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

This morning, NOTE has published a report for the second quarter in the financial year of 2026. And standing beside me to give us a presentation and also participate in a Q&A, I have the company's CEO, Johannes Lind-Widestam; as well as CFO, Frida Frykstrand. Welcome.

Thank you.

Thank you.

You will give a short presentation. And afterwards, I will return to ask some questions along with our viewers and analysts. Go ahead.

Thank you. Okay. Normally, I try to summarize the quarter, how it went. And we can say that the market still continue to show strength. We see order intake is strong. We see some very positive customer wins that we have presented. We also see that the component market is getting a little bit more constrained. That means that we have seen lead time expansions, which has affected our top line a little bit. Since our top line went down a little bit, we also see that our cash flow is a bit weaker, but Frida will come back to all the numbers. But all in all, I would say that we continue to build for the future. We extended our factory in Torsby and in Kasdon, and we will see factory moves in Lund and Hyvinkää. I will come back to those later. So all in all, I think the quarter is fairly good. I would have liked some more top line, but that will come in the second half instead. So with that said, I move over to you, Frida.

Thank you, Johannes. So this is the numbers for Q2, and we report our highest sales ever in the quarter with sales of [SEK 1.175 billion]. This is an increase of [28%], whereof 1% is organically. So we see strong sales coming in from our latest acquisitions, Kasdon and STI, which are performing in line with our expectations. We achieved an underlying operating profit of SEK 112 million, an increase with 19%, and we have an underlying operating margin of 9.6%, also in line with our expectations. We see that we have a high flexibility, and we are able to adapt to our customers' needs and combine growth with sustainable and profitable growth. As Johannes mentioned, operational cash flow came in lower than we expected at the beginning of the quarter. We see that we have a working capital tie-up in inventory. This is due to constraints on the material market. which Johannes will come back to. But this meant that our cash flow -- operational cash flow came in at negative SEK 34 million. So we have a strong focus on improving this going forward. We also know that we have created strong operating cash flows previously, and we see a potential for that also over time.

