Earnings Call: Q1 2021

Apr 19, 2021

Quarterly report

Good morning, everyone, and welcome to this Q1 presentation for Note. I hope that everyone have had the time to read our report. And as always, please put your phones on mute or your computers on mute. And We take any questions after the presentation. And for those of you that are on the Teams call on the computer, you can use the raise your hand function or you can just unmute and ask your question. But we'll take them after this presentation. First of all, I have to say that we are Quite excited about our presentation or our report. It's a quarter that has many different phases. We ended last year with Some inventory reductions at our customers. We also saw that we were had some Yeah, it was a bit hard to say where this quarter was going to take us, but we have the indications that many customers were seeing increases. We started the year in January with the yes, the marginal growth and then the growth has came stronger during the quarter and We can say that March was by far our strongest month ever, both in terms of sales and in terms of profit. And that is something that we try to capture in our guiding where we expect that our growth will continue at a higher pace than we have seen the last year and also in the last past years. So we're quite optimistic. Then of course, there are what everyone is seeing on the Media. We have component shortages. We see that it's the semiconductor market that is tightening up. We have tried to Mitigate that in a way where we have built inventory. We have very deep discussions with all our customers see how can we better together ensure that we get good availability on these components that are very hard to get at the moment. Q1, we have not seen any big push outs Due to this, we see that we are a bit delayed on some start up of new production, but it's marginal. We have not moved away any big volumes of sales from the Q1 into the later half of this year or the later part of this year. So Q1 is fairly accurate as we see it. So that with the introduction. Okay. Very welcome to this note presentation. As always, we try to keep everyone on mute. So please use your mute function on your phone or on your computers and if you don't get that working, please be aware of that. Your any sound that you make will appear in the conference. I would say that Q1 was a bit of a tricky quarter. When we ended Q4, we had some inventory reductions at our Customers, we saw that it was a bit tricky to see where this quarter was going to take us. We started the year with A quite weak January, just marginal growth. We Gained some speed in February and March was by far our strongest month ever in the group, both in terms of sales and in profit. We also saw that our order backlog was growing by the month. So we also ended the quarter with A record high order backlog. Also we will come back to it a bit, but it's I would say it's a better The substance in the order backlog is a bit stronger than we normally see. We have a longer order horizons with the customers. And therefore, we are expecting that we will not see some big push outs of orders as we normally see. As I have explained earlier, we are always Adjusting our deliveries to what the customers actually want even if they have ordered, we are not forcing them take on volumes that they don't need. So therefore we have seen some, we are predicting a bit higher order Backlog than what we actually deliver, but we are expecting that this time it looks more as it's more solid as I would call it. So this looks very promising. What we also see is that The year is gaining some speed. We see that the component market is getting tougher. Everyone that reads media sees that we are talking on a daily basis about companies that are reducing their forecast over sales due to shortages of semiconductors. There are a few Claring names that often pops up in these discussions. But so far this year, we have not seen any big push outs of orders. So we are seeing that the Q1 Sales was fairly in line with what the customers had ordered. We did not move out so big volume so far. We are expecting that this year will be Problematic when it comes to getting components. We have increased our inventories of these kind of components in the Q1. We started this already last year, but we see that the inventory some inventory buildup that has Pushed down our cash flow a bit, but it's something that we are we see it as our service to the customers and we are working more or less on a daily basis with most of our bigger customers to try to mitigate the shortages. And so far it has worked out fairly good. But this will be one of the areas that everyone in that are dealing with any kind of electronic manufacturing will talk about and have on top of their agenda for this year, at least as I see it. Okay. Moving on to the Q1. It's, I would say, promising start of the year. Sales up 6%. We have quite big currency swings compared to last year, minus 5% when we convert the non Swedish krona into Swedish krona. And operating profit up 21%, up to 8%. It's a quite big margin strength that we see here. And For those that follow us, we see that normally Q1 is our seasonally weaker year or weaker quarter. We have The Chinese New Year that