NOTE AB (publ)

Welcome to this Q1 presentation of Note. As always, how do I describe this quarter and where we're standing? Yet another quarter quite much affected by inventory optimization among our customers. That means that they are buying less than they sell. We see that some segments are doing quite weak. We will come back to that later on in the presentation. But we can see that the green tech sector is not picking up as we had expected when we entered this quarter. We're now comparing our Q1 numbers compared to quite low numbers last year already. So this surprises us a little bit. It's quite far below our customers communicated expectations as well. So that recovery that we have been talking about for some quarters is still not happening. That is one of the reasons or probably the main reason why we did not end up in the mid of our guidance, rather in the lower end of the guidance. We can also see that this segment is not expecting to go so much better in the second quarter either, so we will see quite slow sales in the green tech segment also in the second quarter. After that, the indications is quite much stronger, but we have seen that quite many quarters now that they are forecasting higher demand than they reach. So green tech is a segment that is still doing fairly weak in our portfolio. We can also see that industrial, as I said before, the last two quarters, we are expecting the majority of the growth coming from industrial segment. That is very valid, as you see. On the cost side, I mean, we talked after fourth quarter that we are adjusting the cost base. I would say that we have done that fairly good. We are a few... What do you call it? We are a few... points higher than in in profitability in the first quarter compared to the fourth quarter last year we are not where we want to be we have been up to around 10 and that's where we are aiming also for this year even with the start we don't see that as as unrealistic given where we see stand and what we see as i said in the of the fourth quarter we are going to see the first quarter slow second quarter Potentially higher we see that the speed entering second quarter is still a bit lower than we expected when we were looking at the year three months ago. But we are seeing that the demand from the customer side is improving quarter by quarter if I look at their forecasted volumes. So we're still expecting to see quite low Q1. That's very easy to say because we have now communicated it. Second quarter we are expecting that to be Yeah. In line with Q1, potential is slightly higher. Even if we guide quite low, we have higher ambitions. Third and fourth quarter, we are expecting to start to see organic growth again. So that's how we see the year. We are also seeing that the sales towards our customers are lower than their sales to their customers, where we can measure that and where we have the transparency from them. And that tells me that we are on the road to recovery. I got a question earlier today with how we see upon the underlying demand and we have seen that we have been growing roughly 20% in year over year organically the last five years. I don't expect the market to be at that level this year. The last update I got from the industry statistics is that they are expecting the EMS market to be flat or decline 1-2% this year. That is the underlying growth for this year, but trending on the 7% in the longer period. We should know that in 2023 the last number I saw was roughly 20% growth for the industry. So what everyone that tries to understand the EMS market is saying that in 23, the industry delivered the growth of 24. So instead of just delivering what the customers wanted, they delivered a higher growth. That came from the long lead times that were implemented during the component shortages. Now market is stabilizing and we see that everyone is trimming down their inventories and that will have this effect. Then again, we are into a slower economy in general in Europe and that has an effect. So my prediction is that we are If we have been seeing 20% year-over-year growth for note side, I would say that our customers are now, the customer sales this year are probably in the 5% to 7% growth if I look at their sales to their customers. So I still believe that our customer base will grow with the portfolios that we produce this year. yeah long introduction if we go into the numbers yeah sales roughly flat 1 billion 55 million that is That includes 4% acquired growth, so we are 4% negative on organic. Operating profit, underlying operating profit is more what we are trying to measure ourselves from, 8.8%. Last year, 10.2%. Last year, we had 5 million in positive currency revaluations, and this year we had 2 million negative. And we have talked about how the big swings of the currency is affecting our profitability. And I also said that it doesn't really matter if the Swedish currency is low or high. It's the fluctuations that is affecting the result much more than where the actual level is. Then you can argue saying that okay if the dollar increases in relative size to Swedish the price will go up because we have this currency converters in our agreements and then our customers will pay a higher price but that is basically how it works. The positive side with the weak Swedish krona is that the added value in Sweden is becoming lower compared to others. So the Swedish competitiveness is becoming stronger if that's the case. We can also see that the sales from the Swedish entities are roughly 50% of the note group sales. and that is we entered that level last year we are still on that level so as I said before it doesn't really matter where the currency is but the fluctuations