NOTE AB (publ)

And welcome to our Q2 presentation or the first half year presentation. As always, I will try to start with a short summary of how the quarter has, how we see upon the quarter. First of all, we are disappointed of the sales. I will come back a little bit to why the sales came in at the level it came. But mainly I would say that it's due to the, we see delays in the communication area, mainly dependent on that the telecom operators have pushed out their investments in infrastructure. And that has pulled out some of our demand, especially in this field, and that is also reflecting in the rest of the world sales. On the Western Europe side, the quarter came in fairly well aligned with what we expected. We also see that profitability came back, especially in the Western Europe region. We are at almost an all-time high at 10.5%. The rest of the world is burdened a bit with the lower sales and that we couldn't compensate fully in that way. We can also say that cash flow came in aligned with what we expected, very strong. 154 million operating cash flow. We are very pleased with that. The inventory levels continue to decline. We are at almost two year low or something, which is very, very positive. We are down with 300 million inventory from our peak, also very positive. The cost adjustments that we have talked about for the last quarters, quite well aligned. We still have some work to do, but as I said, the work never ends. Because when you think you're done, you see that one other site is declining and one other is increasing, and then you start to jiggle around a little bit. So you're never completely done, but we still believe that what we do is having a good effect. We are adjusting as we go along and we also see very positively upon the future. As you see, we have today also presented that we will double our Toshbi factory in size. Toshbi is our largest factory at the moment, and this investment in the extended factory will facilitate the growth of more than 100% of that site. We believe that we have customer demand for a big part of that increase over the coming years. So that is very pleasing to see that we have reached that far in that expansion phase. Besides that, we are seeing that the general economy is weak and that has a consequence on that several of our customers' destocking activities take longer time than they have expected. And that also has been a bit of a burden for us on the sales side of this quarter. All in all, I would say that if we would exclude the communication, I will come back to the segments later. The quarter came in as we expected. Profitability also fairly much aligned with what we expected. If we would have had the better sales in the communication area, we would have reached a double-digit OP in margin, which is in one way our objective for every quarter that we see. So all in all, that is how we see upon the quarter. If we then move on to the numbers, we can see that sales came in at 6% decline, 10% organic. Operating profit, .8% at 99 million. Underlying 97 million, 9.6%. Both of these numbers are below last year. But for those that follow us, it's important to see that this is our strongest OP for the, if we look at the last four quarters. Q3, we were at 9.1. Q4, we were at 8.5 underlying. Q1, 8.8. And now we're at 9.6. And for those that knows, we are guiding for that. We will keep this level going forward, which we are fairly comfortable with. When I say keep, that means keep or higher. We will guide for slightly higher also. So we are expecting that to come through. We talked about cash flow, 154,238 million for the year. I think that is very pleasing. I think the group has never had a better liquidity situation. And we have an equity ratio of 49% give or take. So all in all, a very good quarter from a cash flow point of view. -to-date numbers, down 3%. It's never fun to see that we are down. So this is really frustrating to see. I think our underlying business is significantly stronger than what we can report. But everything comes down to what the customer actually wants to receive in the quarter. So this number we are expecting that very soon will come back into positive numbers. OP, 9.2%. Given where we stood when this de-stocking activities started to occur in the second half of last year, I think we have rebounced quite well. The last two quarters last year were significantly weaker. We see that we are in a constant increase if you look quarter over quarter. And we expect that the increase will continue. Q3 is always a bit tricky to look into since there is the holiday. And you never know. Or we were closing the factories two to three weeks basically in Western Europe. And that will have an effect on the sales. And normally we manage to compensate the lower sales with lower costs from the holiday pay and so on. But this quarter is, I would say, the toughest to guide in. For the full second half, we are looking very positively upon this. And we see that several of the customers that are today weaker than last year are showing nice increases. The only segment that we don't expect that we will see some kind of recovery is in the communication. I don't expect that to come back into positive numbers until 2025. That's basically how we see it. But we can say that the cash flow is the strongest ever in the group. So from that perspective it looks good. Moving on to the segments. As we said, Western Europe, first half year .1% in OP. For the quarter, the number was 10.5. The rest of the world, 5.9. For those that remember, the first quarter we came in quite weak, 4. something. Second quarter we were at 7.2. So we also see a stronger development in that segment. What you can see is that the number of employees continues going down. Now we are at roughly 1,500 or 1,490 or something. That number is fluctuating quite a bit depending on where we see the increases and where we see that the temporary staff is coming in and so on. But we are in a stable situation. If we look at growth, as I said before that I expect Sweden to continue to increase. We see a slight decrease. We had quite high sales on the spot by also in the first half of last year. That is a bit reflected on this number. UK, starting to see increase. The UK has been a bit weak over the last couple of years. We are now seeing that some strengthening of that region. We are expecting the UK to remain in positive numbers for this year. The rest of the world, we talk a lot about China. China is down 30% this year. The reduction is stronger in the second quarter than in the first. Estonia down 17%. We are expecting Estonia to start to reduce the reduction if you put it like that. The second half in Estonia looks much better than the first half of this year. But China will remain at a quite weak position. That is what we see at the moment. Moving on to the customer segments. The trend has been clear. Industrial, we have a defense in the industrial segment. The growth in the industrial is not only due to the defense. That is very important to say. Also the big industrial customers we have are showing quite nice increases for the year. I would say defense is standing for maybe 200 million in the first half of this year. So say what can that be? That is like 10% of the sales, slightly below that. We talked a lot about communication. Down 20% for the first half. 27% in the second quarter. And this is where, this is the reason why we missed our guidance. We had expected to deliver communication for maybe 25 