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SP Group A/S
CSE:SPG

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SP Group A/S
CSE:SPG
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Price: 311.5 DKK -0.95% Market Closed
Market Cap: 3.8B DKK
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Earnings Call Analysis

Q3-2023 Analysis
SP Group A/S

Company Faces Decline but Remains Resilient

The company experienced a 4% sales decline and booked a loss in Q3 2023, partly due to rising interest rates that increased financial costs. Despite a 2.7% top-line drop in the first 9 months of the year, there was growth in sales of guidewires, ventilation equipment, and medical packaging. Sales of own products decreased by 16% to DKK 455 million, while EBITDA fell by 8.6% to DKK 324 million with a margin decrease of 1.1% to 16.6%. However, the firm reduced net interest-bearing debt by around DKK 70 million, increased equity by DKK 125 million, and still has an EBITDA margin at a historically high level.

Navigating Headwinds: Sales Decline Met with Operational Progress

The company's third quarter disclosed a 4% decrease in sales and a recorded loss partly attributable to global economic pressures like rising interest rates, along with increased financial costs. Despite these challenges, the company witnessed robust sales in categories such as guidewires, ventilation equipment, medical packaging, and industrial components. Positively, there were gains in operational cash flow, equity, and a notable reduction in net interest-bearing debt.

Product Mix Shifts Impact Revenue and Margins

A primary driver of revenue changes was a noted shift in the product mix, with a decline in proprietary brand sales. Earnings before tax fell by 31% due to a downturn in EBITDA and increased financial expenses, yet the net interest-bearing debt to EBITDA ratio has remained stable. On the upside, the company has been successful in improving equity by 19% and bolstering cash flow significantly, amidst a cautious investment approach and debt reduction.

Economic Challenges and Destocking Trends

The company has been contending with currency exchange headwinds, particularly a weaker dollar, leading to an estimated DKK 18 million impact on the top line. A trend of destocking was observed across the industries due to prior supply insecurities and the recent interest rate hikes, leading customers to convert inventory to cash—this destocking is anticipated to taper off, and not be a significant factor in the coming year.

Optimistic Prospects Despite European Market Slowdown

While 75% of the company's business in Europe is currently seeing stagnant growth, there have been no customer losses, and new customer acquisitions reinforce confidence in future growth. The healthcare sector shows a growth turnaround in Q3 after an earlier slowdown, and the clean tech sector demonstrates an impressive 17% growth in the same period. Overall business diversification and a robust footprint across North and South America, Asia, and Europe, combined with cost reductions—like consolidating factories in China and planning a new plant in Atlanta—place the company on a promising trajectory for international expansion.

Shareholder Dynamics and Market Strategy

The share price has dipped more than the market average, which management is addressing proactively. Despite this, long-term performance since 2010 remains strong. Shareholder base has grown by 27%, signaling investor confidence. Strategic focus remains on acquisitions, dividend payments, and debt reduction, all within a prudent financial framework responsive to the high-interest environment. The company continues to assist customers in reducing costs by innovating with materials like composites, aligning with market demand for cheaper and better products.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

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U
Unknown Analyst

Hello and good afternoon. On behalf of [indiscernible] Capital, I would like to welcome you to this Q3 2023 earnings call together with SP Group. My name is [indiscernible] and with me today, I have CEO of SP Group, Frank Gad, who will take us through the Q3 results and the latest development.

Before moving on, I'd like to quickly introduce you to the platform. Some of you may be new to the platform but you can see that you can ask questions in the text box below the image and you can post your name in the box on the left-hand side.

I'd like to say a big welcome to Frank and pass over to him now.

F
Frank Gad
executive

Thank you very much and thank you for listening in. In the third quarter, we had a decline in our sales of [ 4%]. We booked a loss. And we have also seen interest rates go up in Europe as well as in the rest of the world and that has increased our total financial cost.

On the good side, we have sold a lot of our guidewires. We sold more ventilation equipment. We sold more medical packaging. We have sold more industrial standard components. We have increased our cash flow from operation and we have increased our equity and we have reduced our net interest-bearing debt. And we will try to go through that in the presentation.

