NOTE AB (publ) (NOTE) Earnings Call Transcript

Good morning, everyone, and welcome to NOTE's Q4 presentation. How do we see upon this quarter? It's -- when we entered the quarter, we had a bit higher expectations. We saw some pushouts of customers that affected the sales and on and the consequence also on the bottom line. So the quarter ended very much in line with what we guided for in mid of December, which means that we ended up at yes, SEK 1.080 billion sales and 8.5% in underlying operating profit. This is not according to our expectations, we are expecting higher growth. We are expecting to be better in compensating on the cost side. So we are quite disappointed on the quarter. It's fair to start in that area. We -- if you look at the profit, it's -- yes, it's lower than any other quarter for the last, say, 6, 7 quarters. And so we will come back to that. But to everyone that doesn't follow us so frequently, we are -- our profit is -- we can say that we are expecting to compensate better when it comes to cost side when the sales go up and down. This quarter was a bit specific. We have factories that were done with maybe 40% from the speed we had in Q3 into Q4 and to get those -- the cost sides of those sites in shape, so we don't lose margin, is quite tricky. So we had some lagging effects in terms of adjusting the cost side to the run rate. Now when we enter this year, we are better aligned with the sales and the cost side. So we will -- everything else equal, we will do better profits on the same sales going forward. With that said, we have some factories that are doing extremely well as well. So there is a big deviation between sites and between the different customers and segments. As was said before, it's still -- destocking continues. You can say that the destocking takes a little longer time than expected due to the lower or the weaker economy. That is fair to say. We can see that what we expected when we entered Q3 has taken more time than we expected in adjustments from the customer side. And as we have said, we are fairly flexible in pushing sales between quarters and so on to support the customers' business models that there we are a bit different than many of our peers that are much stricter and if an order is placed on a certain date that will be shipped on that date. So therefore, Q4 we pushed out maybe SEK 20 million, SEK 30 million out of the quarter in -- as we guided for, that had a profit -- negative profit effect, but that will be sold in the first quarter instead of the fourth quarter. So that's how it looks. Looking at next year or 2024, it's -- we are expecting that the year will start a bit softer as we guided for and that it will pick up a little bit during the year. We're not expecting that the market will be fantastic in the second half. We are expecting the market to be fairly much as it is now, but we are -- our view is that the destocking effect will have a positive sales trend for us. When we -- when our sales are better meeting our customer sales, that will be -- then our sales will go up. So what we see is that the customer sales to their customers is significantly stronger than our sales to our customers. And that's very important to know that this -- our sales today does not reflect our customers' speed through the water as I see it. So it's -- yes, as I always say, the -- when it turns down, it goes a little bit faster than we think. And when the business picks up, it's going to go faster than we see. That is -- the swings are quicker and a bit deeper than we have seen in the past. And I think that is something that we can build down a lot into. If you look at the numbers, 4% growth -- majority of that is acquired growth when minus 1% on organic, operating profit reported 10.9% versus 12.3% last year. Last year, we had a one-off of SEK 15 million. This year, we had one-offs of somewhere around SEK 26 million. The underlying is 8.5% instead of 10.9%. So it's a bit weaker than we expected. It came in, in the -- where we expected when we did the guidance. We can see that cash flow came in stronger than we expected. As I said, we are in a trend where the inventories are going down. It's a bit hard to say which quarter the reduction will come, but the inventory is SEK 100 million lower than it was when we ended Q3. And our expectation is that the cash flow or the inventories will continue down, that will continue to have a very positive cash flow effect. As I said before, it's very tricky to say if this is going to end up in Q1 or Q2. But if this summarize the year, we are expecting a good cash flow and a good reduction of our inventories. Then we think that at the end of this year, we see the sales are expected to be stronger, and that will naturally have an -- we'll start to build some inventory to facilitate that growth. But overall, the inventory will go down, and that will support a good cash flow for the year. For the full year, 15% growth from 6% organic, I think 5% acquired and 4% currency, still growth. I think if you look at the EMS market, expectations of that is that it's going to grow organically around 7% trending over time. But there will be big swings around that number. If you look at '21 and '22, we had organic growth exceeding 20%. And now we had 6% for this year. Last year, we -- about 5% of our growth were in -- '22 were spot buys that we invest to customers. So if you take that away from '22 and you add it on to '23, the difference is not that big. So if we count that way, we are at 11% of organic growth from a volume point of view, a bit complex, but that's how it looks. Our industry is very often not that straightforward as it can sound. So what do we think about the future? I think this trend line is going to continue. I will come back to our guidance later on. But I think it's fair to say that all years, we are going to trend higher than the underlying trend line, which is 7% organic growth. The industry is expecting that 2024 will be slower growth, aggregated for the EMS market due to higher growth in '22 and '23. So the message that I got was that it's -- the industry has