Earnings Call: Q4 2019

Feb 5, 2020

This is Johannes Linde Wiederstam, CEO of Note. Starting with the Q4 report and the 2019 as a whole. This was a record year. And what we can say is that we probably made record on all lines. That means that sales ended up at the new high level at SEK1.76 billion, up with 28% 17%, excluding acquisition. We also have a currency effect that is just below 3%, And the currency effect was declining through the year since the Swedish currency gained some strength in the second half. So the Q4 numbers are a little bit less than 3% affected by currency. What we also see is that our operating profit ended up at SEK 124,000,000, also new record level. We were 48% higher than last year. If but if we exclude some nonrecurring costs, we were 37% up from last year. Our margin ended up at 7.1%, also a new record level. We had went up from 6.6%, counting in the same way. Yes, profit of the financial, SEK 116,000,000 and profit after tax went up with 44% to SEK3.20 per share. We also had a very, very strong cash flow in the 4th quarter, ending up at SEK75 1,000,000 positive. For those of you that were present on this call after Q3, we were at a negative number here, and the cash flow in Q4 ended up at SEK96 1,000,000 isolated. We also guided you that we would have a strong cash flow due to that inventory levels were in much better control already at that point, but there are some lagging effects with the payment terms from suppliers and so on. So this was a little expected, but the level was also a little surprising to us that it came in this strong. Q4, also similar numbers as for the year in whole. We also know that the acquisition of Speedboard took place at November 1, 2018. So we only had 1 month of acquired growth in this quarter, meaning that the difference between the total growth and organic growth is much smaller. So the organic growth without acquisition was 20%, and the total growth was 22%. And as I mentioned on the last slide, the currency effect is a little bit less than 3%, just over 2% if we calculated it correctly. Order backlog continues to be very strong, 25% higher than last year. This number has been going between 25% 30% for the year, and we believe this is a very good level for us going forward. Operating profit, up 27% from 28% to 35%, also very good level. The margin, also the strongest margin we have presented for a single quarter at 7.4%. And here, we often discuss this. We did it also after Q3. What is the end game of OP level? And I will get back to that question when we're at the end of this presentation. But we believe 7.4% is a strong number. We also see profit after tax went up with SEK 2,000,000 up to SEK 26,000,000. And we I also got some questions on this morning that how the profit after tax only went up from SEK 83 to SEK 90 0.9. And the reason is that there is always some tax effects depending on where you earn the money. So it's we will some quarters are a little bit better, some are a little bit lower. But in average, we are around 20% of profit after financial items in profit after tax. It can go up 1 or 2 percentage units between the different quarters. And as I mentioned, cash flow, very, very strong. We are now where we believe that we are quite well in shape. Our inventory turnover ended up at 4.5 at the end of the year. Last year, we were at 3.9 and we have been down to 3 point 6% at the worst month during 2019. 4.5% in our industry with our mix is a fairly relevant number. We can go up to 5%, but this you should not expect us to increase this number a lot more from this level. We believe that we are in balance when it comes to inventory level at this point. Split between the different regions. Western Europe, as you all remember from last time, this means that the sites in Sweden, Finland and U. K. And Rest of the World is Pernod and China or Estonia and China. What we see is that the sales in the Western Europe region has been very strong for the year, 34%. But we also have the acquired growth is part of this. So the level without the acquisition is around 17%, 18%. For the rest of the world, the number is 18% growth. But here, we have the biggest impact of the currency. So the currency factor is roughly 6%, and in the Western Europe, it's 1% to 2%. So the growth in the organic growth without currency is stronger in the Western Europe region compared to rest of the world. However, we had growth in all factories, and the growth was exceeding 5% organic in local currency in all our sites. And I think that is a really good strength for us to see that we're not only growing in a few sites. We're growing all over the line. And we also see that this has a good effect on our profitability. We see that our operating profit in the Western Europe region is up to 9.1%, also record level for those sites. We have struggled a little bit for the rest of the world, and a lot of that has to do with China and the restructuring of the Chinese site due a lot due to the tariffs where we have had customers that have left us for other low cost regions in the Asia region, but we have also moved back some production to Sweden internally. So still, we managed to grow the site in China with 4% in local currency. So that is very pleasing. But the restructuring has cost us some money, and therefore, we are showing seeing that the number is down to 4.1%. I expect that we will increase the operating profit in our Rest of the World sites for during 2020. We have done quite severe efficiency programs, and we expect those to pay off in 2020. Inventory, as I told, we ended up at the same level with inventory ending 2019 as 2018. But with the stronger growth, we see that the inventory turnover went up from 3.9 to 4.5. So that's very pleasing. And the headcount, we have been reducing the headcount a little bit in our low cost sites, and we have increased in the high cost sites. And the reason is, of course, that the growth has been much stronger in the Western Europe sites compared to the rest of the world. We ended the year at 10.70 employees or 10.92, but 20.70 is the average number for the year. Okay. Segments. We talked about this last time, and I and we are often questions why we have such a big part of our sales in the Industrial segment. And as I told you at that time, the Industrial segment is a huge segment, and we have a lot of different subsegments in the Industrial segment. So there is not only 