There's no change in the group management. The 4 of us has been here together since the spring of 2020. We celebrated 50 years anniversary last year. We have sold our services and products in 97 countries last year. We have subsidiaries in 12 countries and 3 continents. So we are in North America, in Europe and in Asia. And we have 2,485 committed colleagues.

We make surface solutions and plastic solutions and we use a number of different technologies and we sell our products globally. This is a picture of our guidewire that is one of our own parts. We distribute it globally. We have seen the top line decline 2.7% in the first 9 months of this year. Sales of own products were down to 16% to DKK 455 million. EBITDA was down 8.6% to DKK 324 million and the EBITDA margin declined 1.1% to 16.6%. Profit before tax ended up at DKK 139 million. Earnings per share was at DKK 8.90. We reduced the net interest-bearing debt by almost DKK 70 million and we have paid dividends and we have purchased own shares also in this period and we have increased our equity with DKK 125 million since the beginning of the year.

We have introduced this new test kit from Meditec. We sell that to hospitals but also to the food industry and we have got approvals now to sell it in the European market. Over the last few years, we have grown on the top line. We have improved our EBITDA and we have improved our profit before tax. We've got healthier balance sheet to become a bigger company and a more profitable company through a stronger balance sheet.

If you look at the last almost 13 years and you can see our top line development here and the top line has been growing over 10% in average from 2010 to 2022. And then in this year, we have seen a decline of 2.7%. We've also seen negative growth in a few quarters earlier. And I am convinced that we sure will get back on track and get close back to the business again. We have planned for growth and we've got a little bit robust product mix this year than we had last year. So our EBITDA has declined due to the lower top line and a little bit lower margin and you can see the margin decline here. It is, however, still at a historical high level.

U
Unknown Analyst

Frank, if I could jump in here. we've seen a bit of a fluctuation in the EBITDA margins throughout this year, down a little in Q2 and then up a little in Q3. Could you put some words on what this fluctuation is driven by and if this is seasonal? And yes, a little bit more on this.

F
Frank Gad
executive

It is mainly due to product mix. And what has changed in the product mix, we will look at it in the next slides here. But a major contributor to the change here is that we have sold less of our proprietary brands this year than we did last year. And you will see that a few slides later. And that is the main driver. There's not much seasonality in it.

Earnings before tax is down due to the lower EBITDA but also much higher financial costs this year compared to last year. So it is down with 31%. Net interest bearing debt-to-EBITDA is 2.2% and that is more or less at level what it was last year. So despite EBITDA has declined, we've also been able to reduce the net interest-bearing debt and therefore, this rate will be -- is more or less the same.

And then the third quarter results and the first 9 months results compared to last year. And we have been through the profit and loss statement. You can see the equity is up with 19% compared to last year and also during the year. And the cash flow from operation is DKK 102 million in the third quarter, up from DKK 73 million, as the cash flow in the first 9 months is DKK 288 million, up from DKK 210 million. And the cash flow in the first 9 months of this year is actually more than it was all of last year as you can see on the right side.

Then we have reduced our investments. We're still investing in the future. So we are buying new equipment, new technology but at a slower pace than last year. So we have this year invested DKK [ 120 ] million, still DKK [ 198 ] million in the first 9 months. And we have reduced our net interest-bearing debt since the beginning of this year. In the fourth quarter of last year, we made an acquisition, that was why we had a big jump from end of September to end of December last year.

And then you can see we have increased equity. And therefore, the equity ratio has gone up from 42% last year to now 47%.

Coming back to your question, [ Philip ], here, you can see that, that is our revenue from our own brands. And we have actually seen a good growth in the sales of animal housing ventilation, of guidewires, of medical packaging and the industrial standard components. However, the sales of ergonomic and medical is down this year from the very high level we have seen in '21 and '22. But we are still at a higher speed in this business than we were back in '19 and '20. And it is something we have seen before that if you have a headwind in the economy, then companies do not invest in ergonomic solutions and working environment short term but they then will start to do that again after a few quarters.

And if you look detailed into the figures, then you can see that the decline in the first and the second quarter was around 50%, in the third quarter was only 25%. And I'm pretty sure that the 2 would be back to growth again also in that area.

But all of the proprietary products are down to approximately 23% of sales, while in the last year were around 28% and that has an impact on the EBITDA margin.