delivered somewhat '24 growth already in '23. So that will have negative effect on the industry's growth for the year. We have been quicker to adjust to this, which is why we see that our growth in the third and fourth quarter is slightly lower than the industry. So we are expecting that we have moved over some of the sales into '24, where our peers has pushed it out in this year to keep their numbers that they have promised. We have seen some indications that some peers are guiding for a very slow first half with negative growth numbers. So it depends on how you think, but we believe that '23 came in sales slightly lower than expected. We were slightly less profitable than expected. Cash flow came in fairly much as we expected when we started the year. But very back heavy, so the Q4 was a big cash flow quarter for the year. But all in all, given all the -- how should I say, the problems and the challenges that we were facing when we entered this year, we believe that we came in fairly okay, slightly lower margin. We were expecting to hit the 10% this year in the underlying profit so we are behind there. We will do our utmost to come back to where we should be. Moving over to the segments. Still very good growth in Western Europe. Rest of the World slowed down in the second half, especially our Estonia factory had slower growth in the fourth quarter. We should know that in the fourth quarter in '24, we had fantastic growth in that factory. So it's a bit of how you compare. So overall, they did a very good year. '23 was the best year we have had in Estonia. And also around the best year we have had in China. Sales were flat, but the profit -- the underlying profit was a bit higher. So Rest of the World is doing very well as I see it. And my expectation is that the Rest of the World will have slightly lower operating profit than Western Europe. The margins are thinner in those regions. We also see inventories went down in both regions, if we would exclude the inventories that we acquired in Western Europe. So all in all, fairly good. If we look at the segments, and I get a lot of questions because this is very -- a lot of moving here. We have industrial, very well-supported defense industry as part of Industrial. That part is growing very good, 15% for the full year. I would say that in terms of growth for '24, I would expect that most of the growth in actual numbers will come from this segment. Communication is in a good trend. We are seeing that in the outlook, for example, cell phone infrastructure is quite weak. So we have some customers in this area. They are a bit pessimistic about the outlook for the '24, especially for the first half. So communication -- we have some customers going very well, but we have some customers that go quite weak. So this is a segment that I'm quite neutral into this year. Medtech has had a fantastic year this year, startup of a few new accounts that have been growing heavily. Looking into next year, I think Q4, we were actually a bit negative on growth in Medtech. So this is fairly , how should I say, we are looking at the year with maybe plus/minus 0 in this segment. Greentech, I'm always optimistic about this because I believe in that this electrification and yes, the reduction of carbon dioxide has to come. And the only way it can come is through products. It doesn't matter how much our politicians are talking about it. We have to change over to products that are supporting lower carbon dioxide footprint. So this has to come. So I'm still very -- it frustrates me that we're still showing negative numbers in this segment. We are well positioned. We have a good and diversified customer base here. So it's -- yes, so we should -- our customers should do a better job, you can call it, but I'm not going to say that they are doing a bad job, but it feel -- it frustrates me still. We have had very high expectations on this segment, and it has not came in as expected. Fourth quarter were actually slight growth but I still expect that the first half of next year will continue to be low. We see more and more pushouts in this segment as well. So it's quite weak. So all in all, I would say that when I look at this, the majority of the growth will come from industrial. It's our biggest segment, it will grow in relative size in 2024, as I see it. Also, when we talk about customers, we have our 15 largest customer stands for 48% of our sales. And our largest customer in '23 were around 5%, down from 6%. So dependency of one single customer is lower this year compared to the previous years, which I think is very good. Again, when I look at customers, I talked about it in the Q3 presentation, the swings from -- or for the customers during the year. It continued in the fourth quarter, but it were more aligned with the third quarter. We did not see an increase of those swings, but it came in fairly aligned with that. So going into '24, I would expect that these big swings will not continue into the year. Customers with low demand in the second half of this year will continue to start on a low level and start to increase over the year. And the ones that are ending '23 with good demand and good speed will continue with that. So I think the swings in the quarter will be much less in Q3 compared -- or in Q1 compared to Q4 in '23 and that's very comforting because that means that we have adjusted the factories to what we are seeing in the coming quarters. So that's how we see it. Yes. Some highlights. Yes, strong balance sheet. I think that is something that I'm very pleased of. I think our target is down equity above 30%. I think above 40% is better, especially in these kind of situations. Cash is becoming a cost with higher interest rates. It costs money to have a weak balance sheet. So we are -- we're not suggesting that we should be weak on this one. Also continued strong or very high pace of investments even though the second half was slightly slower, we continue to invest in our production equipment, and that is a good security for everyone that is working with us that we will continue to be better and more efficient also