million more in the quarter. And would have been in the, more or less in the middle of our guidance. But we allowed the customers to push out deliveries in that segment. And that was the reason why we missed the guidance a little bit. Medtech, we talked about it that we were in a, that it would come in a little bit weaker. And then if you look at the Medtech for the last four quarters, we are quite in that, in the range we have in the last three, four quarters. We had a strong growth in that segment in the first half of last year. So the comparable numbers are a bit tough. Green tech, I've said it before many times that it's starting to be in the size that it can no longer decline. But the customers are unfortunately continuously proving me wrong here. And this is quite, how should I say, it's quite sad to see. It's a segment where that should support the overall growth of the electrification trends. It should strive for a better climate and so on. But the customers are not seeing any turnaround in this segment. We have some customers that are growing in this segment. So that means that some is going really, really weak. When will this recover? It's very hard to say. I would say we are at the level now that it can, it's hard to shrink it lower. So my expectation is low on the green tech for the coming one, two quarters. But I don't expect it to continue to decline in the same pace that it has. The segment is down about 20% so far this year. So what can we expect for the half year to come? I think the trend that we see will be fairly much aligned with what we see. Industrial will continue to grow, driven by a few of the large industrial customers from the defence area. Communication continue to be low. Men Tech, fairly flat quarter over quarter. But that will, since we had the big or the strong first half in 2023, we will see a decline in the year to date numbers. Green tech, I expect that to start to show that we should not decline more quarter to quarter. Last year, first half was a bit stronger and that effect we would still be measured against. But if you say Q3, Q4 compared to the current run rate, it should not go down more. So that is what we see. If I would look into 2025, I would expect communication to bounce back very strong. Men Tech, we are seeing that the customers that are stocking is starting to talk about recovery in 2025. Industrial segments, the customers that are currently not going so well are also looking very positively upon 2025. So I would say that we will see a gradual strengthening of our sales in several of these segments when we are looking at the end of this year. Q4 looks very, very, very good at the moment. So all in all, I would say that the demand is gradually becoming stronger. And also the period where customers with short call of leave times where they give us material authorization is now getting better and better. So we are looking positively upon several of these segments going forward. But the short term communication will be fairly weak. Green Tech is on the low level that we are continuously monitoring, but we are expected to be flattening on the level that we are at. I stopped there, otherwise I can talk forever as you know. Some operational highlights. Still, delivery performance are almost back in line after the component shortages. We are allowing a lot of deviations and sometimes that is not reflected in our measured on-time delivery. Quality, still on a very good level. This year will, it looks like this year will be a new record in PPM level. So we are expecting that to continue to be good. Ordered stock decrease, reflected short of lead times. We have talked about it several times. If we look at quarter to quarter, it looks fairly flat. So that is also something that is good. We're not seeing a good decline there for the deliveries in the coming six months. CopEx, still on a high level. We are investing for growth. I think we are, I don't remember the exact number now, but we are higher this year than last year in terms of equipment investments. Expansion of Torsby site. We expanded the Nortelje site last year with another, I think, 1,000 square meters roughly. We are looking at capacity increases in several more sites as we speak. We'll come back to those later when those are decided. But overall we are investing in both equipment and in our footprint to ensure that we can cope with the growth that we are expecting to come. Return on operating capital, 23%. That's a bit low, I think. We can do better and we will come back with a better number going forward. As I said, strong balance sheet equity ratio is up to 49%. Liquidity situation is stronger than we have ever had in the group, so that looks also very good. So that is basically how the operational side is looking. If we go to our last slide, the outlook. We are guiding down a little bit, 4.1 to 4.4 with the mid guidance fairly flat to last year. Last year we did 4.24 something. Our margin, we are expecting that to be aligned with the second quarter or stronger to reach 9.5 to 10.5 for the year. Our long-term target of 7.5 billion is still what we believe in reach. The market needs to come back to the strength it has shown the last four or five years before 24. And as we have said before, 24 is a year that is very, how should I say, it's one year that is not alike any other year. We came out of the component crisis in the second quarter of 23. Extremely strong order books, demand was solid, all customers were really pushing us to deliver more. And it only took like four to six weeks and then we started to see declines in order intake. We started to see push-outs due to inventory situations. I think in Sweden in 2022 the increase of inventory at the industrial sites were massive. I think the conversion rate from profit to cash flow in the first half of that year was less than 50%. So the inventory increases were visible but no one really paid attention to them. And that has been a burden for us and for the industry for this year. If I look at our peers, everyone is indicating quite weak performance and also quite weak outlook for the year in terms of sales. I see this as that we deliver the growth in 22 and 23 that were supposed to come in 24. I don't see that the usage of electronics is declining. I don't see that our customers are losing market share and so on. And we are not losing any programs. So our view of the future is still really, really positive. So it's a bit tricky to sit and be CEO and then you need to adjust your cost side to mitigate the current sales level. And then you are looking at maybe three, four quarters ahead. We're looking at significantly higher volumes than we're doing today. So that is why we are constantly investing in equipment and in our footprint. But at the same time, we are just in the cost level to reach the profitability that we expect that we should be able to deliver. So it's a bit tricky situation where we are pulling one foot on the brake and one foot on the gas, if you put it like that. So I think that reflects basically where we stand. The market is expected to come back very strong in a few quarters. But we will still see one quarter or so where we will see the production level at a similar level as this quarter. So very tricky outlook. And therefore, we are keeping our, that we guide in an interval and not the min point. But if you look a few years ahead, it looks very, very solid. I think I stopped there and I opened the floor for questions. And then I was...

