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Electronics Production | April 21, 2009

Note reported first quarter loss

Sweden based EMS-provider Note reported sales of SEK 329.1 (427.3) million and an operating loss of SEK -8.6 (13.8) million for the 1Q of 2009.
The operating margin amounted to -2.6% (3.2%) and the loss after financial items was SEK -11.1 (11.5) million. Cash flow after investments was SEK -15.3 (24.0) million.

Significant events in the January–March period include the implemented measures to transfer labour-intensive production and sourcing services to the group’s units in cost-efficient countries. Staffing in Sweden reduced by
91 people, or 16%, in the period. The EMS-provider also started up a Nearsourcing centre for additional sales growth on the Norwegian market.

Arne Forslund, President and CEO of Note said:

We are now in the final phase of our methodical efforts to realign NOTE—from a traditional contract electronics manufacturer to a unique services provider on the EMS market. Our new business model has been tailored to
customer needs to get to the market quickly. With Nearsourcing, we are now seeing clear evidence of how we help cut customers’ time to market by over 50%.

With our new preferred parts database NOTEfied and the associated PLM (Product Lifecycle Management) tool, we are ensuring effective sourcing and cost control right through product lifecycles, and as a result, we succeeded in securing several new customer contracts in a short period. Due to the rapid and severe downturn in the manufacturing cycle, we also took resolute measures to adapt our costs at our Nearsourcing centres and Industrial Plants to deteriorated market conditions.

Progress in the first quarter

Low demand from the end of last year persisted right through the period. In the short term, the weak business cycle has a negative effect on ongoing deliveries. Accordingly, first-quarter sales were down 23% year on year. However, there is a wide variation between sectors. What is more pleasing is that with our new business model, we are achieving successes with new customers and markets. When Kongsberg Defence & Aerospace recently chose to use our unique database NOTEfied for developing new products, we viewed this as a market breakthrough for Nearsourcing.

As a result of our new way of addressing the market, we also signed several keynote collaboration agreements with new customers including OTRUM, Tour & Andersson and Telespor. These new deals are very significant to our future, but will not feed through to our Income Statement until late in the year. Consistent with our new business model, we have coordinated and centralised our sourcing operations on Gdansk, Poland, which reduced our purchasing costs significantly.

The transfer of labour-intensive production to our plants in cost-efficient countries is another important component of NOTE’s realignment. In the past five quarters, we took decisions to reduce our staffing, mainly in Sweden, by some 400 people, or over 50%. Last year, we laid off 130 staff, followed by 91 in the first quarter. These measures have major implications for our cost structure. Accordingly, in like-for-like terms, our production costs reduced by over 16% year on year. Continued rationalization and firm cost control enabled us to cut our other overheads by 15% year on year.

The realignment of NOTE is extensive, and our countermeasures to the recession have been consistent and resolute. Despite our significant cost savings, reduced volumes on the market have exerted downward pressure on margins. Thus, profit performance this year has been weak but in line with our internal plans. Normally the first quarter is the year’s weakest in volume and profit terms. A deteriorated manufacturing cycle has also raised a major challenge to balance our stock levels to match reduced customer demand. While our stocks remain high, late in the quarter, we saw a clear trend-break, resulting in a reduction of our stock.

Considering that challenging conditions also extend to the credit market, we were also pleased to arrange a new funding facility with our bank connection.

The future
In the short term, we have a sharp focus on strengthening our cash flow, and primarily, we expect to be able to achieve this by continuing to reduce our stock. We have now adapted our costs, so we could cope with a potential volume downturn in the range of 30% while remaining profitable. We are continuing to monitor progress on the market closely and are prepared to take further action if necessary.

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