are pushing down both sales and profit in China. And we have some start up effects in January that normally It shows that Q1 is often our weaker quarter. We have a bit higher increase of our profit after financials and profit after tax, up 37% and profit per share up the same, of course. So NOK 107,000,000 in profit Per share is by far our best first quarter ever. Cash flow SEK 4,000,000,000. It's we will see some effects. March was our strongest month in sales and that is reducing our cash flow a bit. So we are expecting a normalized cash flow, maybe not As strong as it was last year when we had more about 150 percent of our profit after tax and cash flow, we don't expect it to be that high, but we It to be good positive numbers. And as I said, order backlog increased with 30%. And I would say also like this that normally we are having maybe 70% of the sales in the next quarter on order and 30% on forecast. Today it's even stronger when it comes to fixed and firm orders. We are More on the 90% of the quarter is on fixed orders and only 10%, yeah, 10%, 15% maybe that are on forecast. So we are having a better visibility and this is something that comes with when the component market is tightening up, The suppliers are more willing to ship to us if we have firm orders. So our customers are placing more firm orders on the longer horizon than normal. So this is just how this industry is working. But we can say that when it comes to this, How should I say, the reductions and the recoveries that we see in our industry. We are seeing that normally our reductions are coming a bit stronger than we expect than we've seen in the forecast and in the orders, But also the recoveries are faster than we expected. So we are expecting a quite solid recovery for the rest of this year and also going to 2020 when 2022 when we are expecting the world economy to be fairly strong. So we are expecting a very strong recovery this If you can say a recovery after a +6 percent in organic growth, but we see it as a recovery up to our expected plus 10 presenting in growth. So we are expecting a very strong year. If we look at our margins, we have talked note. Quite much about that we have been seeing that Western Europe are performing on a good level. We're on a very good level, but rest of the world has been struggling a bit. We have invested Quite much in efficiency programs in China and Estonia. And we are now seeing that, First of all, the sales is going up fairly good in this region as well. It's mainly China that are recovering well. But this We also see that our profitability in these two sites are starting to climb up to where we want them to be. 7.4% It's a good operating profit even though it's weaker than Western Europe, but it's stronger than most of our peers that we measure against. So even though we still believe that there are more to get out from this area, we are performing those sites on the as we see it very good levels. If you look at the rest, we are actually If we include also the head office, we're roughly 1100 people. And if we go back 2 years, we were 1100 people. So the growth that we have seen has been done without increasing our headcount. So we are gaining efficiency, we are turning more sales per headcount and we are And therefore, we are reducing our cost base and that is what we see on the profit level that this equation is very, very Favorable if you can manage to do with the growing without increasing headcount, we'll add more numbers on the bottom line, so to say. And we are expecting that this development will continue. We will of course grow headcount, but with a lot less in percentage compared to the sales that is our expectation. And we will see where that leaves us. We are investing, we're investing in automation, we are investing in better machines, we're investing in increasing our sites footprint. I'll come back to that a bit. But The majority we are investing in getting a more efficient production through our sites. As We have talked about many times we are not jeopardizing our performance. We're still seeing that quality and deliveries on What we call world class level. We are often saying that we are best in class here, but everyone is not reporting the same way. So this we can always debate about but we don't see any big customer complaints in this area. We are seeing that the customers are very happy with our performance in general. Okay. Moving on to our segmentation from the customer side. We have changed this. We have taken away 2 segments, high end consumer and defense, and we have replaced it with green tech. The 2 we have taken away were combined maybe 8% of our sales and we felt that they were too small to be to adding value in our presentation. We have also seen that the green tech area has increased quite much over the last 2 years and therefore we wanted to highlight this In our reporting and in Q1 it stands for roughly 20% of our sales with more than 100% increase. So we can say that this area is one of the areas where we are Harvesting a bit from our sales work. We are putting quite much energy in attracting new customers in this area. And we have seen that some of these customers have really taken off in the Q1. They started already last year, but Q1 was a very good