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Carl Nåen from SED. Please go ahead.

Yes, good morning, Johannes. I hope all is well. Just a couple of questions from my side. If we start off with your lowered guidance here, I just want to question a little bit regarding Q3, how you look upon that. I know it's hard and so, but do you think it's possible to reach similar volumes in Q3 as you did in Q4 or in Q2? Will that be tough given vacations, etc.?

Yes, I think that will be. I would expect Q3 to be lower than Q2 in terms of sales. I expect that we will be able to keep the margins at fairly the same level as we did in Q2.

Would you say that it's driven by lower demand or just normal seasonality?

Normal seasonality, I would say. I don't think the demand will be lower in Q3. If you look at August, September, those two months will probably be higher than the average of April to June. But I think the lost sales in July will be hard to compensate due to the vacations. When you have a slightly weaker demand, then you close the factories maybe one week longer because then you consume the vacation instead of running the sites with more summer holiday stuff.

Yeah, sounds fair. And then there's a question on the order intake. I know we don't report that, but is it possible to give any kind of indication of how order intake was in the quarter compared to your sales levels?

I would say that the order intake is well in line with our sales. We don't measure that in that way either. So now I will answer you based on my gut feeling. We are seeing that the order intake is balancing our sales fairly well at the moment. And if I look at the next quarter, I think that is more or less full to where we are expecting us to reach. So we don't measure it that way and maybe that is something we could look into over time to do.

Yeah, that's good. And then a question on the cash flow here, quite strong. I mean, if we continue to see a little bit softer demand here, should we expect cash flow to continue to be relatively strong here going forward, you think?

