NOTE AB (publ)

This morning, Note has published a report for the second quarter in the financial year of 2026. Standing beside me to give us a presentation and also participate in a Q&A, I have the company's CEO, Johannes Lindh Videstam, as well as CFO, Frida Frygström. Welcome.

Thank you.

You will give a short presentation and afterwards I will return to ask some questions along with our viewers and analysts. Go ahead.

Thank you. Normally, I try to summarize the quarter, how it went, and we can say that the market still continues to show strength. We see order intake is strong. We see some very positive customer wins that we have presented. We also see that the component market is getting a little bit more constrained. That means that we have seen lead time expansions which has affected our top line a little bit. Since our top line went down a little bit, we also see that our cash flow is a bit weaker, but Frida will come back to all the numbers. But all in all, I would say that we continue to build for the future. We extended our factory in Torsby and in Kasten, and we will see factory moves in Lund and Hyvinke. I will come back to those later. So all in all, I think the quarter is fairly good. I would have liked some more top line, but that will come in the second half instead. So with that said, I move over to you, Frida.

Thank you, Jonas. So this is the numbers for Q2, and we report our highest sales ever in a quarter, with sales of 1,175,000,000. This is an increase of 20%, where 1% is organically. So we see strong sales coming in from our latest acquisitions, Keston and SDI, which are performing in line with our expectations. We achieved an underlying operating profit of 112 million, an increase with 19%, and we have an underlying operating margin of 9.6%, also in line with our expectations. We see that we have a high flexibility and we are able to adapt to our customers' needs and combine growth with sustainable and profitable growth. As Johannes mentioned, operational cash flow came in lower than we expected at the beginning of the quarter. We see that we have working capital tie-up in inventory. This is due to constraints on the material market, which Johannes will come back to. Okay.

some market and operational highlights in the second quarter. I think what is important is that we are growing on the fastest growing market and that is security and defense. Our organic growth in this segment came in just over 20% and our expectation is actually significantly higher than that going forward. What we are very pleased to see is that the work coming out of STI and also from Kasten is really progressing in the way we expect. We have very fruitful customer dialogues and I hope we'll come back to the market with some good wins over the second half of the year. And we see that the dialogues and the expansions of the business coming out of these two companies will be fruitful for the group over time. But what we also see is we see the sales level of 20%. That's the highest sales we have ever had. 20% growth is always appealing. We lacked a few percent organically, and that comes from the tighter market on the component side. What we mean with that is that the AI storage are consuming a lot of parts and in some way they are disrupting the balance between supply and demand in the industry. what we call component types that are most on challenge is PCBs, that means the bare boards, and also the more complex semiconductors, especially on the memory side. What happens when these two segments are disrupted is that the lead time on those two segments are going up and that affects the full supply chain. We cannot produce boards if we don't have the bare boards. So that has pushed out some of the deliveries from this quarter. And how much that will affect us over the year is a bit hard to say. What we are presenting in our order backlog and so on, there we have moved out the orders that we today don't see that we will deliver. So we have ordered quite a few pushouts from 2026 into 2027 and that is also reflected in how we present our order book. So the order book should be representing orders that we expect that we can deliver this year. Then again, we know that when you have a shortage on the market, there will be swings on that, so it can become worse and it can become better and so on. So there will be changes throughout the year, of course. But what we also see is that when we look at this, we are not sitting still, as you put it. We work tight with our customers. We work tight with our suppliers. We have good partnership on both the supplier side and the customer side. we're looking into how do we do this in the best way combined. So it's not that we do things and not involve the customers. So the customers are always involved in this. And the more mature the customers are, the better the result will be. So the bigger industrial and the bigger security and defense customers will most likely come out of this stronger than some of the more immature companies where we fight a lot around how the lead time expansions are affecting. With all that said, I will come back with the summary. I will move into the customer segments. And as I said in the first quarter presentation, we were expecting industrial segment to come in strong. We saw the order book was strong in that segment. It remains strong. We see a growth of 11% quarter over quarter. That's very, very pleasing. If I look ahead, I would say that the industrial segment will continue to be strong. If it continues to get momentum, it's a little hard to say, but we will continue to show good growth numbers if we manage to deliver on our orders. Security and defense. I think we said when we stood there when we presented the STI acquisition that we would expecting it to be between 27 and 29 percent in terms of our sales and we ended up at 28 percent of our sales in this quarter so that was fairly accurate. We also expect this to continue to grow. We think the security and defense areas where we will have the strongest organic growth We also see that both Kasten and SDI are growing as companies. Even if they grow in their world year over year, it will still be counted as acquired growth until they have been in our books for a year. So we expect both Kasten and SDI to grow on the market organically in their world, but we will report it as acquired growth. So very positive. Communication, it's an area where I've said that we will turn into growth. Order book, very, very strong. But these customers have very complex products, very semiconductor heavy, as I call it. And that means that we struggle to get components. We have good plans together with the customers in this area. And we are expecting that communication will turn into black numbers, that means that we will see growth from Q3 and onwards. Medtech still affected by high deliveries in the first half year to our largest customer in this area that have been low for the last four quarters. We will quarter over quarter start to match last year because Medtech started to decline already in Q3 last year. Green tech, I've said that it's a bit of what you call sluggish. It goes a little bit up and down. We don't see a clear trend. We see that there might be upswings coming from the higher oil price and the oil supply difficulties. We have not seen that in our order books yet, but that is likely to come that we see an increase of green tech over time. But so far, we have not seen it. But it has recovered a bit. It's now 13% of our sales, and it was lower than that, and now also with two acquisitions that would have represented some 17, 18% in the old note, if you put it like that. So it's on a higher level today than it has been over the last, say, one and a half years. So fairly happy, even though we see a slight decrease here. We think the run rate is decent. So all in all, if I summarize this slide, industrial and security and defense will drive the growth ahead. Communication will add to that. Medtech, yeah, still quite weak outlook. We will not see the same decline as we have seen here, but it's not going to be a big increase, so to say, quarter over quarter or the run rate we see. Greentech, I expect to see similar sales numbers as we have seen in this quarter for the two quarters to come. Yeah, very quick summary of the segments. Back to you, Frida.

