NOTE AB (publ)

Welcome to Note third quarter presentation for 2024. As always, I tried to make a short summary of the quarter. First of all, we did not reach our sales expectations. That is pretty clear. We had to go out and give a new guidance. With that lower sales, I think the profitability came in pretty much where I expected or even slightly better. I still believe we're doing good cash flows. And I think that means that we are, how should I say, we're converting the results as it should. I mean, we're not growing. And that means that we have a positive impact on the cash flow. We have lower ARs. Inventory is going down or continues to come down. This also gives a positive contribution to the cash flow. So those what I call financial fundamentals in our world is working as it should. So therefore we are expecting cash flow to be stronger than normal also for the coming say one, two, three quarters. It depends on when we are through all that. So I would say that we still have maybe 50 to 75 million more inventory to be reduced in the coming quarters. And we also see that our depth of our suppliers is slightly lower than normal. And that is an effect of that. We buy less at the moment than what we consume. So that would also when that normalizes, it will also have a positive impact on the cash flow. So cash flow is expected to continue to be strong for the coming quarters. With that said, it's also very tricky to have these calls. We're looking very positively up on the future. And then we have a very weak quarter from the sales point of view. So how do you how do you summarize that in a good, good way? I would say that the industry when we went into 2024, we're expecting a quite slow year. Expectations were basically flat. The latest expectations is, of course, quite more negative than that. So the complete industry is going quite weak at the moment. If I look at note, we will see that Q3 20 percent negative on sales. That will be the lowest point in this dip as we see it. Guidance for Q4 is about eight percent down, if you look in the middle of the of our of our guidance and that is. Yeah, if you look at that guidance, you can see that. Normally, a week here, then then like this, then you close a few weeks more when you have vacation in in in Sweden, Finland and Estonia, and therefore July will become a month where you have basically half the speed compared to normal month. If you would add in one half month in the in the third quarter, we will be in the in the in the in the guidance of Q4. So we're not expecting Q4 to be better run rate than we have in, say, August, September. It's basically the same speed. So we're not expecting a big recovery in Q4. It's more that we normalized the monthly average that we were were hitting in Q3 and Q2. So that's what we see. We don't see this as a weaker or we don't expect the Q4 to be a strong recovery. We expect it to be at the same level as I would say Q2 and onwards, if you take the normal month level. So that's what we are looking at. So why do we continue to invest in new buildings, expanding factories and so on? But the issue is that we're not seeing one, the same trend for everywhere we are. We see China extremely weak. I think we're down with 35 plus percent this year. Estonia has had a very weak year. A lot of customers that have been dealing with with stock reductions. Then we have Finland doing new a new record year. Toshiba doing new record year. Lund will do a new record year. We had the record month in September. So very different depending on where you are in our world. So it's not only that between the segments, it's very different. It's also where are you in implementing the new customer programs that we have been awarded? So what we will see as we see it is that we will gradually come out of the of the weak trend and then more and more of the sites will go from negative to positive. And when that happens, we will see more of a general recovery. We have predicted that to come in this in the second part of this year. We are no longer we're not no longer expecting that. So therefore we have guided low for Q4 and we will get back to you how we see upon next year. In our customers view, we would if we would if we would believe the customers, we would see a strong recovery in 2025. But we will we want to get closer to that before we start to give you more details in that in that guidance. So we believe that 24 will be a very weak year and that 25 will be a growing year again. And we will, as I said, come back to more and more guidance around that. But if I look at what the customers are expecting from the programs that we're producing, their view of the of the of the demand coming 12 to 18 months is significantly higher than what we're what we're achieving right now. And therefore we are investing to be able to cope with that demand, say in the next in in the second half of next year, then we are expecting to be at a significantly higher level. So therefore we are continuing the plans. We are expecting the Torsby factory with seven thousand more square meters. We are moving out of the current premises in Lund because we are simply currently we are renting more than 2000 square meters in another building. So we have already outgrown the Lund facility and we have others where we are expecting similar things. We will continue to invest heavily in automation and in new equipment, also in Q4 next year, because we believe that that is going to be necessary. So it's a very mixed emotions. We are presenting a quite weak quarter from the sales side and yet we are we are putting the the gas pedal quite hard down in investment and and and preparing for the future. So very interesting. If you like numbers, you can say, OK, we are the trend is very negative. But if you look at the five year average, we're still with with the guidance we have for for 2024, we're still reaching 15 percent organic growth year over year. If we start at either 18 or 19 as a starting year, it doesn't matter. So still the growth for the for a longer period has been very strong. And we we don't see any signs in the market that will indicate that this has came to stop. So therefore we are preparing for higher numbers in the in the in the coming quarters and years. Even though we don't get support for for for increasing our guidance in Q4 more than we have been guiding in our. In our guidance in September. OK. Long story