Yes, I would say so. As I said before, we were looking at the inventory level and when the inventory is going down, we also see that the cash flow will come in maybe two, three months later. And the reduction of inventory was strong in the later part of Q2 and that indicates that we will have a stronger cash flow in Q3 compared to just the normal sales conversion into cash.

Yeah, I see.

And then now

you're...

So I would expect a good Q3 cash flow as well.

Yeah, and now you mentioned that you have a very strong balance sheet and good cash positions, etc. How is the M&A evaluation going on? Would you expect a closer deal by the year or should we wait until 2025?

We don't comment so much on if we are close or not in this. We are constantly looking at different M&A activities. What I would say is that the price expectations from the sellers are a bit... How should I say a bit... We have hard to reach the common view of price expectations. I think the sellers are quite eager to discontinue 2024 as a year. They're looking at some kind of average of 22 and 23 when they look at their earnings and then 2024 is a year that we have to don't look at. And I think that is wrong. So we have had a bit of a hard time to see the same way on how to evaluate businesses at the moment. So therefore, I would say price expectations from the sellers and from us are a bit... We have been a bit far away from each other. Not on the multiples but what should be the base for the multiple if you understand my point.

Yeah, I see. I just have one last question on the cost side. I noticed that your gross margin was the highest level it's been in the last eight quarters or so. So I was wondering a little bit on what you're seeing on the input cost side etc. or if it's possible to improve this margin even further going forward.

That's a good question. I think it is possible to improve it but on the other hand, I think it's more... What I would say is that the volume, when the volume starts to increase again, I think that will continue to be a good... We will continue to have a good, what do you call it, the fall through effect of that. So I would more expect that maybe the gross margin will continue or remain where it is. Maybe some slight increase but higher volumes will have a better fall through so that will generate more of an EBIT profit increase rather than the gross margin. But we will see when the volume starts to point in a positive way. But we are very pleased with how the gross margin has developed and that it was along with what we expected. I also told in the Q1 presentation that we were expecting this figure to go up when the effect of the higher material cost would decline.

Yeah, that's very clear. Thank you for answering all your questions, Johannes. Have a good summer.

Thank you, same to you.

There are no more questions at this time so I hand the conference back to the speakers for any written questions and closing comments.