Yeah, so if we look at the markets where we are present, we divide them into Western Europe and rest of the world. So if we look at Western Europe, we see a sales increase of 32%. And here we have added our latest acquisition in Kastan and SDI, which are included in the UK. So adjusted for acquisitions, we saw growth of 5% in this segment. Sweden, our largest home market, had sales increase of 8% and adjusted for acquisitions, we saw a decline in UK with 13%, but as I said, STI and Kestan came in in line with our expectations so they have a different setup than the other sites in UK where they are more heavily into security defense so they have a different outlook.

Can I interrupt you there Frida? I have a comment on UK because I didn't think of it when we were prepared but one of our largest customers in UK had a standstill for the quarter due to component crisis not the one we talked about last year but one of the newer customers So UK actually had a stronger demand than what we managed to supply. So if I would add that in, we would be more or less on flat number in UK, and that will come in the third quarter. Sorry.

And then we have a smaller site in Finland, which had growth of 3% in the quarter. If we turn to the rest of the world, we saw a negative sales impact of 12% for the region, where in Estonia we had a growth of 2%, whilst in China we had a negative growth of 32%. And then we have a smaller site in Bulgaria, which declined some. And if we look at the operating profit, we see strong operating profit in both segments. Western Europe with the strong growth is increasing, and here we also expect to have a higher margin than in rest of the world. We are still pleased with the margin we do in the rest of the world. 8% for this region is still a good number and also taking into account that they are struggling with the top line and that is of course affecting the profitability in this segment. But overall we are satisfied with the operating profit from these segments.