short, here are our numbers. I think most of you have seen them, but sales eight hundred nine million down 22 percent. Opie came in at eight percent. We have some positive one offs in this, which is the currency and the currency translations. And we had some negative with one offs where we are continuing to adjusting our cost level. We'll come back to you a little bit how that has worked for the last year. Underlying eight point three compared to nine percent last year. I mean, we were as you know, we're always talking about what I call fall through on on on increased sales. If you look at this, we have if you look at the negative fall through on reduced sales, we are we are hitting much better numbers than we have than we are expecting for the for for increased sales. We're we're expecting 15 percent of growth to to to end up at bottom line. The reduction here of 200 millions has only has resulted in in the reduced Opie of 27 million. So we are we are below the 15 percent on the negative fall through, which I think is very strong. It's much easier to increase profit when you grow than than to keep profits when you when you when you are when you are declining. So I think this is very I'm very impressed with how we have done this. So this is telling me that what we have done from the from an automation point of view, from a cost mitigation point of view has been efficient. So so this is one thing that we're we're we're very proud of. Cash flow, I've talked about it. One hundred fifty seven million in the quarter. Almost four hundred million year to date, very strong numbers. If we then exclude the investments that we have done in order to acquisitions, we are three hundred forty million in free cash flow. Very, very positive. Going into the the segments, if you look at Western Europe, we are declining less than we do in the rest of the world. I've talked about it before. China is significantly weak. If you look at this, we are also hitting quite good numbers in operating profit. So Western Europe is not affected as much as the rest of the world. We are we are only declining one point one percent, but that also related to that. We are we are we are not losing as much sales in Western Europe. So that is very the link is very clear. If you look at the rest of the world, we are declining. Yeah, from from eight point nine to five point four percent. That is that that is that is something that we are working on. And one part of the one offset we were presenting is another cost saving initiatives in China that we will that we will do in the in the coming quarter. But if you look at the number of employees and we are counting number of employees in the year to date number and then we see an increase that in total. But if you look at where we were one year ago when we ended Q3, we were nine seventy two in Western Europe. Now we are nine hundred twenty two. So we're done with more in headcount than our sales is dropping. So we are we are we're seeing an efficiency there. The same goes also for the rest of the world. We're done with twenty four percent in sales and we're done with 14 percent in headcount. Here we have some more work to do. So we will we will continue with that. But this is to me, this is showing that we are continuing to prepare ourselves for for for for being efficient also in the lower sales that we're having. So this is something that we will continue with. What will happen when the growth comes back is that we have reduced our overhead costs. So when the when the sales is coming, we're going to we're going to hit the 10 percent mark that I always see as our as our target much earlier than we would have last year. Say that last year we had we were reaching 10 percent at maybe one point one billion this year. I think that level is down to maybe one billion, one billion twenty five or something. So very important to keep in mind that we are we are adjusting our cost base to hit better operating profit at the lower sales. It's very easy to add capacity when needed and it's better to adjust to where you are and then you add resources where you need them. Otherwise, you would have a bucket full of and not fully utilized resources. And we don't like that. So that's how we think. But if you look at the numbers, see China minus 35 percent. And as I see China, we are not seeing a quick recovery. We are preparing for a lower speed in China. We are preparing for growth in Estonia. We are preparing for growth in Sweden and so on. But China will continue to be at a quite low level as we see it in the near future. We don't see a recovery there as of now. Looking at the segments and here we are seeing that industrial is the only growing segment. We were declining in Q3, but year to date, it's a growing segment. And in the segment, we have defense. Defense is what defense has grown with maybe. I don't have a number 150 million plus. It's probably 200 million this year, but I don't have the number in the back of my head. But if we exclude that also, industrial is negative. But what happened in the third quarter was that we were expecting communication to be at a higher pace. And in this segment, we had a few customers coming in with quite high expectations and the conversion from forecast to orders were not happening. So we have one of our biggest customers in this segment were expecting sales of 30 plus million. And we ended up at nine. We didn't know that when we entered this quarter. And therefore, we were a little bit caught by surprise. I had a meeting with the CEO of that company just before the summer. And they were very optimistic and they did not get orders as expected. And this is a customer where we're doing only all the installations that they do. It's a bit of custom design. So they cannot buy to inventory because they don't know which customer that will order. So there is a late configuration. So that was converted to pushed out orders or pushed out forecast as we see it. So this segment had problem with converting quotes and tenders into orders. And we hope that that will change. The guidance in Q4 is that we keep these customers as a similar level as Q3, just to be clear. So we don't have any high expectations of communication in the fourth quarter either. We will see if the conversion comes in, we will exceed what we expect in this segment. Green Tech took also one hit in this quarter. Our biggest customer on the EV Chargers, we