will have an effect on us and that's why we have started to show you the effects of it because Going back some three, four years, the effects were very small because fluctuations were not that strong. The last two, three years, it has been really big fluctuations and that has a big impact to us. Over time, it will often flatten itself out. Last but not least, cash flow, positive, 84 million. It's also important, why are we seeing positive cash flow? Yes, we are earning money that will convert into cash flow, but we also see that the inventory is declining in a good way. I think we had 90 million in inventory reduction in the quarter. It's the third quarter in a row where we have seen inventory reductions. And we also see that the cash flow will be like two, three months after the inventory reduction comes because that's the payment terms from the suppliers that will have an effect. So given the inventory reduction we see, we are also predicting that in second quarter we will have a good cash flow. That's what this indicates. So we also see that what I said the last few quarters that we will have a strong cash flow in the coming quarters, but it will also fluctuate depending on how all the numbers will come in. So that's very important. Our cash position is strong and it's getting stronger every quarter as it looks now. If you look on the two segments, Western Europe, slight increase. It's basically acquired growth, rest of the world decline. We see that if I look at the sites, we see that Estonia is doing fairly flat, China is reducing. What we can see if we look on the year as such, we will see that China will decline. We see a much weaker demand in China compared to all other markets that we are in. And as I've said before, we have also adjusted our sales in China to more be going towards Chinese companies or Western European owned companies with assembly in China. So we see that the demand in China and Asia is weaker at the moment compared to the rest of the world. I think China in itself were down with like 20% in a quarter. So that is also one effect. We have seen that and we have taken that into consideration when we have done our guidance for the year. But China is weak. And that has an effect on the margins on the rest of the world. We are, yeah, Western Europe, 9.7%, still not where we want to be, but a big reduction this quarter is coming from the rest of the world. We are expecting both the Western Europe and the rest of the world to increase, but we will see that Western Europe will have significantly higher more than this year than the rest of the world primarily driven by the weaker sales of China we have adjusted China quite significantly in the cost side but it's we are not expecting to reach the same profit level in China this year as we did last year Going forward, segments. If we look at this, we can see that strong growth in industrial. Now it's around 60% of our sales, highest number in quite a few years. We see that growth is 12%. As you know, defense is part of this segment, but we see growth in the segment even despite, even if we exclude defense. So industrial is a strong segment at the moment. Several accounts that we started to ramp up in the second half last year has continued to go well. So we are expecting industrial to continue to be on a strong level for the rest of the year. We have good order coverage in this segment. Communication. We have ramped up several accounts in the last year. If you remember, we had a good growth throughout last year. This year, we see that many of the installations are postponed. You see the rollout of 5G base stations is significantly slower than the operators has communicated earlier. And we see that our customers that are delivering into this are affected by this and they are pushing out their orders to better match what they see on the market. This has probably an effect of the slower economy and the higher interest rate where they don't want to invest so much in the systems as they have done in the past. I expect this to... bounce back but it will take more than one or two quarters so communication is expected to be on a lower level this year than it has been before Medtech also very strong growth last year more than 100% we are on a good level we are expecting that Medtech will jump a little bit up and down it depends on what orders we get out for the quarters I don't expect it to grow this year but we will see how this quarter or how this segment will end then Greentech I looked at some numbers in 2021 and the first half of 22 Greentech was up to almost 30 percent of our sales now it's down to I think the number was 14 percent or something at the moment So, it has basically halved in relative size. So, when our sales has grown significantly, Green Tech has actually been reducing also in actual numbers during the last two years. So, the recovery that the customers has expected and communicated to us and what we have then run out of these expectations has not came in. So this is one of the segments that we are very disappointed in the sales, and we are also looking at the orders for the second quarter is not indicating that we will see a swing upwards. So if I look at the segments, industrial will continue to drive our sales, and that is what I expect for the year to come. Communication MedTech will probably see a quite weak second quarter, and then we are expecting it to bounce back and come back with positive numbers. Greentech, if I look at what the customers are telling me, it will bounce back, but that has been the story for the last four quarters, and it has not yet happened. So we are looking into Greentech with some, how should I say, less certainty. The other