development. Industrial, still our largest segment. We are reducing a bit 4% here. A lot of that comes to U. K, where we still see a quite big reduction. We were minus about 25% in UK for the Q1, which corresponds to maybe SEK 15,000,000 SEK 12,050,000,000 and most of the reduction in Industrial segment is coming from that. But there is, As always, big swings between the customers here. So some customers are growing fantastic and some are being a bit lower than last year. Communication still struggling. It's still problematic for our customers to install the equipment in the field. So we are expecting that to bounce back a bit in the second half of the year, but we are now maybe 40% below 2 years ago. So we had a reduction last year and we still see that this segment has not flattened out or started a recovery. We expect it to happen this year, but it's a bit tricky to say exactly when it is. It has now gone from maybe 25% of relative size to down to 10%. We expect this to recover also, but we are not certain that it will happen in 2nd quarter, but In the second half, we do expect it to recover. Medtech, we are gaining more customers here. We are winning new accounts. We see that our customers in this segment are very how should I say, they are growing, they are Introducing new products and we are in a good spot there. We know that one of our MENTE customers Had a really high takeout in the first half year last year and then they did some refurbishment of the factory and did not order for like 4 months when they were moving the production. So we are measured against a quite strong Q1 last year. But MedTech, we have high expectations for this year, and we expect it to start to show double digit growth already from the 2nd quarter. So all in all, I think that we will see that with exception for communication, we will see growth in the 1 hour in the rest of this on the 3 segments with quite decent numbers when we are summarizing the 2nd quarter. From April and onwards, we know that we are measuring our sales in the UK towards the corona reduced sales levels. So that reduction that we have seen in Q1, we will not see going forward since the measurement are against a very weak sales instead of a very strong sales. But we are expecting UK to continue the recovery that we have seen. Moving on, I've talked about most of this, but it's quality delivery or I call it operational performance And that is something that we are focusing a lot on. And if you take below these numbers, we are working Heavily in reducing our throughput times in our factories, we are reducing our middle or in production warehouses. So we try to get more a better order flow. We know that this is improving our delivery performance. It makes us more it's easier for us to communicate with customers if we know that we don't get and the products that get stuck in warehouses in the production. So this is parts that we are focusing a to improve and that results in better quality and it results in better delivery performance among a lot of other things, but very, very, very important for us. We also see that we are attracting new customers. We have communicated a few wins. Some customers are not willing to dispose or that we are showing their names, but we are with very good customers that we expect lot from that we have been awarded. And we are working quite enthusiastic with new companies. We are which actually are making me more pleased that we are getting more and more orders from our existing customers. That is a proof of that they are approving what we do. If we would start to lose on them, we would have a very Tough work to fill up with lost sales with new customers. So we are in a good position where we are winning new business from existing customers and we are attracting new customers. So therefore, we have high expectations of the future. Yeah, we had we can say that the market is normalizing second half year. It was a bit of this we talked about this inventory reductions. We are expecting that is that this year will be better. We haven't said it before. Yeah. Not so much more to say, I'm touch upon it. What we are we are also investing in our business. We are focusing A lot on getting better and more efficient machines. We are not only looking at Our SMD lines, we're looking at automating other parts of the production. We are investing a bit in automatic warehouses and other areas where we can get what I call indirect Direct persons, the ones that are on the shop floor, but not adding value to the products. We try to reduce the number of those individuals as much as we can by introducing new and smarter technologies. And so far this has worked very well. We are in the middle of a significant expansion of our Tushpi site. Tushpi is, I would say, one of the largest site. It's probably the largest site when we are summarizing this year and the expansion of the capacity has been very, very necessary. So this is the site will be ready for us in as it states now in November 1st and this is very important for us. We have talked about the tough market and this has resulted in some kind of inventory buildup. As those of you that are working in this area will recognize, it's not so easy to build up inventory when there are shortages. So this is a bit of a limbo