were doing a refurbishment program with them instead of building new units. So we lost maybe 15 million in new sales of that. We were helping them to upgrade all the revisions into the latest revision. We were changing the communication cards in the units and therefore that had an impact of our sales. That one-off is not expected to happen in the fourth quarter. We are expecting them to be back on a normalized level. So Green Tech were affected by a kind of one-off. Medtech is running at a slightly lower level than last year. We are expecting fourth quarter to be in line with the third quarter. We haven't made any big adjustments to that in the guidance. We haven't increased that. So our guidance is feeling very, how shall I say, modest, rather than that we expect growth in it. So what do we expect for the future? Communication, very low level. Medtech, we also see some of the customers there have been doing less compared to what they have forecasted in. We had very high growth in 23 in Medtech and we are probably expecting to get back on the 23 level in 25. Green Tech, I hope that that will recover. We have much higher expectations from the customers than they're not converting expectations into orders. So I would say that Green Tech as a segment is a lot of wait and see, not so much conversion to orders. So that is where we are sitting. Industrial, we have a lot of big industrial companies outside of the defense area that are also pushing some orders out. We're doing fairly good volumes, but we know that there is a lot more to come. We have also quite a few new customers that are on the way in, especially in the industrial segment that we expect quite high sales from in the coming 12 months. So we have some growth enablers that we will see some effect of in the coming year or so. Challenging market. If you look at this in a broader perspective, what do we see? There is not only in the contract electronic manufacturing industry where I have seen reduced guidance for the third quarter. If you look at the car industry, we're not really selling into the automotive industry, but we're selling to the suppliers to the automotive industry. So when those are reducing, we are seeing a decline for us as well. So I would say automotive industry will, if that takes a big hit in the coming year, that will affect most of the industrial companies supplying into them. And that could be a challenge for us. We're not that much directly involved in those businesses, but it will have spreading effects that can be stronger than what we see. I would say that is the biggest challenge for us if that industry is not bouncing back a little bit. But overall, I think that we are pushed down. There is a lot of these inventory reductions going on among several of our customers. And when that runs out, we'll see higher sales going forward. We can talk a lot about this, but I'd rather come back in the presentation of Q4 and see where the quarter has landed. Some highlights. Despite all this, we still keep operational excellence as part of our offering, and our quality and delivery performance is still in world class as we see it. We're adapting our businesses. We're continuing to restructuring. We are taking a cost for that for seven million in the quarter. The most important thing is that we're trying to adjust our cost base even lower than where we are to be able to hit higher profitability numbers on the lower sales. Order stock. We have the lowest decline in the last five quarters now. We are declining with 3% in the quarter. That would indicate that there will be... And we're guiding down with 8%. So maybe the order coverage is better now when we enter fourth quarter related to the guidance compared to where we ended Q4 last year. That is a positive signal as I see it. We're also seeing that this shortening on the order cycle that we have been talking about, I would say that that has more or less ended. The availability on the market for components is good. There is no allocation as the supplier is talking about. That means that we will not see any more reductions of the order backlog going forward related to the component shortages. So I would say that we can say that this is normalized after Q3. As I said, CAPEX is continuing to increase. We are moving or we have just decided to move Lund into new premises. That will happen in the mid of 26. There is going to be a new building that is starting to be built this fall. And I think that is very important. Lund is one of the sites that have been showing the highest growth in the last, say, four or five years. So that's very important for us. Lund is also, our current building is in an area that will be restructured into housing. And that industrial field will be turned into housing. Return on operating capital, 23%. We're still keeping that number high up. This is in line with our long-term objective. And I think we are quite higher than many of our peers on this number. Our equity ratio is up to 49%. Our liquidity situation is very strong and solid. We believe that our balance sheet looks very good. If we find the right acquisition targets, we have plenty of room for those. So we just need to find the targets and agree on the price. That's not that's easier said than done. But we have a good pipeline and we have some good dialogues in this area as always. Outlook. As I said, we have our guidance is around a billion for the fourth quarter. That means negative 8% from last year in the middle of the of the guidance. Profitability, we expect to have a higher underlying profitability in Q4 than we had last year. And we believe that that is a solid number. Our performance as of now is indicating that that is fully reachable. We also believe that the market is strong in the long time period. So our guidance for 2020 remains as is. We moved it one year ahead. I would say the outlook for the industry has not changed. The 24 has become a lot worse than when we set this number. So we basically say that 24 will be what I call a lost year in sales. It's not lost in any other activities because we have in our mind built no to be a stronger company during this period. So we're better prepared for growth and better prepared for the future today than we were one year ago. We look very positively upon the future. So with that said, I will open the floor for questions. If there's any questions in the room, I take them first. Yes.