segments are fairly, or are easier to track than Greentech. A lot of startup and scale-up companies that are expecting to grow, but their market has not come in as they have seen. Some highlights. I think, as always, I have this as my top remark every time, it's quality and delivery is what is important in our industry. As long as we continue to deliver good numbers here and are continuing to drive efficiencies out of our production, we will have a good dialogue with our customers. You could argue with saying, okay, we have seen quite slow sales the last, say, two, three quarters, but we have not lost one single customer during this period. So my expectation is that when the customers bounce back, we will be gaining from that. And we don't have any discussions with customers that they are not seeing that we're performing and that we have exit discussions. So the customers are staying and they are fairly happy. And we do like customer service every year. And that is very positive. Every year it's very positive. And I think this year is more positive. It's the best year ever if I got the information correct. So I still expect that we have a strong, solid and fairly loyal customer base and that is where that is where the majority of our growth is coming if i look at the sales increase the last two years the existing customers with extensions of the program has been contributing more than the new accounts that we have been winning in 2020 and 21 it was the opposite but 22 and onwards the existing customers has grown more or more of our organic growth has came from organic or from existing customers relative to new customers so that is the and we expect that to continue When I talk about order stock decreases, we have 18% lower order backlog now compared to one year ago. If I look at how many quarters in advance customers are placing orders today compared to one year ago, it's a significant difference. Last year, or in 23 at Q1, we were still looking at 9 to 12 months of order horizon. Now we're often taking orders on one to four weeks, but then we have an agreement covering the fluctuations within the first, say, four months. So transparency in terms of how long order visibility we have is much lower today than it was one year ago. However, this is how our industry has been living for all the years, except for the years where we have component shortages. So this is a normalization of the market. It doesn't mean that we will see lower sales or that we will see customers starting to move production around. It's more that they want to place the order quite late because that will reflect what they need rather than placing orders, say, 9 to 12 months in advance. So this is a normalization of a pattern rather than something else. We have been talking about this and I was one of the only transparent CEOs when this increased because we had like order increasing with 100% some quarters. And we were very open saying that this is not a reflection of how we would see the next two quarters. This is more of an extension of the order length. So now we're going back to normal. And that is, in my opinion, fairly good because that also increases the... How shall I say? If you win a new business, if they have placed orders for 12 months in advance to their current EMS supplier, then the time it takes for us to take over that production is very long. Now, when it's normalized, it's easier to get access to new wins faster. And we have a very low exit from customers. We are winning much more than we are losing. We're relatively set not losing any big order or customer. So for us, this is good. We also talk a lot about investments and CAPEX to support our growth. For those that knows, we are extending our factories, we are increasing our capacity, so our view of the future is very bright. We would not do this if we didn't see this demand coming. So if we look at what our customers are expecting, say four to six, eight quarters in advance, we see very positively upon that. And we see that we will gradually come back into those numbers. I've also said in the past that increases comes when they come they are steeper and faster than you expect because then you also see a stock build up and in many cases it's not only our customers it's their distribution channels that are also building stock because they want to meet the current the increased demand with the higher preparation But that comes negatively when the demand is declining. Every step in the chain are decreasing their inventories. And that's what we have seen. So fluctuations are... how shall I say, quicker and deeper or higher than we have seen in the past. So that is something to keep in mind. Then you can argue, why couldn't we see this clearer two quarters away? But you can also always learn. I think we and the peers are going to see that this is the same scenario for many of us. but that's how it is we're still investing quite heavily and this is one of the reasons why you can continue to drive our head count relatively said compared to our sales lower and lower and we have a lot more to do so even if we have been doing this for several years we have a lot more efficiencies to take out from our factories and we will do that and we are doing it that's part of our daily tasks so i'm very pleased to see what we're doing there Return of our operating capital, 23%. We have been up almost 30% when we were doing at top. I expect us to come back to that in the coming years. Always strong balance sheet, equity ratio of 45%. It's the highest we have seen in several years. Our liquidity situation is stronger than I think ever since I started. So good preparations for the quarters and years to come. Outlook. Second