in a slower economy than -- so we will continue to be better in our capacity utilization and so on. If we look historically, I've said it before, but we have grown from 2018 to today with 230% overall, and we have increased the head count with less than 60% in the meantime. So I think that is why NOTE has managed to take these big steps in profitability. And we will continue with that. So what we see today with the slower pace of Q3 and Q4, we see that as a -- how should I say, shorter period of -- I wouldn't say failure but less good results. So we are -- when we look at this year, a few years on line, we will see a big -- small what do you call it, a big, small hack in the curve or -- so that's how I see it. But also, we talked a lot about components market. Today, you can say that it's normalized, meaning lead times are back to about where they were before 2021. Availability of components has start -- has came back to almost normal. There's still some work to do here where some suppliers are trying to maintain longer lead times and higher pricing. I believe that, that will continue to normalize over this year. Pricing is something that is still too high, in my opinion, on components. So this will continue to come down. Lead times will continue to come down. Also during this year, when it's shortages, many suppliers are requiring that we were buying on noncancelable, nonreturnable conditions, meaning that if we order something today for delivery a year away, that product will arrive in our inventory even if we don't need it. And that every time there's shortages, suppliers want to lock up the customers because they know that after shortages, it will be a downturn. So they will just ensure their sales for like 3, 4, 5 quarters going forward. I think that is something that we need to work on to change the behavior in the industry because that creates these big swings. It doesn't bridge it. It creates more swings. It has been for that way for many, many years, but it's not a good situation. The industry as such is losing on it. The consumer is paying a higher price due to the suppliers in ability to balance the swings in demand as I see it. But that's how it is. What is positive is that our quality performance is still very high, highest in the industry. Our delivery performance has came back very strong in the second half. We were delivering good during the component crisis, but we see that the numbers are starting to come back to where they were before the component crisis. So I think that is also very important to know. And as I said before, if we are delivering on quality and delivering performance that offsets a lot of discussions around cost increases and so on. If we can ensure that the customers get the products on time with good quality, that is the main concern for many of our customers. So it's very important. Then price, of course, is always important. Okay. Where are we heading. For the full year, we still see that the guidance we did in December are valid, SEK 4.5 billion to SEK 4.8 billion with a margin of 10%. This means basically that we are expecting to be 10% growth plus/minus a few percentages. We also see that Q1 will be fairly much in line with Q4 when it comes to sales. There's some seasonality effect. We know that China is closing 2 weeks for Chinese New Year that will -- that effect is since we're doing maybe SEK 40 million a month in China that is going to cost about SEK 20 million in sales. So that's the effect it has for the group. But it's -- all Q1 has the same effect, so it doesn't really move forward. But if we compare Q3 or Q4 to Q1, that effect has to be considered. And also long term, I think it's important to know when we're going away from a quarter or from the last half year with slightly weaker numbers, if we look at this from a bigger picture, is it -- where are we heading? I think that is important. And why do we believe that we will achieve good growth over the next 4 years? As I said before, we're looking at what we have achieved. We're looking on how the underlying trends in the industry, and we're looking at how the bigger groups are gaining market share from the smaller companies in our industry. If you consider that, I would expect that the listed EMS companies will continue to have double-digit growth over time. It will be swings between quarters and years, but the underlying growth will be very strong for those industries. The reshoring trend is not beneficial for the small one factory producers because they are too small to take on this. So these trends will benefit the larger companies like us and our peers. So I believe that this is supporting an underlying good growth going forward. We also see that the regionalization in the world is supporting our footprint. So both of those trends are beneficial for us. There's no, unfortunately, no trend saying that the globalization will come back. It's -- we still see more and more -- or trade barriers are put between different regions. It's sad to say, but that's the way we are heading. So it's sad for the world economy, but it's good for our current footprint. Our factory in China is playing a very important role for us for the products we make there. But our majority of the sales is coming from Western Europe. And that's where we see that growth is stronger. So we are quite pleased with how our footprint has developed over time. We have a lot more to gain from our 2 last acquisitions and so on. So we believe that all in all, the growth will come from production in Europe or from the sales in Europe and we are very well positioned there. So for me, I think it's -- we have everything in our own hands to achieve our long-term targets, and we will continue to deliver on that. Looking at -- if we are looking at the last 4 years, growth has been higher than what we are expecting for the coming 4 years, just to put that in perspective. And as always, I can talk forever, so I will open up the floor for questions. So I think we start with the questions in the room, if there are any. If not, I'll start with the questions online, and then we move over to...