Back to me, to the last slide. I think just to comment on that, we see good profitability both in Western Europe and in the rest of the world. We are investing in increasing sales and market activities. We are investing in new IT systems, and those costs are taken on the head office, so we are a bit... What do you call it? We are a bit heavy on cost increase on the central functions and that is what restricts our profitability a little bit. Those investments we expect to pay off over time, so it's something that we have to do. Okay, if I summarize the quarter, I think what is good is that we see that the market activities are strong. We have good dialogues. We hope we will close more business during the second half that are sizable. That means that they are sizable enough to be communicated. We win a lot of smaller business over time and extensions and so on, but we don't present them because we think that the value of them in relation to the group not that significant. So we only report the ones that we feel is significant. So that's how we do it. And the order book reflects that. If we would have presented the full order book, it was significantly higher than 11% up. But then again, now we see that the length of the order book is extending. So it's become a bit hard to compare last year compared to this year with the longer lead times. But very good activity on the market. We also see that the technology intensive segments are growing. That means that the AI storage, very important to have this first breakthrough order from this one customer. So that's very important for us. We also see that we are gaining good attraction on the communication field from very complex products in that segment as well. And we expect to close some orders on that side as well. WE ARE BENEFITING ON THE STRONG PARTNERSHIP THAT WE HAVE WITH WAYSTREAM. THEIR ORDERED INTAKE IS STRONG. WE EXPECT THAT WE WILL CONTINUE TO DELIVER ON THAT AS WELL. SO VERY, VERY GOOD MARKET ACTIVITY AS I SEE IT. AND WE ALSO SEE THAT, YES, THE MARKET MAY NOT BE THAT STRONG. I SAID IT BEFORE, YOU NEED TO HAVE THE RIGHT CUSTOMER IN EVERY SEGMENT BECAUSE THE SEGMENT AS SUCH MAY NOT GROW, BUT THERE WILL BE STRONG GROWING CUSTOMER WITHIN EVERY SEGMENT. SO YOU HAVE TO BE STRONG IN THOSE. So order backlog 11% up compared to last year in like for like terms. That means currency adjusted and we don't include the new acquired sites. Very important to keep in mind SDI and Castan is excluded from this. So that will be on top. And again, we expect that the second half of the year will continue to progressively increase organic growth, and that's what we see. We also expect that we will end up with an underlying operating margin within our previous guidance, 9.5 to 10.5. We are 9.4 now, so it's very little improvement that is needed. So all in all I think that the outlook from where we stand is promising and we are expecting to build upon that. Okay, over to questions.

Yes, thank you very much Johannes and thank you very much Frida. There's a lot of questions that have come into the chat as well, so while we wait for our analysts to get ready with their microphones and their cameras and also make themselves known by raising their hand, I'll move on to those questions. And you mentioned during the presentation that Kaston and STI has performed according to expectations, but that might be a little vague and there's two questions here. First of all, how has Kaston performed during the first half of this year so far?

Yeah, they are coming in fairly much in line. One of the, what do you call it, the non-recurring costs in the quarter is that we adjusted up the earn-out for Caston. And to be clear, we have earn-out of Caston, not STI. So any adjustments there is related to Caston. So we can say that Casson is performing better than expected. We were expecting to have a shortfall or a gap in order to our largest customer, but that order came in and we managed to secure supply of components, so we didn't get that. So they are actually coming in slightly better than expected. They will do their best here ever if they manage to deliver the forecast in the third quarter, which is very pleasing. STI, it's important to remember that STI are very back-end heavy on the year, so the fourth quarter will be their strongest sales, and that comes a little bit with budget years from the customers. It's a little bit, if you want to be a bit blunt to say it, it's a little bit like governmental spending. I mean, their customers are often governments in the end, so therefore the fourth quarter is normally stronger in SDI than the other three. So we expect quite high growth and high profits coming out of STI in the second half of the year.

How high?

We don't comment on that, but higher than we have seen so far.

All right. We now have analysts who want to ask their questions, and we'll begin by moving our attention to Tomas Blikstad from Pareto Securities. Please ask your question.

Can you hear me now? Yes. Yeah, great. Good morning. Thank you for taking my questions. Just if you could give some color on the current component and supply chain situation. And so to say, how confident are you in delivering on the scheduled 2026 backlog and your visibility generally going forward?