discussion, but we started already in maybe in August, September to increase inventories there. And this has so far Resulted in a fairly good result as we see it. There are of course Shortages, especially if you would launch a new product today where you have not forecasted or ordered these products, You will have to wait a long time. That is the problem as I see it. For running business, we are still sorting or managing to get the inventory even though it's a lot of work behind it. But for new products, it's quite challenging. Return on operating capital, we are at 23%. Target is 20. We were at 23 already in 4th quarter. We are not expecting that this will go down Actually, we are expecting that we will be remain at the high level. We will maybe see a quarter or so that will be weaker, but over time We will improve this number as well as we see it. Continued strong balance sheet, a bit weaker with 49% in equity The rate we were at 51% in Q4. The strong March is reducing it a bit where we have increased the working capital. We are also expecting this number to remain or improve actually. And We are looking at how do we how can we take a bigger part of this market that we're seeing. There are good growth opportunities. It's quite turbulent. We see that many of the Companies in our industry are actually performing fairly okay. It's not 2020 was not the best year, but it was not as weak as many would have thought. So there are very few that are in financial difficulties as we see it. But there are good opportunities. We are pursuing a few of them and we are expecting that we will come back during the spring with more information about where we are in this segment. But we are also focusing a lot on growth opportunities within our existing business, meaning that we are Investing in more capacity, we are enabling our customers to grow with us. That is also an area that we feel that is very important to ensure that we never run out of capacity. If we look at our what we expect from the future, first of all, currently all our Plants in Europe and Asia are fully operational. There are no restrictions. Basically, we still have some Distancing in our UK sites, we expect that to go back to normal within a quarter or so, since UK is quite far further ahead when it comes to vaccinations. So we expect UK business life to be back to normal sometime after the summer. We still see the strong demand in EU and China. And when I read this, I realized that that is that we could have said we are in stronger demand recovery for all our sites because we are only in EU and China. So But all our sites are seeing good positive trends in new customer wins. We are seeing that the current customers are increasing their orders. We are in dialogue with several very, very interesting global OEMs. So we are seeing that despite the difficulties where we cannot meet each other at the way we want, we cannot travel, but we still attract Good new customers, which has actually surprised me a bit, but I've said it before, so now I'm not surprised, I'm just impressed. So this is something that we're very proud of. And with what is said, we are if we look at our order status, The order backlog is actually a bit stronger than we communicate, but we are since it's longer, that's why we have reduced it. It's actually somewhere above 40%, if we would measure it as we normally report it. But we see that the order horizon is a bit longer and therefore we have Only reported it as above 30. But if we look at in our books, we are expecting the year to end at the higher end or above this our guiding, but we are also a bit nervous about the component shortages and so on. So The order intake and the customers' forecasting is really solid and we are expecting that that will show off in our books in a good way this year. But we also expect 2022 to be very, very good as the economies around the world is Opening up and we see that this will also be a boost for our sales. Our last picture, If we look at sales, always measured in sales in Swedish, we had a very Small drop in the Q4. We bounced back in the Q1 and we are expecting that how should I say that the curve will start to point up in a more steep way when it comes to sales going forward. We are saying that the last 5 years, we have an annual growth of 10%. Despite the 6% in 20 We are still seeing that we had the last 3 year, we were at 14% in annual growth. And That is a number that we are of course expecting that we will hit or improve by this year. But what I'm more optimistic is that when I started there, I started in the later part of 2018, No one really expected that we could break the 7% in operating profit barrier. I think that what we have shown the last Maybe one half year is that this is very doable and we are expecting that we will continue to improve this number. Growth is of course of essence, if we are to hit this, but we are seeing that we can do better and we are expecting to do better than where we are. Even though we are Quite proud of seeing that we are at the trailing 12 month, we are at 8.2% or 8.3% in operating profit. And I think that if I would have guided that when I started, no one of you would have believed me, but this is where we are and we are expecting that we can do even better. So