Okay. Some market and operational highlights in the second quarter. I think what is important is that we are growing on the fastest-growing market, and that is Security and Defense. Our organic growth in this segment came in just over 20%, and our expectation is actually significantly higher than that going forward. What we are very pleased to see is that the work coming out of STI and also from Kasdon is really progressing in the way we expect. We have very fruitful customer dialogues, and I hope we'll come back to the market with some good wins over the second half of the year. And we see that the dialogues and the expansions of the business coming out of these two companies will be fruitful for the group over time. But what we also see is we see the sales level of 20%. That's the highest growth sales we have ever had. 20% growth is always appealing. We lacked a few percent organically, and that comes from the tighter market on the component side. What we mean with that is that the AI storage are consuming a lot of parts, and they are -- in some way, they are disrupting the balance between supply and demand in the industry. And the [to] what you call it, component types that are most on challenge is PCBs, that means the [bare boards] and also the more complex semiconductors, especially on the memory side. What happens when these two segments are disrupted is that the lead time on those two segments are going up and that affects the full supply chain. We cannot produce boards if we don't have the bare boards. So that has pushed out some of the deliveries out from this quarter. And what that will -- how much that will affect us over the year is a bit hard to say. What we are presenting in our order backlog and so on, there, we have moved out the orders that we today don't see that we will deliver. So those are -- we have ordered quite a few pushouts from 2026 into 2027, and that is also reflected in how we present our order book. So the order book should be representing orders that we expect that we can deliver this year. Then again, we know that when you have a shortage on the market, there will be swings on that. So there can be -- it can become worse and it can become better and so on. So there will be changes throughout the year, of course. But what we also see is that we -- when we look at this, we are not sitting still as you put it. We work tight with our customers. We work tight with our suppliers. We have good partnership on both the supplier side and the customer side. And we are looking into how do we do this in the best way combined. So it's not that we do things and not involve the customers. So the customers are always involved in this. And the more mature the customers are, the better the result will be. So the bigger industrial and the bigger Security and Defense customers will most likely come out of this stronger than some of the more immature companies where we fight a lot around how the lead time expansions are affecting. With all that said, I will come back with the summary. I will move into the customer segments. And as I said in the first quarter presentation, we were expecting Industrial segment to come in strong. We saw the order book was strong in that segment. It remains strong. We see a growth of 11% quarter-over-quarter. That's very, very pleasing. If I look ahead, I would say that the Industrial segment will continue to be strong. If it continue to get momentum, it's a little hard to say, but we will continue to show good growth numbers if we manage to deliver on our orders. Security and Defense I think we said when we stood here when we presented the STI acquisition that we would expect it to be between 27% and 29% in terms of our sales, and we ended up at 28% of our sales in this quarter. So that was fairly accurate. We also expect this to continue to grow. We think the Security and Defense area is where we will have the strongest organic growth. We also see that both Kasdon and STI are growing as companies, even if they grow in their world year-over-year, it will still be counted as acquired growth until they are -- have been in our books for a year. So we expect both Kasdon and STI to grow on the market organically in their world, but we will report as acquired. So very positive communication. It's an area where I've said that we will turn into growth. Order book very, very strong. But these customers have very complex products, very semiconductor heavy, as I call it. And that means that we struggle to get components. We have good plans together with the customers in this area. And we are expecting that communication will turn into black numbers. That means that we will see growth from Q3 and onwards. Medtech still affected by high deliveries in the first half year to our largest customer in this area that have been low for the last 4 quarters. We will quarter-over-quarter start to match last year because Medtech started to decline already in Q3 last year. GreenTech, I've said that it's a bit of what you call it sluggish. It goes a little bit up and down. We don't see a clear trend we see that we -- there might be upswings coming from the higher oil price and the oil supply difficulties. We have not seen that in our order books yet, but that is likely to come that we see an increase of Greentech over time. But so far, we have not seen it. But it has recovered a bit. It's now 13% of our sales, and it was lower than that. And now also with the two acquisitions, that would have represented some 17%, 18% in the old NOTE, if you put it like that. So it's on a higher level today than it has been over the last, say, 1.5 years. So fairly happy even though we see a slight decrease here. We think the run rate is decent. So all in all, if I summarize this slide, Industrial and Security and Defense will drive the growth ahead. Communication will add to that. Medtech, yes, still quite weak outlook. We will not see the same decline as we have seen here, but it's not going to be a big increase, so to say, quarter-over-quarter or the run rate we see. Greentech, I expect to see similar sales numbers as we have seen in this quarter for the two quarters to come. Yes, very quick summary of the segments. Back to you, Frida.

Yes. So if we look at the markets where we are present, we divide them into Western Europe and Rest of World. So if we look at Western Europe, we see a sales increase of 32%. And here, we have added our latest acquisition, Kasdon and STI, which are included in the U.K. So adjusted for acquisitions, we saw growth of 5% in this segment. Sweden, our largest home market, had sales increase of 8%. And adjusted for acquisitions, we saw a decline in U.K. with 13%. But as I said, STI and Kasdon came in, in line with our expectations. So -- but they have a different setup than the other sites in U.K. where they are more heavily into security defense. So they have a different outlook.

Can I interrupt you, Frida. Yes, I have a comment on U.K. because we -- I didn't think of it when we were prepared. But one of our largest customers in U.K. had a standstill for the quarter due to component crisis, not the one we talked about last year, but one of the newer customers. So U.K. actually had a stronger demand than what we managed to supply. So -- if I would add that in, we would be more or less on a flat number in U.K., and that will come in, in the third quarter, sorry.

And then we have a smaller site in Finland, which had a growth of 3% in the quarter. If we turn to Rest of World, we saw a negative sales impact of 12% for the region, where in Estonia, we had a growth of 2%, whilst in China, we had a negative growth of 32%. And then we have a smaller site in Bulgaria, which declined some. And if we look at the operating profit, we see strong operating profit in both segments. Western Europe with a strong growth is increasing. And here, we also expect to have a higher margin than in Rest of World. We're still pleased with the margin we do in Rest of World, 8% for this region is still a good number and also taking into account that they are struggling with the top line, and that is, of course, affecting the profitability in the segment. But overall, we are satisfied with the operating profit from these segments.