Thank you for the presentation. Lucas Mattsson, equity analyst at Ingress. I have two questions, maybe three if we have time. First, do you believe that the expected sales in Q4 is primarily due to timing factors or seasonal patterns or increase in end demand? Or increase in end consumer demand?

I would say that our guidance is fairly flat to our run rate. If you look at the month, so we're not expecting any big deviation from what we have seen in Q2 and Q3 if we exclude July that is lower. So we don't expect a recovery. We are expecting Q4 to have the similar market conditions. We are expecting that the de-stocking will be less and less going forward for every quarter. We have expected that for some time. So that is due to happen sometime.

Okay, thank you. And in your opinion, besides lower interest rates, what other factors would encourage customers to shift from let's say a relatively defensive approach to a more active one?

I think that's a very good question. I think that will be one enabler. I think that just going back to the, or just for us to get our sales up to where the customers consumption of the product is that would be a step up. But I would say that the general economic climate is a limiting factor now. All the private persons and a lot of the companies are not investing so much at the moment. So there is a lot of wait and see as I see it as of now. And then, yeah, so that would be my biggest, how should I say, the biggest upside. If the economy bounces back, we will see a good growth, especially if the construction industry is recovering, that will have a good impact for our business.

Great, thank you. And do you still see that the 7% estimated market growth is a realistic outcome until 2030 given the, as the global economy has faced quite notable challenges during the recent years, for example geopolitical risks, China, slowdown and trade wars, etc.?

We believe that that number is valid for Europe and I think the European production is going to benefit from the geopolitical disturbances. There will be more production down here than that have been or in or historically been made in China. So we believe that the European part of the of the manufacturing will increase. But the world economy, I see quite negatively on. I don't think that that will grow more than maybe 2 to 3% a year, but the production in Europe will grow faster. That is what the indication is showing. Great, thank you very much. Thank you. Any other questions? Otherwise, I start with some questions from the web. I have one from Carl Noren here or I have a few from him, so I'll take them one by one. Carl is not here today. New customer wins here today. Is it possible to comment on this or on this or how you are tracking versus previous years? Very good question. We have seen a decline. This has been weaker than the last few years. We have seen that the time from quote to decision has increased. So we're working with a similar number of quotes and a similar number of bids, but we see that the time from we submit the quote until the customer makes a decision is significant. The longer so this is this has been a bit weaker this year than last year. Second question from Carl. Is it possible to tell us a bit more on the development within industrial in Q3? It is some 90 million lower from Q2 in Western Europe, which segments are seeing lower demand. I understand there is some company specific, but can you share some more info on this? I would say that Q3 is a quarter where we close the factories a bit longer and that has a negative effect. We had less working days this year than last year. So it's more of a general decline rather than a company specific decline. Green tech continues to slow further. We know you have played, which is developing very strong, but the rest of the portfolio must be really weak. Are you seeing green tech being worse going forward or stable or what is the trend? I think that green tech is at the lower end where it will be. Just play this one part there. There is also listed companies. I will not comment on them specifically, but in general terms, I would expect that green tech is at the lower end of where it will be. So I would expect if any, I would expect increases. One more from Carl. Can you comment anything on price pressure and pricing in the market or some companies wanting lower prices from you and have you lowered prices, but rather customers wanting lower prices? Yes, this is a very good question. I would say that customers are always wanting lower pricing. We would see that we are in an inflation economy. Many of the economies out there are still pushing up salaries and so on. So there is a cost increase pressure as well that is offsetting, as I see the price reduction activities. I would say that we have not reduced prices more this year than any other year. We have mechanisms where the material cost is constantly adjusted to the price that we pay for it. So we're not negotiating that because the agreements are stipulating how to deal with that. But outside of that, I don't see that the price pressure is higher this year. But this is a good question. As long as we and the peers are maintaining a healthy profitability, there is unlikely that there will be a price competition among our peers here in our part of the world. But as soon as we will be, if we see companies making negative profits, then I would expect the price pressure to be higher