we are optimistic of where we are both from in terms of sales and also in margin. I think that I will This is Thomas Stans from Heechum Invest and I have a couple of questions. First of all, congratulations. It's a great result. It's Really impressive. Thank you. You've given a lot of color, which is great On both order backlog and the semiconductors, George. So I just have one follow-up question On the prices of components, are prices in U. S. Dollars starting to move because of the shortage Our price is stable and it's just a question of availability. I would say that the prices on the semiconductors are increasing. They are the last number I heard was that the global Price level was up maybe 20%. It came from this Taiwanese Centimeters company that are doing parts that are included in main in basically any semiconductor that is sold. So we are expecting to see a 20% increase of semiconductor give or take then this will be higher on some parts and lower on others and it depends a bit of how long our customers Have a secured availability and pricing, but we are expecting the prices to go up. In our price models, we are getting compensation for this. So we don't expect this to push our margins down. And this 20% number, is that fair For the type of components you are buying or is there other types that are more stable in price? I think it's too early to say. It's we are seeing some components have increased much more, some are still managing to buy at basically flat pricing. So it's not too easy to answer the question. It's a big variation between the different Structurally, in the past, Western Europe has been more profitable than rest of world. Is there any structural reasons behind this that means that Rest of World should be below Western Europe In the long run or not? This is a very Tricky question as I see it's when if we go back 5, 6 years ago, we saw that our profitability was actually higher in the rest of the world than in Western Europe. But with the structure we have today where production is moving back to Western Europe, I would say that In the near future, say, the next 2 years, I still expect Western Europe to be stronger in margin. But from a structural point of view, there is basically no reason for it. It's more that we are where we are and we are improving from where we stand. But I don't see any reason why rest of the world could not hit like 9%, maybe 10% in operating profit over time. So it's yeah, It's more that we have been struggling, we have had challenges and we have addressed them and it takes some time to get the full benefit out of the improvements that we do. And we are seeing this quarter or we also saw it already in the second half of last year that rest of the world was improving. But This quarter it was it came in further or as we see very, very good, the best in many, many years. Just a follow-up question On the order book, this increase in component prices, is that also showing up in the order book? Or is it not? I guess, 20% increase in component prices would be Not very significant, but material in the order book if it's increased if it's included in the order book. First of all, it's on the semiconductor. It's not the full boom. It's only 1 or 2 components on each board. They are quite expensive, so there are maybe 20% of the BOOM cost on the board and sometimes even higher. So it's not the full pallet of components, it's only these components that we have seen the increase on so far. Normally, we are adjusting the prices closer to when we sell, so they are not reflected in our order backlog. All right. And trying to figure out how much market share you are gaining. Is there any way you can help us understand how much the underlying market is growing? Yeah, we have looked at our peers a bit. And if we look at 2020, we would estimate the market in The Nordics to be fairly flat, so in local currency maybe a few percentage growth. So say that we gained maybe 5% market share last year, it would be a good assumption. We expect this year the market to grow with maybe 5% or so. So we and we are expecting to continue take market share, but this is based on how we look at our peers. And a final question, what kind of investments do you need to make to maintain this growth in Is sales or in production capacity or other areas? I would say that if we hit the higher end of our guiding with say 20% growth, we would have to invest maybe SEK 60,000,000 to SEK 75,000,000 in our in new equipment. So to gain another SEK 400,000,000 we would be 65 maybe and say that maybe 40% of that is replacement investment. So the additional is maybe SEK 40,000,000 SEK 40,000,000 SEK 50,000,000 to gain another SEK 400,000,000 would be my best answer on that. It depends on where the growth is coming and if there are any very unique processes that needs high investment high automation or so. But In rough numbers, I would put it like that. Thank you and congratulations again and keep up the great work. Thank you very much, Thomas. Hi, I have another question. Played, is it within the segment Greentech? Yes. Okay, super. That was all. Thank you. Any other questions? If not, I thank you for attending and I hope that you are happy with the report and that you remain as a shareholder. Thank you very much.