U
Unknown Analyst

And Frank, I have a question here. So a big theme in the economy recently is that companies have been destocking and then may be built up too much working capital during the corona years and after COVID-19 in 2022 and that's then been coming down in recent years. How much do you see this being an absolute fall in demand? And how much do you think is this sort of destocking thing?

F
Frank Gad
executive

I think the destocking in combination with the FX headwinds, we have seen the dollar at a lower level this year and again we compared to the first 9 months of last year and we have calculated that we are missing approximately DKK 18 million on the top line from the change in FX mix. So the combination of FX mix and destocking, I think, makes up more than the decline in the top line.

And why are people destocking? Well, they were buying a lot when they could not get what they wanted, if you remember, they could not get the chips and the electronic goods and they were afraid they could not get the plastic. We have all the time been able to supply people what they want but again they won't be buying too much plastic for a while and now the interest rates has gone up, so now they want to destock and convert to cash and bring the cash back to the bank manager, so he will reduce the interest charges.

And we see that going on, I think across the world in more or less all industries. Some of our customers are also selling less this year than they did last year because of the change in the global economy. And if you look at the European economy, then I think we are close to [indiscernible] this year but the world economy is still growing. Our challenge is that 75% of our business is in Europe and here, things are not growing.

The good thing is, we have not lost any customers. There are no other -- we have not seen any of our customers going back to another or gone out of business and to the contrary we've got new customers on board . And therefore, I'm convinced that we are sure to see growth coming back again.

U
Unknown Analyst

Frank, we just got a question from the audience here about do you expect this destocking cycle to continue into 2024? Or how do you view this?

F
Frank Gad
executive

I think, let's go to the next slide, then I can elaborate a little bit on it because if you take the clean tech industry, that's -- is the first picture here, then we have ever seen 10% growth in the first 9 months but we saw accelerating growth to 17% in the third quarter. Here, we saw destocking taking place during '22 . Many of our customers in this industry were destocking last year and it is my impression now that they have left this behind and they're growing again.

If you take the next one, that is the health care revenue. Here, we saw destocking in the first 6 months but actually still growth in the third quarter. And here, I think most of them have also destocking behind at least at the end of this year. And then there are other industries where I think that's actually been moving pretty good until now but they might have a slowdown.

So I think it is different from industry to industry. And overall, I think that we are very close to where they have stopped the destocking if you look at our total portfolio. So I do not expect that destocking will be a big issue next year.

U
Unknown Analyst

That's great.

F
Frank Gad
executive

And if you look at the figures we basically had just elaborated and then you have them all here. The health care industry here, we have seen growth in the third quarter but decline in 2 first quarters. In clean tech we saw decline last year, slow growth in the first 2 quarters, high growth in the third quarter, food-related had slowed down in the first 2 quarters, lower slowdown in the third quarter. Automotive growth in the first 2 quarters but now they're slowing down. And all the molding industries, it's a mix of everything. And here we have seen some of the companies really doing destocking now and some of them are also affected by the world economy.

If you are selling equipment to container harbors at the -- number of containers moving in the world are going down, destocking going into [indiscernible] people have expected then they'll probably buy more equipment. So this business has slowed down. And there are a number of, you can say, stories that you can add together and at the moment, that is not moving very fast.

At the bottom line here, you see our own brands, we saw a big decline in the domestic business in the first 2 quarters, lower decline in the third and I think fourth quarter will be back to growth. And the good thing is that we have growth in all the other areas where we had very negative growth in the -- during the COVID period.

And if you put it all together, then 32% of our business is health care and now 31% is clean tech, 13% is food-related, 6% is automotive and all the remaining industries are 18%, And customer concentration has gone down so that we have no customers who accounts for 10% of the sales. 10 largest account for 48% and 20 largest account for 57%.

We have a global footprint. We have 15% of our sales in North and South America, 10% in Asia and 75% in Europe and Europe is at the moment, sales-wise things are moving little slower speed. We have this year consolidated 2 factories in Shanghai area -- in Suzhou into 1 factory. So we have moved this team only into the same facility as [indiscernible] has been in for few years. So now we have only 2 sites in China. The 1 in [indiscernible] and the 1 up in the north and then the 2 factories that have moved together in Suzhou and they did that in the middle of the year.