Thank you. Yes, we have some written comments here. One from Marcus. Considering that the turnover for 2024 is about the same as 2023, there is now a need for a rather sharp increase in growth in 2025 for forward to reach the total 7.5 for 2027. Is it reasonable to expect such a growth going forward? I would say if we look historically, we have grown faster than what we needed in 2025 to 2027 to reach that number and we are not seeing any reason on the market why this strong demand will not be there. I think the customer's outlook is very strong and solid and we are seeing good growth or underlying growth in many of the sub-segments that we see. When the de-stocking is over, we are expecting to be back into double-digit organic growth or stronger. Yes, we need to close the gap that we will create in 2024 but as we look now, we are expecting that we will grow very, very strong 2025 and onwards. We still believe that the communicated target for 2027 is still reasonable or reachable. Second question also for Marcus. Is there any impact on reduced purchases in the spot market on the organic growth of minus 10%? If we look at the material part of our sales, we see that that is reducing and that means that we are now having lower purchase prices in the sales. Yes, that has an impact. If it's a spot market or the general increase of the component pricing that we saw that has declined, that is a bit tricky to say but the impact from reduced purchase prices is quite clear in our numbers. Given that, it's fair to say that the volumes produced in the second quarter is probably quite in line with last year but the purchase prices is lower. Can you tell us something about the M&A pipeline? I will answer this question in a way and if I see any more of that, I will skip them. Yes, what we see is that there is a good activity out in the market. There is a lot of prospects that we are being presented to. We have been looking at a few of them. We have a dialogue with a few of these prospects. We don't see anyone that is very close to be closed but otherwise it's a market that we are constantly looking at and there's a lot of potential targets that are currently up for sales. As I said before, it's very hard to reach alignment in how to evaluate these businesses and that's why we have been a bit cautious of them. There are a few that we think is very attractive that we are pursuing at the moment so let's get back to you when we see more activities in this area. It's an interesting area and we need to be selective in this and understand what the long-term objectives and the performance of the customers are. Thank you for the questions Marcus. Then we go to Johannes. You have been negatively surprised by the revenue development over the two past quarters. Do you have any data points to support that it will not happen again? I would say that this is a very good question Johannes. I would like to say that we will not be seeing this again. What we have seen is that for example this quarter we were looking at quite strong sales towards especially two customers from China in the communication area. Around early May we were approached from them with that they wanted to push out volumes. At that time we were expecting that we would still reach our guidance and then we had some more push outs in the second half of June. Those are a bit hard to predict if they will come or not. We are not expecting to see this in any new segments. I would say that we are more certain that we will not be seeing these negative developments but we cannot say for certain. That was a very bad answer Johannes but that is how clear I can be on that. We did not expect to be seeing this for this quarter either. That is what we see. What we can say is that the underlying view of the market is that the market is fairly strong. It is coming back. We see that in several areas and then we have a few that are still declining but I would say that I think the market is stronger today than it was a quarter ago from an underlying point of view. The only question is are we going to still be negatively affected by the stocking or the de-stocking or will that cease during this quarter? Good question. Not so easy to answer Johannes. Then we have one from Tor Egil. Hello Johannes. Well done on margins. One question when investing in new efficiency gains to be gained from AI and machine learnings. Yes, I would say that AI and machine learning is something that we have been working quite hard with in the last couple of years. The modern equipment that we purchase are fairly good at this. If you look at for example, AOI equipment, very quick self-learning. Also when we do the new SMD lines also have this built in so that they are detecting errors and are suggesting to correct those in the next round and so on. That kind of AI learning is already in place. We have automated warehouses that are using AI to be more efficient in where they store things so that the most frequently used parts are easiest to access and so on. All that is in place in several of our factories. For those that it's not in place then we are investing in that kind of equipment. So yes, we are expecting this to be a part of our efficiency gains. As I said before, efficiency is something that we take very seriously upon and we are expecting to increase our efficiency going forward. Then we have one question from Tommy. The factory in China hasn't been doing so great lately. What's your view on the Chinese factory market in the long term? Yes, China has been performing fairly weak. It's one of the factories where we have the highest exposure to the communication segment that has been weak as a segment. We also see that there is a trend where business is moving back from China to Europe. We have internally moved business for 50 to 100 million Swedish out from the China facility into Western Europe facilities and Estonia. China is a site that we have been restructuring to face a lower volume at the moment and that is our expectations going forward. China is still a really big production market so we should not neglect that fact but it's weaker for the business or for the companies that we have been strong at in the past. Therefore, we have been trying to adjust our customer portfolio to be customers that are keeping the business in Asia or at least that they are doing the next step in the sound for being done in Asia. Our view on the factory is that it's a very nice factory. It's a very efficient factory and we have very good and attractive customers there so we are very pleased with the factory even though the market is a bit weaker at the moment. Ok, Stefano, you talked about inventory reactions. For a better understanding, how much was your stock level one year ago, how much is it now and is it now in line with your target? I will take this number from the back of my head. We were about 1.4 billion Swedish in inventory one year ago. We are at 1.1 give or take today so we have reduced that with somewhat of 25%. I don't have the number in front of me but that is my view. I would say that we still have another 10 to 15% to go until we are where we want to be. As you know, our inventory turnover target is between 4 and 5 and we are just shy of 4 at the moment. I would say 100 to 150 million more is what you can expect us to reach of inventory reduction for the rest of the year given or under the circumstances that the sales is fairly flat. If the sales start to increase in fourth quarter, I would expect that our inventory will start to increase for the new customers and the new programs. But everything square or everything equal, we would still expect inventory to continue to be going down with maybe 10% more. That is the last question I have from the written questions. With that said, I would say that thank you for listening. We are not very pleased with how some of the customers are performing at the moment. We are expecting that this will gradually improve. We are very pleased with that we have been able to cost mitigate in a way that we are almost meeting the same profitability level as we did last year. 9.6 is a number that is fairly good given these circumstances. We are very comfortable in that the margins will start to continue to increase when the volumes are getting stronger. We are looking very positive on the margin development. We are expecting that the sales will start to increase later on in this year. We are expecting third quarter to be that the underlying demand is fairly in line with the second quarter. 25 looks really solid at the moment. That is also good to have in the back of your head. We believe very firmly in the very positive years to come. That is what we are investing in to be able to meet that higher volume. With that said, I would like to say thank you to everyone that is owning shares in our nice company. I wish everyone a nice summer. Thank you.