Thank you. Very good question. What we see is that the lead time extensions that we have seen are, I wouldn't say stabilized, but they have not been extended over the last month or so, and what we do is that we sit together with our customers and we agree upon their delivery plan that is reflecting the availability of components. So what we are presenting in our order backlog is confirmed by our current delivery times or delivery schedules from our suppliers and it's also confirmed by what our customers are expecting. So in that respect it's well balanced. Then again we don't know if this becomes worse or if it's stabilized at the same level or how it is. Normally we see the biggest disruptions when it starts because first you can survive one or two months with your safety stocks and then you have a gap until you get the next deliveries in and we have seen the gap and I think June was a quite strong month and Our expectations going forward is quite strong, but what is the problem you see is that if someone wants to increase their volumes, that's going to be tricky because we will just be in balance with current demand. So it's a good question, but I would say that what will restrict us more is the PCB or the bare board shortages. That will restrict us more, I would say, than the memories, even though the memories will be affecting some of the boards. But yeah, very interesting to monitor this going forward.

Would you have another question, Thomas?

I could just follow up and thank you for the detailed answer. When you look at the component situation now, and to me it seems that there is a lot of pent-up demand when you look at the three consecutive quarters now of double-digit organic backlog growth. So you say there's some risk of these deliveries not being delivered into the second half of 2026, perhaps being pushed out to 2027? Or did I misunderstand?

What we feel is that we try to give you a balanced picture. We don't have like big orders in the fourth quarter where we don't have supply for it. So what we confirm is where we expect us to come in. Then we are chasing material to try to start programs earlier than we have confirmed them. AND WE ALSO KNOW THAT THERE WILL BE PUSHOUTS FROM SUPPLIERS GOING FORWARD. SO I THINK THE DEMAND IN, SAY, THE FOURTH QUARTER IS STILL QUITE, HOW SHALL I SAY, I'M NOT 100% CONVINCED OVER HOW THAT WILL LOOK. I THINK WE WILL HAVE PUSHOUTS AND I THINK WE WILL MANAGE TO PULL IN SOME ORDERS. SO WHAT WE ARE EXPECTING IS TO SEE A BALANCE IN THAT, AND THAT'S WHAT WE TRY TO REFLECT IN THE ORDER BOOK. So we are expecting the second half to move back into decent organic growth numbers. If there will be 11% or if they will be slightly less or slightly higher, it's very hard to say at the moment. The order backlog and the order intake that we have is supporting even stronger numbers, but we don't get material for that.

Okay, that's very clear. Thank you very much. We'll get back in line.

Thank you very much. Thomas, we have another analyst that want to ask their questions. But before we do that, I want to, there's also some questions in the chat regarding the components. And first of all, are you expecting better visibility from customers given the longer lead times on components?

Definitely.

All the larger customers are very aware of this, so we have weekly updates with all of them and say, okay, what do we see now? And say that the lead time is extending with, say, 10 weeks from one week to the next, then we will cover that with longer order horizons from the customer sides. they know that if they don't harmonize with us in this, they will have very hard to get their deliveries out. So there's no conflict in this. Everyone is trying to solve the problems and the visibility gets longer. The order horizons are extended in line with new lead times from suppliers. But it takes time to dial this in. So it's more of a balancing act to get this in line. But I think we are quite well in that part at the moment.

Speaking of the line, there is another viewer who asked the following. Are the components for 2026 secured and how far in advance do you typically secure component supply? Are the secure components arriving as expected?

Obviously not in Q2 since we were a bit shy of a top line due to this, but I would say that Some suppliers are better than others. There is always a risk that there will be some other Microsoft or Google that come in and buy full suppliers, full demand or full capacity and then that will add on to the problems we see. But we haven't seen that in the last couple of months. We will see what we feel today is that we have our commitments or our order confirmations that we see they are based on our confirmations that we have on the supplier side with some margin. So we think they are in good balance and that's how we see it. Then again the future will tell.

There is also a final question before we move on to Anton Ingves. How big of a risk are the shortages to your expectation regarding organic growth?

I think today our organic growth, if we are falling short of what we say, it's going to be all dependent on that we don't get supply because the orders are there and the demand is there. If we go into next year with low organic growth, the market is there and is supporting what we are trying to communicate. It's more of how much availability do we get. We're back into this situation where we were some years ago, where demand is higher than our ability to get components. But the same situation applies to basically everyone in our industry at the moment. Because what will happen now is that customers will start to over-order, and that will drive demand. So it's a bit of that effect I also expect to see in the coming one to two years.

