our customers is delivering. And that's something that we know and that has been the case for many years. So we are not concerned of the negative growth in the quarter. We just see that, that is some of the programs we delivered more than our partners in the supply chain could do in that field. So this is something that will come back throughout this year and next year. Also with Kasdon, I think that if we are running this with, I think, where 13% of sales is now in the Security and Defense area, if we would add Kasdon to this, it would have 2 to 3 percentage unit in this segment. So that will take us slightly higher than 15%, 16% in this segment. And we expect the organic growth coming from this segment to increase that share significantly over the year -- coming years. Communication, I think it's still a segment that we are not very pleased with. There's a lot of delays in this segment. It has -- we -- in Q3 last year, we were a bit complaining about the order intake and the pushout from the customers there. We see a few of our largest customers there are not back to numbers that we are expecting and that they are expecting. And that will affect our ability to grow. One positive thing is that we are now -- we have signed this agreement with Waystream that we communicated in the second quarter that we will be their only supplier, and they are sourcing back the manufacturing from China to our Lund facility. And that is something that will -- yes, will start to come into our books in the fourth quarter and the first quarter next year. They still are consuming inventory that were produced in their Chinese supplier side. Medtech. Medtech is an area where we have a few customers. And if 1 or 2 of them are late with deliveries, that will have an effect in our quarter. I think if you look at this, the Medtech sales is adding up from maybe 6 larger accounts. And in this quarter, we had no deliveries to one of them due to overstock or that they didn't -- they choose to produce other products. And that is affecting the quarter. Greentech, I often laugh when I look at this. This was 28% of our sales 3 years ago. Now it's coming back. We had the best quarter in many, many -- in maybe 2 years in the segment. We were up 47% and the pleasing here is to see that it's not -- I mean, Plejd has been in this segment, and they have been growing. But this quarter, the growth is coming more from what I call a return on the EV market. We see Charge Amps is moving up. We have some other customers that are really ramping up in this segment. So we're pleased to see that this quarter is widening and growing. So that is very, very good. I think I said that after Q1 or so that this segment is getting so small, so we cannot shrink it anymore. But now we see that it's coming back in a good way. And the outlook for this segment is a continued growth. If we are coming in at 47% in Q4, I don't expect that, but I expect it to be in good double-digit growth also in the fourth quarter. So for the year, it will be a good recovery in this segment. You can argue this is a strategy that is good to be in this segment because what we call it, the electrification is a bit slow at the moment. And if you look at Germany, if you look at other markets, they are pushing back on the demands on what to do here. But if you look at Sweden, I mean, the chargeable cars are still selling between 60% and 70% month after month. So there will be more and more EV cars out on the streets. This is primarily driven by company cars, of course. But the good thing is that 3 years after company cars is what -- that will be sold to a private person because that's when the lease period ends. So with the secondary sales of cars is adding a lot of volume to the EV market. And those customers that are buying used EV cars, they will buy their charging station. So we still believe that there's a lot of room for growth in this area. And that is also our customers' view on this. And if you look further out in Europe, I mean, the percentage of EV cars is shrinking the further down you get -- if you get to South Europe, you rarely see EV cars, which is a bit frustrating if you produce EV chargers, but that's how it is. So we will see where this takes us. But my expectation is that we have stabilized on a low level. We're starting to grow, and we expect this segment to continue to grow over the coming quarters. So that is basically how we see the segments. If you look at our graphs, we have really turned the trend on profitability. I've been clear on that, that we are -- that this is the area where we are seeing our ability to deliver is stronger than on the top line. Profitability is more in our hands. The sales is -- you can -- how should I say it a bit more -- you can say that it's the customers that has to come in, then you can argue, okay, we need to win more customers, and that is true, and that is something that we do constantly. But I've said it before that the time it takes from you win the customer until that product is ramped up is increasing. And that is a trend we have seen ever since the component crisis that our customers are still -- they have -- we have preproduced, we have made the industrialization projects, but they still are selling their old versions for a longer time. The exchange of going from the old to the new versions is a bit slower. And that is pushing out some of our growth in the coming year. And that is something that we are working with the customers, one, both to understand and also to see how we can help them to be more efficient in the ramp-up. But there has been -- this time has been longer, if I look at the last 2 years compared to the period before. And that prevents us a bit from our growth. So what we say is that we anticipate that our sales will come into SEK 1 million to SEK [ 2 million ] -- or SEK 1 billion to SEK 1.050 billion, and that we will have a margin of 10% to 11%, so that is where we expect to end the quarter and of course, with strong underlying cash flow to continue to generate into that pocket. So with that said, I think I will stop my presentation. My view is that the third quarter is a very good quarter. I would have liked to see more top line. I think that all other indicators are in where we want it to be. Profitability is continued to increase -- and to increase with 1 percentage unit with only 6% growth. I think that's very good. I often say that if you are below 5%, then it's a cost-cutting activity. It's not the volume game. So to be able to improve that number with this much is really pleasing. I think that if we look at the year as such, I think what is it, 0.7% up on an organic growth of 0. I think that's also good. So we need to get our growth back in shape. The rest of the business is looking as we want it. So that is my conclusion of this. So I will open the floor for questions. What do we do? -- yes, we do questions in the room before so.