And we have handed back the key to the old premises. So we have reduced our cost base in China and still have room to grow and give good service to our customers. In North America, we have 2 plants and we have decided to make a third plant. So we have, this year, acquired land and we have started building a new factory in Atlanta, where we will do injection molding and the factory will hopefully be in daily operation in the second half of next year.

Then we have still a lot of factories in Europe and we have our sales and services in Canada, in Norway and in the Netherlands. We have had to adjust on each factory the workforce. So it is adjusted towards the new [indiscernible] on the demand side. And that means we are in total approximately 121 people less than we were at the beginning of the year.

We have not made any acquisitions this year. We made a number of acquisitions in previous years. But this year, we have not been able to find a match between what sellers want and what we feel we can afford to make. So we have then decided to keep the money and reduce the debt.

U
Unknown Analyst

And Frank, just on the acquisitions, is this because sellers are still not adjusting to the high interest rate environment? Or could you add a little flavor to what -- what's going on?

F
Frank Gad
executive

That is our experience, that sellers are not -- they still believe that the world is as it was a year ago. And they just don't want to see that on the share price of SP Group.

U
Unknown Analyst

Perfect.

F
Frank Gad
executive

Well, still -- we still have acquisition on our agenda and we are still drinking coffee and we still want to talk to people and also we can do lot of acquisitions going forward. We would also like to continue to pay dividend and hopefully, also we do, so that. And at the moment, we cannot do acquisitions, well, then we are reducing debt. We have not launched new share buyback programs. We launched 1 in August of '22 and there was 1 in April 23 and then we completely turned off, we have spent the money and we have not launched a new one.

And all the companies we have acquired during the last 8 years, we are very happy with the fit in and they are all contributing to make a stronger SP Group. And we have been able to increase our EBITDA margin year-by-year since we started this acquisition path.

This slide here, you can see we have consolidated in China. So we are 1 factory less now than in the beginning of the year. And then we started to build a new factory in Atlanta in the U.S. So we, in '24, I think have the same number of factories that are now and then we are still looking for acquisitions and then you can put them on top of this.

So but basically, the slide shows that we become a much more international company over the years. So we have now more than 70% of our sales outside Denmark, we have 70% of our colleagues outside Denmark and we have 17 factories around the world outside Denmark and then we still have a number of factories in Denmark.

The share price has declined and we also declined more than the market. And I am really sorry for this. However, if you look at long picture -- the bigger picture, then we have still outperformed the market since 2016 and especially since 2010. But I'm aware that we cannot pay our bills because that's history right now. So we're working hard to change this future.

We have got a lot of new shareholders during the year. So actually, we have -- we are now 4,175 shareholders and that is up by 27% during the year. And I think it is the highest growth rate we have ever seen in a year. We have 3 large shareholders that is ATP and Lannebo and Odin. And Lannebo has increased its shareholding this year. The same has Schur Finance and I have and the management team members and then you can see the remaining -- and we all flagged that, of course, when the insiders has been buying shares and then the other shareholders own the remaining 51%. So roughly 1/3 of the shares are owned by management, 1/3 by international investors and 1/3 of Danish domestic.

And the market condition, well, all our customers, they are focusing on getting costs down and a quick way for getting costs down is to make better and cheaper products. And we help the customer to do that, so we get replace wood and metal and glass and substitute to plastic and composite. And I think we've never been as busy as we are right now looking at new composites where people want to convert metal to plastic. And that is a leading indicator for getting more business in the next years.

We continue to manufacture globally, with a powerful team and the right equipment and the right technology. And this year, we have opened a new big factory in Poland with 12,000 square meters. And we have bought the land and started to build a new similar factory in the U.S. to continue to be build both for global business.

U
Unknown Analyst

Frank, yes, I had a question there. You mentioned some -- potentially new customers are looking at how they can reduce their component costs and maybe switching from metal or glass to plastic. And my question was, are you already seeing this and it sounds like you are but also do you then expect this trend to accelerate or continue at similar speed to what you're seeing now?

F
Frank Gad
executive

We -- I think it will accelerate because in good times, companies are busy keeping the business running. In bad times, they have to stop and rethink what they are doing and that gives a incentive to make new innovations and substitute wood and metal and glass with plastic. So actually, when the economy is slowing down, then this part of the business is accelerating but you cannot see that in our top line. Now you can see that in our top line in a year or 2 because it takes time before people have actually made up their mind, built a new mold and get it running.