Alright, we turn then to the analyst at Nordea, Anton Ingves. Please ask your questions.

Yes, thank you. Hi and good morning. Maybe start off on the recent data center order. Obviously very positive news. Can you elaborate a bit more on the potential here in this segment? and perhaps the potential for additional or larger volumes with this customer that you now communicated?

Okay. What we have won is one product type into this customer. They have other product types that we will also start to look into if we can try to win them. But only this product line that we have got is representing somewhere what we call north of 100 million a year and it's not like a one-time order this is an ongoing supply plan that this is related to. How big this will become it's very hard to say it's a new customer we need to get to learn each other and so on before we can say that but what we're securing material towards is in line with what we communicated for the first year so Yes, very, very positive. And I also think that this will prove that we are a trusted partner also in this segment. We have not had any large orders in this, and we are very pleased to say that we now are part of this journey as well. And I think if you look at how the market expectations in this segment is, it's fantastic. But then again, we will see how it goes. But we're very pleased and I'm very proud that we managed to secure this order, to be honest.

The margin profile in this segment, is that on par or perhaps a bit above group level?

I would say that if you would put this as a high volume order, that means that the margin is slightly below the rest of the group. Then again, you will have less overhead cost and so on on it. So I would say that it will be an order that will, what do you call it, the incremental sales will add the margins in roughly the same level as the group, if you put it like that. I don't want to go into more detail there, but that's what I see.

Perfect. And then I know you touched upon this earlier as well, but in STI sort of their organic growth, perhaps versus your expectations as well.

Read the the acquisition. Yeah. Okay, we can take some rough numbers. They were doing just shy of 50 million pounds last year, and the forecast for the full year of this year is just shy of 60, so that implies a 20% growth. Then again, we don't have them for the full year, so there will be a subtraction for what happened in the first quarter. But that's what they say, and what we're looking at numbers for 2027 is significantly higher than this. But that's how far as I go with giving you numbers. Also, I can say that their sales is normally like 32% is coming out of Q4, maybe 25 to 27 in Q3, 20, 22 in Q2, and 17 to 19 in Q1. That has been their pattern for the last, say, two, three years. so we are expecting the same pattern this year and maybe also next year so it's good for you that follow us to understand that STI will push a lot in the fourth quarter and that should be reflected in how you do your projections I don't want to tell you how to do your work but we have not been clear on that so I try to be that sorry for not being clear in that in the past and

Do they experience sort of the same problem with the sort of supply chain constraints or is it the better situation for them compared to sort of the old note?

I would say it's slightly better in the security and defense area because the customers are more used to have placed long lead time orders. That means that we have known these orders for a much longer time. So that means that we have been better in adjusting our delivery schedules towards what availability we see. So I would say that they are slightly in a better shape than other segments due to longer visibility from customer side.

Okay, perfect. That's clear. And sort of the last one here, in the medtech segment, obviously very weak performance in Q1 and in Q2 as well. You mentioned that you don't have expectations of sort of a large pickup here in H2, but Can you give some more flavor of the development and maybe a bit more longer term as well? Is this a growth area over time or how should one view this?

I think it's a very interesting segment and there is a lot of work out there and we are going to intensify our efforts in this segment and we have recruited a new sales director for the segment and so on because I think there is a lot more to do here. We are a bit unpleased with our own performance here, and we try to sort that out. So with that said, I'm expecting this segment to continue to be at a level that are fairly aligned with where we are. And then I will get back to you in the coming presentations to see how the progress is in this segment. We are not happy with the performance there, and we try to sort it out. But at the moment, we are at the level where we are.

Okay. But how much would you say is sort of customer just pulling back volumes versus your own sort of operations that's driving the weak performance?

In Medtech, the demand side is weak and therefore I would not blame component issues on our performance in this segment.

Okay. Perfect. That's clear. That's all for me. Thanks a lot.

Thank you.

Thank you as well, Anton. And picking up from where Anton left off, in the medtech sector, there was a client that decreased their volumes by 70%. How should we see to that? Is that a permanent volume increase?