Anders Akerblom from Nordea. Just a few questions from my end. So firstly, I mean, you alluded to it a bit with larger customer contracts, but it would be interesting to hear how you kind of view the potential trade-off between volume growth and profitability.

Yes. I think that if you look at our business and if you read -- this will be a long answer. I will start with saying that, Anders, because I think it's a very important and good question. If you look at our business and say that we -- with the normal customer contract, if you win, say, SEK 100 million contract, we will normally expect to see 15% or higher fall-through on that contract. That is what we -- you utilize your fixed cost assets in a more wider way and then the fall-through is quite strong. If you look at larger accounts, maybe we expect the fall-through to be in the range between, say, 9% to 12%. And that will mean that even if it's a quite lower margin compared to some other customers, that we still add profitability in the same range, even if we are pricing it quite aggressive. So that's how we see it. But this is something that we look very carefully in Anders. And I think it's a very valid point. And we will have factories where we will focus on this, where we'll have a lower margin expectation, and we will have factories where we are not going into that chase for these customers where we will have another kind of margin expectation. But the overall picture is that we are expecting to remain at this level, 9.5% to 10.5% is what I would expect for the future. I personally expect us to be over 10%, but this is where we are heading, and this is what we are planning for. But growth is very important for us at the moment. You can say that the last, say, 1.5 years, there has been a lot of focus also on getting the inventories down. That has been also pushed out and that can have had some effect on our ability to grow because we think it's very important to have the inventory in shape. So it's a lot of, how should I say, deviating targets that has to be managed into one group of results. So that's how I see it.

That makes sense. If I may have a follow up on...

Yes.

Another question.

Is this for the volume...

Sorry, I thought my voice was sufficient. So looking at industrial, I mean, as you said, flattish basically year-over-year growth, up 1%. So we've started to see a bit of an early cyclical recovery, I mean, in -- partly for other contract manufacturers, but in the market in general. You mentioned that it was weakness among one customer in Sweden and weakness in the U.K., if I heard correctly, driving that. But looking at the portfolio in general, would you say -- how would you characterize the trend among your customers? Is it sluggish also apart from those customers?

I would say that there's quite a big -- how should I say, a delta -- I would say the larger, more well-known industrial companies are -- we see quite decent growth, 5% to 10%, maybe 15% on those. Where we are struggling is more customers with that are more new starter companies. I wouldn't call them start-ups because they are in the -- they are post the scale up, but not with a wide range of products compared to like ABB or Atlas Copco. I think those companies, just to mention too, there we see better growth. So I think the recovery for the larger companies is a bit earlier than for the smaller ones to very, very general. U.K., we have talked about and that the decrease we have seen for this year is particularly our largest customer that has clearly informed us that they have 3 quarters of overstock and they will not buy. And we started that one up again now in September, not at full speed, but still very important for us.

Okay. Makes sense. Just a final one from my end. Torsby. So you discussed sort of delays in the defense what should I say, ecosystem or value chain in the quarter. Does that in any way incrementally change your view of Torsby, perhaps the ramp-up and when you expect to reach sort of satisfactory capacity utilization in that factory?