First one from [ Marcus Romstom ]. This is in Swedish, okay. In our profit guidance from December 11, we were talking about delays from projects in the defense industry affecting the sales in Q4. We do not mention that in the report. We're talking more about challenges in the economy -- are now the economy affecting more than the delays in those projects. Of course, the delays that we saw will be delivered in Q1. So that is part of our guidance. So we are seeing that the start of this year will be fairly weak, if we take that in consideration. But that's included in that. So we are expecting that we will pick up in those customer projects that were delayed. Next one is from [ Karl Norian ]. When you state the good cash flow for the full year '24, can you maybe explain what the good cash flow is 50% to 70% of EBIT? I would say that our expectations is higher than that. Good cash flow is probably, if you look at profit after tax, 80-plus percent of profit after tax is, in my opinion, a good cash flow especially now when we see that the growth is not expected to be that strong, we are expecting cash conversion to be stronger. I said before that growth is consuming cash. And now we are not growing that fast. So it's natural to expect that the cash flow will be higher. Then we have from Thomas. Good day and congratulations for a well-delivered '23 results. What are the consequences for NOTE if customers want to back out of contracts already signed? And if I may add a second question, do you see any risk of being highly exposed to the industrial sector? Yes, if customers want to back out from contracts already signed, often that is regulated in the contracts, that could be that if all the material risk is contractual belonging to the customers, so they have to pay for the material. And if they don't want to have orders that they have placed, we are often entitled to compensation for costs that will be associated with discontinuation of those contracts. That's normally how this works. So that's what I would expect. And also, I'm not expecting many customers to back out our contracts. It could be delays in production. And then we have to treat the over -- inventory over time, which is often or regulated in contracts. And if I may add a question, do you see any risk of being highly exposed to the industrial sector? Again, I think our industrial sector is so wide. So it's so many subsectors in that. So I think that's -- yes, we will have subsegments in industrial that will be quite weak also in '24, but we will have others that will be really strong. So overall, this will be very, very, very strong. So no, I'm not nervous about the high industrial segment share of our sales. Then we have from [ Nicolas ]. Do you think that the problems [indiscernible] in the Red Sea and the Suez Canal can have a positive effect on NOTE? Yes, I think very little positive will come out of that thing. And I think it's much bigger than just -- that they're just attacking ships. This is a global geopolitic reason behind this. So this is not very good for anyone. But if I look at NOTE specific, we will, of course, disruptions in supply chains will put more pressure on customers to shorten their supply chains. So in that way, it could be beneficial. Electronic components are more frequently air freight. So anything related to electronic manufacturing will not be affected of this in any big ways. We also ship some products and some sheet metal and plastic from China, those products can be affected. So far, we have not seen any delays due to this. But it's too early to see when this happens. But I would say that the freight industry is fairly good at just rerouting. So they will go around Africa. Costs will increase with maybe 50% for freight, but the goods will arrive 2 weeks later. And the industry will quite quickly adopt to it. So that's what I would expect a freight cost for us for this is, I would say, marginal. So yes, we can be affected, but the effect will be very, very slow. If it's positive, could be, this will also support regionalization. And I believe that, that is good for NOTE. So in that way, yes, it could be positive. Okay. One more from [ Karl Norian ], what signs do you see increased demand as Q1 is expected to be at similar levels? Do you have signs of an improvement already in Q2? Or is it more in H2? Yes. If I look at our orders that we have, the seasonality trends that we normally see between Q1 and Q2, it's -- we are assuming that we will see higher sales in Q2 versus Q1. We also expect hat the destocking that is taking place among the customers will, over time, it will be have lower and lower impact of our top line, and that will give us a higher sales even if the economy remains at the same level. So yes, we are expecting that Q2 will see better sales than Q1 and that we continue that trend in Q3 and Q4. Next question from [ Lars Janssen ]. In our report, you're mentioning that potential dividend may be -- is it a one-off? Or is it a new trend that we will give annual dividend? I say that this is a question that we will come back to when we are sending out invitation for the Annual General Meeting. We have, over the last years, we have seen that we have used the cash flow generated for acquisitions and we have had good output of those. So we will see where we are heading with this. But with the strong cash flow that we saw in this -- in '23, there are potential for dividends. But we will come back to that question. It's more on the Board to answer this rather than me, but that's the logic that we see. That was the last question I had from the web.

Could you give an indication of reaching SEK 7.5 billion -- sorry about that. My name is [ Johannes Stahl ]. I wonder if you could give an indication of the split between organic and acquired growth in order to reach those SEK 7.5 billion by '27?

We are stating that the majority of the growth will come from organic growth. So if we do a larger acquisition, we will adjust this upwards as I see it. So if you look at the last, say, 5 years, the acquired businesses that we have done added in 2023, about SEK 900 million of the -- what can it be -- almost SEK 3 billion in sales. So more than 2/3 of the growth in the last 5 years is coming from organic sales. So we are expecting the relation to be even higher from organic versus acquired, going forward, in that statement.