1 or 2 different customer types. It's a blend of a lot of customers in this part. But what we see is that the trend that we were describing in Q3 that we grow much faster in Mentech and Defense is continuing. So for the year, we had a Mentech growth of 56% and the Defense segment grows 73%, while communication and industrial were growing roughly 20%. And therefore, the industrial segment has declined from 65% in 'eighteen to 62% in this year. However, we do not see that industrial customers are worse or not as good as the others. So we don't have a fixed number of where we want to be. But of course, the wider the spread becomes, the better it is for the group. But when it comes to margin and profitability, we don't see much differences between the segments here. The only one that stands out a little bit is the defense segment, where you have higher contribution margins but a lot more manual work on the products. So that's the only trend we see in this. Okay. Our highlights. It's I would have to say that it's very hard to say what the highlights are because we have done so many good things. But what we can say is that we still deliver on quality and delivery performance, and we believe that we are best in class in this part. We continue to deliver on first confirmed date above 96% in average for our customers. And I believe that no one in the industry comes close to those numbers. So we're very pleased with the development in this part. We also see that the quality deviations that we see are declining year over year, and we do a lot of activities to ensure that this trend continues. We get a lot of appreciation from our customers in due to our performance, and this is one of the areas where we invest the most to ensure that this continues. We also received best quality award from our largest customer in China. And along with that, we also received a much higher order intake from them that we will be producing for 2020. Of course, we talked about strong organic growth. But what we if we drill down a little bit here, we see that we have the split that we are seeking for. We have a good growth of what we call share of wallet. We grow with the existing customers. We are winning the next generation of products at a very, very high level. But we also complement that with a lot of new customers that we win. We have announced Play, the Shar Champs, Delaval and among others for the year. And those accounts are in the start up phases. We have started to produce for them, but we expect strong growth coming out of those accounts. And we also had a record of wins in 2019, as we measured. And our win level were more than 40% up for 2019 compared to 2018. And 2018 was already a record year for the group. So we are very successful on the market, both with winning new customers but also winning more business for the existing customers. So we this long term work that has been going on with the sales are paying off, and we see the result in our books now. But still, we can do even better in 2020. And the bigger we become, the more we need to win to facilitate a good growth number going forward. We also see that our order backlog remains at a very high level. We have 25% higher than last year, and this indicates that we will continue on a high level for the coming quarters. And I guess sometimes question that, okay, you reported 30% higher order backlog in Q3, but you only delivered 20% higher sales. And we know that this is some lagging effects. I believe that 25% stronger order book will mean that we will beat our 10 percent target for the coming quarters in growth. So we are we look very positively upon the outlook for the near quarters. We have one site in China, and this site stands for roughly 20% of our sales. We are following the development of the coronavirus very, very closely. We have the site closed this week. It was planned to open last Monday, but it will open on next Monday, 10th. And if this outlook remains as is, the effects of this will be very, very marginal. If we seek longer if we have to close the site longer, then we will see bigger effects. But what we know from the government in China and how we read the information flow that is that we will open the site as planned on Monday next week. Our operational highlights continuing. We yes, we saw the operating margin. We will come back to that on next slide. But I would like to highlight that we are running efficiency projects. We have done run them in our 2 low cost country sites. We have closed it in China because we are through it. We are going into the second part of the program in Estonia. And we expect that this will have a good impact of our margins for the year to come. We also communicate that we have a target of our return on operating capital on 20%. Last year, we were beating that number to 21. We still repeat that we have the target of 20% on this KPI. However, we are expecting that we will continue to beat the number for 2020. We are growing, so our CapEx level is increasing. It's increasing fairly well in balance with the sales. I can also say for those of you that are questioning how much can we grow with the existing Tushbu, and therefore, we have decided that the site will be extended. We are site in Tushpi. And therefore, we have decided that the site will be extended over the year. So we have a plan that it should be extended in sometime in Q3. We will take the bigger premises in we will take over it. And with that increase, we have space for 50% expansion in Tushbu. And I would say that the group can grow with the existing footprint when it comes to sites at least 50% from where we stand today with this increase. And we have possibilities to extend other sites as well if needed. So we are in a good place for continued growth when it comes to our internal infrastructure. As I mentioned, inventory levels are now in balance, very, very good. We ended up with a good liquidity on hands. Hands. So we are feeling that we're very well positioned for the 2020 to come. The year also strengthened our equity ratio. We are at 41%. We have a communicated target to never go below 30%. So we have very nice headroom on this KPI. We're also pleased to say that our Board have proposed to increase the dividend from SEK0.7 to SEK1.2. We are always happy to give out dividend and to our shareholders. And we feel that the strong cash that we have that we can give this dividend and we still have a good balance in our cash pool. I also repeat what I said in the Q3. We had a share buyback program in about a year ago, and we bought back 1,000,000 shares. We have proposed to or we will propose to the AGM for approval that we will terminate those shares and reduce the number of outstanding shares with roughly 3.5%. Yes. Now our last slide, and I would say that the journey continues, if you put it like that. We are continuing to grow at a very, very good level. We were after Q3, we had a year over year growth that were at 11%. With the strong Q4, we ended up at 12% for the last 5 years in average. And you can see that we had 70% growth in '18, dollars 28,000,000 in 'nineteen, where 'seventeen were organic. In 'eighteen, we had a slight effect of the Speedboard acquisition. It was maybe, what was it, 3%, 4%? 