because then some companies will start to underbid to get more volumes to fill up the factories. That has not happened yet. So I hope that everyone else is doing similar activities that we are doing to avoid that. But that could happen. That was all from Carl. Then I go over to Harald. You explained how the current pace is quite stable and that low turnover in Q3 is largely explained by adaptation in July with prolonged holiday. Given the picture, why did you wait until September 19th with the warning for a weak second half of 2024? What was the additional negative from July to September? The big negative was that we agreed with one customer in the EV segment to do rework on products instead of building new and that the conversion within the communication segment from forecast to orders did not happen. So these were factors that we did not see in the second quarter. Second quarter was fairly strong in the communication segment. So that was the reason. Then we have one from Tommy or we have two from Tommy. We start with the first. You keep presenting forecasts for the next quarter despite the fact that some of the lost forecasts have had to be revised. Has there been any discussion about pros and cons about these forecasts? Very good question and I can assure you that there has been a lot of questions or discussions internally about this. But why have we continued to do it when we are not meeting what we are saying? That can be argued. But we feel that we should be the best one to give forecasts. We want to give you as owners and followers of Note the best possible information to make your decisions on how you see it on Note. Even if we know that the climate has been very hard to predict, we have still continued to do this because we believe that it adds value. If we would feel that analysts and others that are following us are seeing that this is the wrong thing to do, we will cease to do it. But so far we have been encouraged to continue with it even if we have missed it. But I know that this has been a bit problematic and we can only say that we are doing our utmost to do as best guidance as we can. One other from Tommy, you listed a figure of 7 million of provisions for restructuring expenses in Q3. Can you tell us a little more about this? Have you explicitly listed restructuring expenses in recent history? If not, why not? We have not done it lately. We have made adjustments as we have taken them. This quarter we took some initiatives. We made a big reduction in China and we decided to present it as a one-off. In the last year or so we have not presented it in this way. We might have done it in way past but I don't know that. I'm looking at our CFO and she's nodding her head. We have probably done it in the past. The last question I have is from Thomas. Thank you for the presentation. Do you see any risk of customers especially in green tech and communication going away? Are you going out of business because of the market conditions? Yes, there is always a risk. We have what we feel provisions that are covering for that in our report. We have an open dialogue with our auditors and presenting where these are standing. We see some risks in our customer portfolio. I think that we are well covered in this area but there is a risk. I would say that I hope that the economy especially for the green tech customers are bouncing back a little bit. There are a lot of companies that are struggling at the moment. One of them is of course Northwalt. We're not exposed to Northwalt. I would like to say that here we don't have them as a customer. This is rather interesting because we have tried to get them as a customer for many years and we have not been successful there. Currently we're quite happy that we were not successful. But if we would have won them three years ago, we would have been very proud at that time. Time is changing very fast. That was the last question I have. Then I will close the questions and I will summarize. I think if you look at, we think Q3 is, as I said, is weak from sales. We are proud of the profitability. We think that that's a good position for the future. Q4 is slightly, if you call it, bounced back from the current run rate. We will be back on say the Q2 run rate. We have a lower cost base today than we had in the second quarter. Our expectations for profitability is good. We continue to be optimistic about our cash flow. We expect that to continue to be strong. Q3 was really strong, 157 million. If it's that strong in Q4, it's very hard to say when this is time. But if I say that, we will have another maybe 100 million positive cash flow from compared to where we stand and go. If that comes in Q4 or Q1, it's hard to say, but it will come in the near future, coming from continued inventory reductions and so on. That is what we see. We still invest in the future. We still believe that we need to be better positioned and better covered for the growth that we are expecting to come. Therefore, we are continuing to invest in this. Automation, I've talked about it a lot. We are continuing to invest in automation and making our factories more efficient. That is something that we will benefit from the future. We have benefited from it in the last couple of years. And that is something that we remain very focused on. So we're still building for the future, even if this is a quarter that is quite weak. So with that said, I thank you all for listening.