Electronics Production | July 18, 2007

NOTE reports continued profitability gains

Sweden based EMS Provider presented its interim report for January - June 2007. Sales increased by 8% in the first half-year to SEK 895.2 (831.6) m. Essentially, growth was organic, and mainly attributable to the Telecom customer segment.
Agreements were signed for new deliveries with several major Industrial and Telecom customers in December 2006. Preparation for production start-up is proceeding according to plan, with volume deliveries scheduled to take off in the second half-year.

Gross margins expanded by 1.7 percentage points to 12.8% (11.1%). The margin gains were a result of expanded volumes and production and logistics rationalization implemented. Rationalisation and concentration of group-wide sourcing operations in Gdansk has been underway through Note Components since last year. Progress is according to plan, although so far, this realignment has only exerted a limited impact on margin growth.

Operating profit grew by 29% to SEK 55.3 (43.0) m; operating margin increased by 1.0 percentage points to 6.2% (5.2%). Sales and administrative costs were up 15% year on year. These overheads include all costs associated with the change of CEO in the period, totalling just over SEK 2 m.

Net financial income/expense improved somewhat due to reduced net debt. Profit after financial items rose 33% to SEK 51.5 (38.7) m, while profit margin expanded to 5.8% (4.7%). Profit after tax was SEK 38.4 (27.9) m, or SEK 3.99 (2.90) per share.

Second quarter
Sales increased by 9% in the second quarter to SEK 470.2 (433.1) m, mainly attributable to the Telecom and Industrial customer segments. The order backlog at the end of the period remained satisfactory.

Gross margins increased by 1.5 percentage points to 13.0% (11.5%). The margin expansion was a result of increased volumes and an improved product mix.

Operating profit grew by 27% to SEK 30.5 (24.1) m; operating margin expanded by 0.9 percentage points to 6.5% (5.6%). Overheads were 10% higher year on year, mainly due to increased marketing initiatives.
Profit after financial items grew by 28% to SEK 28.5 (22.3) m; profit margin increased to 6.1% (5.2%). Profit after tax amounted to SEK 22.4 (15.8) m, or SEK 2.32 (1.64) per share.

Financial position and liquidity
NOTE has a sharp focus on progressively improving the group's cash flow, the primary aim being to enhance efficiency and balance the business risks of operating activities. Accordingly, NOTE began a methodical change programme in autumn 2006 intended to rationalize its utilization of working capital. As a consequence, cash flow in the latest three quarters was SEK 114.8 m, or just over 8% of sales. However, seasonality means that the third quarter normally presents the biggest challenge for consolidated cash flow.

Despite sustained positive volume growth, cash flow was SEK 27.8 (-15.4) m in the second quarter. For the whole period, cash flow was SEK 73.4 (8.3) m, or SEK 7.63 (0.86) per share. Methodical and close collaboration with customers has enabled a 5%-plus reduction in average credit terms since year-end. However, stock has increased by 12% in the year, and by 8% since the midpoint of last year. The increase primarily comprises the intentional accumulation of buffer stocks to cope with sustained expected positive demand, from Telecom customers particularly.

Dividends of SEK 21.7 m (SEK 2.25 per share) were paid in the second quarter for the previous financial year. The equity to assets ratio at the end of the period was 31.8%, a 1.6 percentage point increase since the previous year-end. Liquidity was positive at the end of the period. Available liquid funds including unutilised overdraft facilities were SEK 123.9 (72.1) m.

NOTE has now posted eight consecutive quarters of positive volumes and stable profit performance. Over the most recent 12-month period, which featured a very strong business cycle for most of NOTE's customers, sales were SEK 1.8 bn, and its profit margin 6.0%. The return on operating capital was 25.6% and the return on equity was 30.8%.


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