Electronics Production | October 26, 2007

NOTE shows continuing growth, but slower Q3

EMS provider NOTE sales increased by 3% in the period to SEK 1,285.1 (1253.0) m. Growth was largely organic, and attributable to the first half-year. Essentially, demand in the Telecom customer segment was less stable than several other segments in the period.
Sales to Telecom customers were very healthy in the first half-year, but reduced significantly in the third quarter. In December 2006, NOTE signed agreements for new deliveries with several major customers in the Industrial and Telecom customer segments.

Deliveries to these customers gathered pace after the summer, progressively and as planned. Gross margins, whichhave improved progressively through the year, grew by 1.4 percentage points to 12.9% (11.5%). The margin expansion was a result of increased volumes in the first half-year and production and logistics rationalizations conducted.

Within NOTE Components, a centralized, groupwide sourcing function in Gdansk was built up in 2006. Co-ordinated sourcing is a key strategic NOTE initiative intended to increase group profitability for the long term. The progress ofthesourcing function is going according to plan, and until the present, the new working methods have only had a limited impact on margins.

Operating profit expanded by 19% to SEK 83.4 (69.8) m, and operating margin improved by 0.9 percentage points to 6.5% (5.6%). Increased resources and expanded initiatives in this market region resulted in overheads being
8% higher than last year. Overheads include all costs related to the change of CEO, totalling just over SEK 2 m.

Despite reduced net debt, higher interest rates resulted in net financial income/expense of SEK -6.2 (-6.0) m. Profit after financial items increased by 21% to SEK 77.2 (63.8) m, and profit margin expanded to 6.0% (5.1%).
Profit after tax amounted to SEK 57.3 (45.9) m.

In the third quarter, normally weaker than other quarters, sales reduced by 7% to SEK 389.9 (421.4) m. In August-September, demand was far lower than planned, mainly for Telecom customers. A number of customers in the
Industrial segment also delayed orders more than expected. However, the start-up of volum production for new customers progressed as planned.

At the end of the period, the order backlog remained positive. Despite variations in demand and reduced volumes year on year, gross margins grew by 0.9 percentage points to 13.2% (12.3%). Margin gains are mainly a result of adapting staffing in several Swedish units and an improved product mix.

Operating profit increased by 5% to SEK 28.1 (26.8) m; operating margin increased by 0.8 percentage points to 7.2% (6.4%). Overheads have also been reduced and were down 4% yea on year. Profit after financial items increased by 2% to SEK 25.7 (25.1) m; the profit margin increased to 6.6% (6.0%). Profit after tax amounted to SEK 18.9 (18.0) m.

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. Seasonality means that the third quarter normally presents the biggest challenge for consolidated cash flow.

Methodical and close collaboration with customers has enabled a 3% reduction in average credit terms since year-end and by 12% year on year.

Like other medium-sized EMS corporations, NOTE faces a major challenge in continuing to rationalise its stock control and logistics. This is particularly apparent in rapid demand upturns and downturns, and is primarily associated with the
complexity of electronics production and long lead-times for electronic components. Lower-than-expected demand, mainly from Telecom customers, contributed to a significant stock build-up in August. Stock reduced
somewhat in September, but at the end of the period, was up 27% on the previous year-end, and up 13% since mid-year. This stock build-up and increased rate of investment meant that cash flow reduced to SEK -
39.1 (-24.9) m in the third quarter.

In October to date, stock reduced by another SEK 10 m-plus. NOTE expects to be able to reduce its inventories significantly by year-end. The equity to assets ratio at the end of the period was 33.2% (27.2%), a 3.0 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 122.3 (41.8) m.


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