31,000,000, yes. 2%. 2%. 2.5%. So we are increasing the speed with the organic growth in 2019. When we look at margins, we see that some say, okay, it flattens out. Yes, it flattens out a bit, but it's much easier to grow from 1% to 4% than from 7% to 10%. So it will be the increase will be slower, but we believe that there's a good room for improvement here. If we can run the Western Europe sites at 9.1%, why shouldn't we be able to push up the low cost sites to at least 7% and then we would reach a level that are above 8%. So we are expecting that we will continue to increase or grow our operating profit. It's always a question how far you get because you come into this, how should I say, you need to make a decision. We can get more growth if we price a little lower, but we that would push the margins in the wrong direction. So we try to have balance there, and we try to work with our cost base to be able to win new businesses at the right price level and grow both top and bottom line. That is our intention. And I would say that the last couple of quarters, we are showing that this is possible and that we still have a lot more to do here. So I would summarize 2019 with that it's a very good year, but I expect much more to come. We are not ready with the build of the new note. We are just starting. With that, I open up the floor for questions. This is Thomas Zhang from NIIQ Invest. First of all, congratulations on yet another amazing quarter, And thank you for a very good presentation where you actually managed to answer all of my questions but one. So I would just ask if you could expand on this migration of supply lines from the East to the West and how node stands to profit from that? Okay. Yes. What we have seen is that with the increased tariffs from U. S, and we are producing quite a lot of products in China that ends up on the American market. What we saw was a big trend, at least especially for the first half year this year, that customer wanted to move out of China to reduce their exposure to the tariffs and especially to the coming tariffs. Now when the trade war has how should I say, it has declined in value a little bit and there is a market understanding that we are where we are, but we don't expect much worse to come, then this trend has declined in importance for the customers. But what we have seen is that we have 2 customers that we have transferred some production, maybe, I would say, SEK 30,000,000, SEK 40,000,000 from the Chinese factory into our Western Europe factories to avoid the tariffs for our customers. Those moves were done already in the first half year. And the second half, we have not seen this trend continuing. However, we have seen that customers that were heavily affected of the tariffs in the first half has came back with stronger orders in China. So we are expecting that China is the effect of China will be lower and lower going forward. But what we see is on the quotations that we receive is that we have a reduced number that wants to go to China. More and more of the customer wants to stay in the Western Europe and the Permian region. So we are changing our sales efforts a little bit to better reflect that we the products that we make in China will stay more and more in Asia, and we will supply Asian factories with the production in China. So the demand has changed a little bit, but this trend had already started in 'eighteen, but the tariffs were more underlining the trend. Does this answer your question, Thomas? Yes, it does. Thank you, and keep up the great work. Thank you. Any other questions? Yes. My name is Martin. The question was how we look upon Brexit. What do we expect from the market? Do we have capacity to grow the market becomes more closed? That's how I interpret the question. And the answer is, I don't know on the first one. That means what happens with the market. It's very, very difficult to say. It's the outlook is that the U. K. Economy is growing. It's not in recession. We had a quite weak 4th quarter in U. K. In the general economy. But we expect that the market will be fairly decent. And when we are forecasting that we will grow our factories, maybe not on a 20% level, but somewhere between 5% 10% is our expectation. That's what the order intake looking. We can increase the production in our existing sites in U. K. With roughly the same number as we have for the group, 40%, 50% is doable in the factories that we have. And those factories are harder to extend the floor space in because they're quite squeezed into the buildings that they are in. But we can also utilize more shifts if needed. So maybe I will restate that number, but say that we can grow at least 50% from where we stand in U. K. The customers are fairly optimistic. I would say that the Brexit became as soft as possible given the circumstances. We are not seeing any limitations in getting material in and out. We don't we have not seen any tariffs on any goods yet, and they give themselves 1 year to sort out all the issues. So I would say that any changes in how the business is conducted, we will see that the later part of 2020 is what I expect. So I would say that a lot of discussions and it was a little bit okay, what now. And all the questions are remaining as unsolved as I see it. But we the market is fairly optimistic, and we are fairly optimistic when we look at the U. K. Market. Any other questions? If not, we are thanking all of our shareholders for their patience with us, and we hope that you have had an enjoyable 2019. And we hope that we can continue to deliver a good result for 2020 and onwards.