This is a customer that has some overstocks in how they run their business and therefore they are quite low on the demand at the moment. What we are expecting is that they're doing fairly well on the market. We are their selected supplier so we don't see that anyone else has taken the volumes from us or so. They are happy with their position, and we are delivering one of the models in a fairly good pace, but the two other models that we do, we basically have a standstill on those. So it's a bit frustrating, but good dialogue with the customer, and we are expecting this, that over time, we will get back to decent volumes here, but we're not there yet. I met with these guys a few months ago, So while you sound very pessimistic about the segment, it's not a lost client we're talking about here. No. And the volumes, do you expect them to return in a year, two years, three years? I would say that in the coming two, three quarters, I expect us to remain at this level. And instead of speculating, I will get back to you when I have more information to say. So that's how we see it. It's a quite small segment. It's frustrating, but it's more important that we succeed in our security and defense deals rather than that we sort this out. But I don't like to have weak segments either.

Fair enough. We'll finish off with some more viewer questions that came in during the analyst questions. Node has increased its additional purchase price with 9 million sec in Q2. Which company does this concern?

This is related to the acquisition of Kasten, and we can be clear that we didn't have any contingent consideration for STI. So this is all related to Kasten that has a different outlook on the future. We have a profitability-based target for them, and we have a different outlook on that in Q2 than we had before. So this is an increase of that.

And is there more performance payouts in the future related to these?

So this is just a revaluation of it and then the target is set for during Q3.

Understood. And the next question is Krister who asks, Note has invested heavily in increased production capacity in its factories during the last years. What's approximately the current percentage of factory utilization in relation to total capacity available?

This is a question that I often get, but it's very hard to say, because if you look at Torsby, for example, where we doubled the capacity, I mean, we have another billion Swedish to push through that if we can fill it up. In Lund, we have been subleasing quite a lot of area in the last, say, three, four years, so we are now moving everything back into one facility that is much more suitable for purpose. But I would say that in that factor we have maybe 40 or 50 percent extension possibility from where From where we stand and even care We will also more or less double the capacity when we are moved into that So I would say that our capacity utilization from a floor point of view We are probably somewhere in 60 70 percent utilization throughout the group or rather 60 I would say so lot of growth potential and then we are investing in equipment and in headcount where we see the need for it, to put it very, very easy. So we have floor capacity in basically all the factories. Some factories we have quite a lot of floor capacity. And then we will add machines and employees as we need.

Moving on to the final question then from the chat. If one were to generalize, how long do you think it will take before your supply chain can meet demand?

I think that, yeah, what we see is that it's fairly good balance. I mean, the balance will be hit on a longer time horizon. So in that respect, I think we already are there. IF YOU PUT IT LIKE WHEN WILL WE SEE NORMALIZED LEAD TIMES THAT WILL BE IN A YEAR OR SO WAY I WOULD SUM MAYBE ONE YEAR AND A HALF THAT'S THE NORMAL CYCLE OF CONSTRAINTS IN THE MARKET BUT WE WILL GRADUALLY BE MEETING OUR CUSTOMERS DEMAND AS NORMAL BECAUSE THE LONGER THEY ARE PUSHED OUT THE MORE THE BETTER WE ARE TO MEET THEIR EXPECTATIONS AND THEIR DEMANDS SO IT'S IT'S VERY HARD TO SAY, BUT EVERY QUARTER WILL BECOME BETTER IN TERMS OF BALANCE, AS I SEE IT. THEN AGAIN, THE SITUATION MAY NOT BE BETTER, BUT THE BALANCE BETWEEN WHAT WE MANAGE TO GET IN AND WHAT WE GET OUT IS GOING TO BE MORE MET, IF YOU PUT IT LIKE THAT. WHAT I THINK IS IMPORTANT TO KEEP IN MIND IS THAT WHAT I SEE IS THAT THE DEMAND SIDE IS CONTINUING TO GROW, AND THAT'S THE MOST IMPORTANT THING FOR US, THAT WE ARE moving on and attracting new customers and new programs from our existing customers. That's what we think is important.

Johannes and Frida, thank you very much for being here presenting and answering our questions.

Thank you.