quarter. I think we're still seeing that the pace we have in the first quarter is where we're standing. We have some signals that it might increase. I want to see that before I guide it to you. So quite moderate or modest guidance for second quarter. I think our cost run rate is improved. So if we hit the same sales as we did in Q1, we will see higher margins. For the year, we are still seeing positive views from our customer sides. So we are, and that is what we try to indicate when we look at the year to come. And also, we are heavily driven by margin or sales will drive margin. We are adjusting cost level to where we stand, so as soon as we get good growth, we will see that our operating margin will come back. For those that have followed us, until the end of 23, we had 15% fall through on our organic sales increase. And I don't see why we should not come back to that when we see the sales coming back. I've also said that I think that 5, 6, 7% organic growth is, as I said, if you are below that, you will struggle with improving your margin. So we need to come back to that level. Then we will start to see that the margins will increase year over year. So we are expecting to turn the negative swing on our margin development. So that is basically what we're seeing. I think the market is really strong looking over a longer period of time. There are no indications that the usage of electronics will decline in the society. There are no signs that the regionalization that is ongoing will stop. I would say that the regionalization trend is getting stronger every quarter. We with a high footprint in the relatively seen strong industrial countries will probably see a higher sales increase relative to Europe as such because Europe as such is quite burdened with the Mediterranean countries that are not growing in their industrial side as well as the northern European countries are doing. I think our position is very favorable going forward and we have made our growth in the countries that we see is most beneficial for us. We still lack some dots on the map, as I call it, but we will see if we can close some of them. Our preparation in terms of funding is very strong at the moment. We are actively looking into the acquisitions possibilities that we see. There is no one that is as far in the pipeline that we can talk about, but we are, as always, keeping dialogue with a few companies at all time. Some more interesting than others, of course. But looking at this, what you should bring with you after this presentation, I would say, sales we're not happy where we are we are where we are we will we will do whatever we can and we do a lot of activities to come back into growth profitability we are not happy where we are 8.8 if you look over time it's not a very bad position but given our our last year's performance we're not at all happy with that And we are expecting it to come back into new levels. I would be surprised if we, when we close 24, if it's not the best year in notes history, meaning that we are expecting that we will beat our last year's sales and that we'll beat last year's uh a bit in in money that is my expectations and i think that we see what the market is indicating that that is supported by what the cost customers are saying and then we have to of course act and work accordingly and ensure that we take out all the benefits we can from from where we stand so i i'm quite optimistic But when we look at 24 as a year for the aggregated EMS market, it will be the weakest year since 2020. That is for sure. I think nothing that happens from now on will change that fact that the industry over-delivered volumes in 22 and 23 that are now depleted or are now in inventories around our customers distribution channels and that this has to be depleted until we see that the growth come back. We started the stock depletion earlier than the peers. If you look at our Q4, it was significantly weaker in sales growth compared to peers. And I think that we were much earlier in accepting that this was the case. That affected our Q4, of course. We talked about it in the Q4 and in our profit warning we had to do in December that we were allowing this to happen. But I think that will come back in Q1 and Q2 with better sales than the peers. But again, we are reporting first, so it's easy for me to say something that I cannot look into. But that's what I expect. I will end there and I will open the floor for discussions and we start with the questions in the room. So anyone? Of course, Carl is first.

Thank you. It's maybe a question on the inventories at your customers or the inventories at your customer sites. What are you getting for feedback when you're speaking with them? Are the customers, are the inventories coming down or what is your impression?

Yes, it is. Normally we have good visibility for maybe 35% of our sales from customers, meaning that we have direct access to see what they have in their own inventories. And we see that those levels are coming down. Not as fast as we had expected. Because we were expecting this to be fairly over at this point. It's still going to drag into second quarter. uh for for the other customers we have to take their how should i say their word for it and we can see that if i look at their sales or the purchase forecast that we get is that they are gradually improving the numbers when i look through the month of this year so that is an indication of that they are are going to see an increase and it's important because If the forecast comes within the next six months, it also drives their material commitments. So we can see that they're increasing forecasts within the committed period, and that's very important for us.