Back to me to the last slide. I think just to comment on that, we see good profitability both in Western Europe and the Rest of World. We are investing in increasing sales and market activities. We are investing in new IT systems and those costs are taken on the head office. So we are a bit -- what you call it, we are a bit heavy on cost increase on the central functions, and that is what restricts our profitability a little bit. Those investments, we expect to pay off over time. So it's something that we have to do. Okay. If I summarize the quarter, I think what is good is that we see that -- yes, the market activities are strong. We have good dialogues. We hope we will close more business during the second half that are sizable. That means that they are sizable enough to be communicated. We win a lot of smaller business over time and extensions and so on. And -- but we don't present them because we think that the value of them are in relation to the group, not that significant. So we only report ones that we feel is significant. So that's how we do it. So -- and the order book reflects that. If we would have presented the full order book, it was significantly higher than 11% up. But then again, now we see that the length of the order book is extending. So it's become a bit hard to compare last year compared to this year with the longer lead times. But very good activity on the market. We also see that the technology-intensive segments are growing. That means that the AI storage, very important to have this first breakthrough order from this one customer. So that's very important for us. We also see that we are [gaining good traction] on the communication field from very complex products in that segment as well, and we expect to close some orders on that side as well. We are benefiting on the strong partnership that we have with Waystream. Their order intake is strong. We expect that we will continue to deliver on that as well. So very, very good market activity as I see it. And we also see that, yes, the market may not be that strong. And I said it before, you need to have the right customer in every segment because the segment as such may not grow, but there will be strong growing customer within every segment. So it's -- you have to be strong in those. So order backlog, 11% up compared to last year in like-for-like terms, that means currency adjusted, and we don't include the new acquired sites, very important to keep in mind, STI and Kasdon is excluded from this. So that will be on top. And again, we expect that the second half of the year will continue to progressively increase organic growth, and that's what we see. We also expect that we will end up with an underlying operating margin within our previous guidance, 9.5% to 10.5%. We are 9.4% now. So it's very little improvement that is needed. So all in all, I think that the outlook from where we stand is promising, and we are expecting to build upon that. Okay. Over to questions.

Yes. Thank you very much, Johannes, and thank you very much, Frida. There's a lot of questions that have come into the chat as well. So while we wait for our analysts to get ready with their microphones and their cameras and also make themselves known by raising their hand, I'll move on to those questions. And you mentioned during the presentation that Kasdon and STI has performed according to expectations, but that might be a little vague. And there's two questions here. First of all, how has Kasdon performed during the first half of this year so far?

Yes, they have -- they are coming in fairly much in line. We -- one of what we call it, the nonrecurring costs in the quarter is that we adjusted up the earn-out for Kasdon. And to be clear, we have earn-out of Kasdon, not STI. So any adjustments there is related to Kasdon. So we can say that Kasdon is performing better than expected. We were expecting to have a shortfall or a gap in order to our largest customer, but that order came in and we managed to secure supply of components. So we didn't get that. So they're actually coming in slightly better than expected. They will do their best year ever if they managed to deliver the forecast in the third quarter, which is very pleasing. STI, we are -- it's important to remember that STI are very back-end heavy on the year. So the fourth quarter will be their strongest sales, and that comes a little bit with budget years from the customers. It's a little bit if you want to be a bit blunt to say it's a little bit like governmental spending. I mean, their customers are often governments in the end. So therefore, the fourth quarter is normally stronger in STI than the other three. So we expect quite high growth and high profits coming out of STI in the second half of the year.

How high?

We don't comment on that, but higher than we have seen so far.

All right. We now have analysts who want to ask their questions, and we'll begin by moving our attention to Thomas Blikstad from Pareto Securities.

Can you hear me now?

Yes.

Just on -- if you could give some color on the current component and supply chain situation. And so to say, how confident are you in delivering on the scheduled 2026 backlog and your visibility generally going forward?

