Electronics Production | October 24, 2008

Note post slight decline in profit

EMS-provider Note has posted a slight decline in turnover. However, the company continues their restructuring strategy systematically.
Financial Performance January–September
Sales were SEK 1,295.0 (1,285.1) m in the period. Sales in the recently acquired operations in the UK, China and Järfälla, near Stockholm amounted to SEK 41.8 m, or 3% of total sales. Thus, sales for other units decreased by nearly 2%. Sales in NOTE’s largest business segment, Industrial, usually features stability and relatively long product live-cycles. However, back at the end of the second quarter this year, NOTE experienced some demand slowdown, mainly from customers in the Swedish engineering sector. Thus, in like-for-like terms, sales in the Industrial business segment were down by over 7% on the corresponding period of the previous year.

Demand from customers in the Telecom business segment is inherently more unstable over time than some other segments. For example, there was a significant fall in sales to Telecom customers in the fourth quarter last year. However, sales year to date in Telecom have been brisk, and were up by over 6% year on year. Order backlog, which is largely made up of industrial products, was lower at the end of the period compared to the previous year, but remained healthy.

To attain a high tempo in change initiatives and ensure lower costs for these measures overall, costs for continued restructuring are expensed in the Income Statement as they arise. Basically, the expenses for the change process affect gross profit. These costs are largely comprised of headcount downsizing in Sweden, costs relating to temporary surplus capacity in new acquisitions—mainly in costefficient countries—and a temporary increase to project management capacity for change initiatives.

These additional costs amounted to approximately SEK 30 m in the period. Despite the fact that sales for the period including newly acquired operations were somewhat higher overall than last year, gross margins contracted to 10.4% (12.9%). Adjusted for the extra costs for the change measures, gross margins were 12.4% (12.9%). Thus, rationalisation so far and cost-cutting on electronics components and production materials in the period did not fully offset increasing price pressure from international customers, and an altered product mix—an increased share of Telecom, with comparatively lower gross margins than industrial products.

As part of the Nearsourcing initiative, NOTE is migrating to more value-added services close to the customer. As part of the initiative to expand and enhance the skills of our sales resources, sales costs increased year on year. But including expenses relating to staff downsizing and newly acquired operations, overheads for the period were approximately at the same level as last year. Mainly as a result of the costs of the change package and altered product mix, operating profit reduced to SEK 44.1 (83.4) m, corresponding to an operating margin of 3.4% (6.5%).

Higher interest rates and increased net debt, largely relating to newly acquired operations, resulted in a net financial income/expense of SEK -8.1 (-6.2) m. Net profit for the period includes positive effects of the market valuation of foreign currency hedges for the forthcoming heartyear totalling SEK 2.7 (0.0) m. Profit after financial items was SEK 36.0 (77.2) m, equivalent to a profit margin of 2.8% (6.0%). Profit after tax was SEK 23.4 (57.3) m, or SEK 2.43 (5.95) per share.

Financial Performance July–September
Sales in the third quarter were SEK 398.5 (389.9) m. Adjusted for the newly acquired operations in the UK, China and Järfälla, like-for-like sales reduced by 2%. Demand in the Industrial business segment slowed further, mainly from Swedish engineering customers. In like-for-like terms, sales to customers in the Industrial business segment were down 7% on the third quarter of the previous year. However, demand from customers in the Telecom business segment remained high, and were up 10% on the third quarter of the previous year.

Gross margins, which progressively expanded in the year, were 11.1% (13.2%) in the third quarter. Costs for the change process in the period amounted to a total of approximately SEK 10 m. Adjusted for extra costs from the change process, third-quarter gross margins were consistent with the previous year. The positive effect of the restructuring in the form of lower cost of materials and reduced costs in the Swedish business will arrive progressively through the autumn. Thus, in profit terms, rationalisation and cost savings achieved in the quarter compensated for the effects of weaker market conditions and altered product mix.

The initiative to enhance and upgrade NOTE’s sales resources were a contributor to increased sales costs in year-on-year terms. Additionally, costs for terminating staff resulted in like-for-like overheads being higher than the previous year. Mainly as a result of weaker market conditions and costs for the change package, operating profit reduced to SEK 14.2 (28.1) m, equivalent to a profit margin of 3.6% (7.2%). Profit after financial items was SEK 12.0 (25.7) m, equivalent to a profit margin of 3.0% (6.6%). Profit after tax was SEK 7.7 (18.9) m.

Significant events January–September
The company's strategic change process continues and measures are implemented to transfer labour-intensive production and sourcing services to cost-efficient countries. This is turn will downsize the headcount in Sweden by 200 staff (or just over 25%).The new Nearsourcing Centre for long-term sales growth has started in the UK. Note also added valuable mechanical engineering know-how close to its customers in Sweden to develop advanced prototypes as well as to offer shorter production runs.

Significant events after the end of the period
• Consistent, methodical focus on Nearsourcing–measures implemented in October to downsize employee headcount in Sweden by a further total of approximately 100 staff
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