U
Unknown Analyst

That was going to be my follow-up question, is roughly what's the timing from agreeing on a project to scale production?

F
Frank Gad
executive

That depends on industry to industry, if you're in medical business, then it takes quite a while, in all other industries they are much faster.

U
Unknown Analyst

Perfect.

F
Frank Gad
executive

Then there is a couple of [indiscernible] core business and also plastic production to specialists and here we try to help the customer by taking over his in-house production, use our skills and our scale to give him a better solution, where he has low CapEX, low OpEx, better quality, better delivery on time. Customers want fewer suppliers. So it is our ambition to become their preferred supplier. So when they cut the number of suppliers down and that is also a big trend at the moment that customers want to have fewer suppliers but then they choose the best and then it's important for us that we are one of the suppliers they continue to work with. And the only way we can ensure that we give the customer excellent service each time it's exposed to us.

And then there is a growing aging and population decline and the scarcity of resources, we have strong exposure to global industries, health care, clean tech and food industry because we have more people on the planet, we will be more in the years to come. We want to have a longer life and a better life [indiscernible]. We want to have a green transition, renewable energy and water, better food and keep the food so we don't waste as much. And we know these [indiscernible] all these solutions to meet advanced plastic and surface solutions.

We [indiscernible] large [indiscernible] in the Baltic Sea that was taken into operation in '21 or '22. And at the time when they build, it was the largest offshore windmill farm in the world. And you can see the [indiscernible] compared to the service role and we are taking [indiscernible] because we believe that there is a strong demand in Europe and also in the U.S. to build a lot of offshore windmills and also onshore windmills in the years to come and to get rid of Putin's gas but also to a rid of coal and I am sure that it takes such a long time to get the permits of [indiscernible].

But our customers in this industry can really help us change the dynamics in the green transition. We see a global economy that is fragile and we see no growth in Europe on the overall level. The good thing is that inflation is coming down again. But growth is also down. We are still at high interest rate and that is slowing down [indiscernible] even more. We invent a lot of new products and the customers does the same and I'm sure this will lead to new exciting solutions that contribute to growth and earnings in the coming quarters.

And we have maintained our outlook and still expect the top line that is somewhere between 0% and 2% bigger than last year, EBITDA margin between 16% and 19% of sales and then earnings before tax between 7% and 10% of sales. And you all remember that we reduced the top line and the bottom line expectation after the 6 months result.

U
Unknown Analyst

Just a question on the outlook. If we look into the numbers, we can see that we need quite a reacceleration into Q4 to maybe reach some of the top end of the guidance ranges. And maybe a bit more on what you expect in Q4 and whether we can expect some of this reacceleration?

F
Frank Gad
executive

We have not said that we will be in the top end or the low end of the guidance. We just said we will be within the guidance. And we still believe that we will grow in Q4 and get within the guidance on the top line. We are, even with the flatness in the guidance on EBITDA and on [ EBIT ] margin. And what we expect of the fourth quarter is that the growth but we also know that the [indiscernible] because if our customers are busy, then they want to have a lot of stuff delivered before Christmas. If they're not busy, then they start to think about making a very nice balance sheet by the year end and that means they will not buy anything from us in December.

And I think, again, here, our customers are in different part of the cycle. So overall, we believe that we will have growth on the top line also in the fourth quarter.

U
Unknown Analyst

That's really helpful clarification.

F
Frank Gad
executive

We want our sustainability in everything we do. So we want to have an ambition of having [indiscernible] environmental impact from the operations that we want to run all our factories on renewable energy and out of the electricity we use at the moment, more than 80% is renewable energy. And we have dedicated a number of pages in our annual report to report on our focus in all these areas.

We believe that with our team and our technology's support on the sustainable development goals, we do not produce plastic bags, plastic cutlery, plastic bottles, disposable plastic bottles or caps. And we're actually very proud that the [indiscernible] has decided to use some of our products to keep this net floating, whether they can catch plastic islands in the Pacific Ocean. Plastic has to be recycled and reused. And this a good example of recycled plastics, where we made things out of old consumer waste. Here we have substituted the wood with plastic waste. Here we have substituted plywood from tropical rainforest with plastic waste in a container for one of the world's leading shipping companies.