Very good question. If you -- what we see is that the lead time extensions that we have seen are, I wouldn't say stabilized, but they have not been extended over the last, say, month or so. And what we do is that we sit together with our customers and we agree upon their delivery plan that is reflecting the availability of components. So what we are presenting in our order backlog is confirmed by our current delivery times or delivery schedules from our suppliers, and it's also confirmed by what our customers are expecting. So in that respect, it's well balanced. Then again, we don't know if this becomes worse or if it's stabilized at the same level or how it is. Normally, we see the biggest disruptions when it starts because first, you can survive 1 or 2 months with your safety stocks and then you have a gap until you get the next deliveries in. And we have seen the gap, and I think June was a quite strong month and our expectations going forward is quite strong. But what is the problem you see is that if someone wants to increase their volumes, that's going to be tricky because we will just be in balance with current demand. So it's a good question, but I would say that what will restrict us more is the PCB or the bare board shortages that will restrict us more, I would say, than the memories, even though the memories will be affecting some of the boards. But yes, very interesting to monitor this going forward.

Would you have another question, Thomas?

Yes, I could just follow up, and thank you for the detailed answer. Just sort of when you look at the component situation now, and to me, it seems that there is a lot of pent-up demand when you look at the 3 consecutive quarters now of double-digit organic backlog growth. And so you say there's some risk of these deliveries not being delivered into the second half of 2026, perhaps being pushed out to 2027? Or did I misunderstand?

What we feel is that we try to give you a balanced picture. We don't have like big orders in the fourth quarter where we don't have supply for. So what we confirm is where we expect us to come in. Then we are chasing material to try to start programs earlier than we have confirmed them. And we also know that there will be pushouts from suppliers going forward. So I think the demand in, say, the fourth quarter is still quite -- how should I say, I'm not 100% convinced over how that will look. I think we will have pushouts, and I will think we will manage to pull in some orders. So what we are expecting is to see a balance in that, and that's what we try to reflect in the order book. And so we are expecting the second half to move back into decent organic growth numbers. If there will be 11% or if they will be slightly less or slightly higher, it's very hard to say at the moment. The order backlog and the order intake that we have is supporting even stronger numbers, but we don't get material for that.

Thank you very much, Thomas. We have another analyst that want to ask their questions. But before we do that, I want to -- there's also some questions in the chat regarding the components. And first of all, are you expecting better visibility from customers given the longer lead times on components?

Definitely. And all the larger customers are very aware of this. So they are -- so we have weekly updates with all of them and say, okay, where -- what do we see now and say that the lead time is extending with, say, 10 weeks from 1 week to the next, then we will cover that with longer order horizons from the customer side. They know that if they don't harmonize with us in this, they will have very hard to get the deliveries out. So there's no conflict in this. Everyone is trying to solve the problems and the visibility gets longer, the order horizons are extended in line with the new lead times from suppliers. But it takes time to dial this in. So it's more of a balancing act to get this in line. But I think we are quite well in that part at the moment.

And speaking of the line, there is another viewer who asked the following. Are the components for 2026 secured? And how far in advance do you typically secure component supply? Are they secure components arriving as expected?

Obviously, not in Q2 since we were a bit shy of top line due to this. But I would say that it's -- some suppliers are better than others. There is always a risk that there will be some other Microsoft or Google that come in and buy a full suppliers, full demand or full capacity, and then that will add on to the problems we see. But we haven't seen that in the last couple of months, but we will see what we feel today is that we have our commitments or our order confirmations that we see, they are based on our confirmations that we have on the supplier side with some margin. So we think they are in a good balance, and that's how we see it. Then again, the future will tell.

And there is also a question -- the final question before we move on to Anton Ingves. How big of a risk are the shortages to your expectation regarding organic growth?

I think today, our organic growth, if we are falling short of what we say, it's going to be all dependent on that we don't get supply because the orders are there and the demand is there. If we go into next year with low organic growth is still going to be -- the market is there and is supporting what we are trying to communicate. It's more of how much availability do we get. So we're back into this situation where we were some years ago where demand is higher than our ability to get components. But it's the same situation applies to basically everyone in our industry at the moment because what will happen now is that customers will start to over order, and that will drive demand. So it's a bit of that effect I also expect to see in the coming 1 to 2 years.

All right. We turn then to the analyst at Nordea, Anton Ingves.