Here, we have made a [indiscernible] 100% recycled material that is one of our own products developed by [indiscernible] in Sweden. And here, you can say we have substituted the plywood [indiscernible] has sold a lot of these [indiscernible] sitting on chicken houses and on pig houses around the world and they are making 90% recycled plastic and then we have 10% new plastic on top [indiscernible] together with [indiscernible] made this design that's here, where there is 25% wood [indiscernible] and 75% plastic. So each chair is unique. And the latest version, the plastic is actually also recycled plastic.

[indiscernible] also developed a steel system that is collapsible so it does not take so much space when you return the empty boxes, it can be reused and reused and reused and then it can be recycled and some of the components are actually also made with recycled plastic.

And to make a long story short, we believe we enhanced the solution because the modern society needs our advanced products and solutions in the steel making industry to make insulation, generate renewable energy, reduce energy consumption, make clean air and clean water and [indiscernible] that measure how much people are using in the health care business, diagnostic equipment, guidewires, ergonomic solutions, medical packaging and [indiscernible] delivery devices. And in the food industry all the way from the farm to the table and in automotive to make lighter and more energy-efficient vehicles, where plastics replace metal.

That was the presentation and an update on what we are doing and how we are control the supply and where we want to go on.

U
Unknown Analyst

I'll take over and say thank you, Frank, for a great presentation. And we have a question from the audience here. So I'll just go back to this slide and it's about the higher interest rate environment that we find ourselves in now. And has that changed your thinking towards what is your optimal capital structure? And the question asks if M&As should -- is still your first priority? And maybe if you don't find an acquisition this year, are you looking to accelerate the repayment of debt?

F
Frank Gad
executive

Yes.

U
Unknown Analyst

Short and sweet. Okay. Maybe you could add a little more detail there.

F
Frank Gad
executive

We've not been successful in finding companies this year. We have generated a lot of cash that you can see and I hope will generate cash in the fourth quarter and we're going to use that to invest in the future and to reduce debt. And then we paid DKK 36 million in dividend to our shareholders and we have been net buying own shares for around DKK 11 million. But that was something we launched back in August of '22 before the interest rates started to go sky high. And when I say sky high, then they are high compared to what we've seen in the last decade but they are not high compared to what it was in the past and also [indiscernible]. We have tried to keep discipline on our acquisition side and reduce debt. And we have not launched any share buyback programs, that I agree with the question, underlying text in the question that it will be good to reduce debt before we start to buy shares back.

U
Unknown Analyst

Okay. Well, I think that's answered the question well. I'd probably like to take us forward to the slide.

F
Frank Gad
executive

But I want -- I really hope that we can continue to pay a handsome dividend to the shareholders because it is [indiscernible].

U
Unknown Analyst

Perfect. If I move forward to this slide on capacity, we've seen the consolidation in China as -- after that, is that something you're also considering in other markets, maybe in Europe where your factories are more dispersed.

F
Frank Gad
executive

Well, we are always looking at that what happened in China was that city council called us and said that they wanted to build a shopping mall where we had our factory. So if we want to take our equipment with us and it would be good if [indiscernible] otherwise, they would just put a bulldozer on it. So it was an incentive that there was no option for negotiation, let's put it that way. We were prepared of that and therefore, we have been able to move the whole factory during the first 2 months of this year and we were out by the end of June.

And it's good because it gives us a lower cost base going forward. But as you might remember, it has been difficult to do a lot of movements in China during the last few years due to corona where China has been in a lockdown situation. We have -- do not plan to close all the factories or consolidate our factories short term. But we are, of course, still looking very much on what we can do more in Poland, Slovakia and Latvia. And we have been growing this year in Slovakia. We have also hired more people in Slovakia. In Poland, we've got [indiscernible] leaders. We need to fill up and we have not done that yet but I hope we can do that during '24 and '25.

U
Unknown Analyst

That's great. And you just touched on it with reference to China and it's a big question in the market right now about China demand. And how are you seeing demand in the Chinese market? Is it coming back to the levels that you expect? Or how do you see it?

F
Frank Gad
executive

No. Actually, we -- I think if we look in China just into China [indiscernible] this year but I've just been a couple of weeks ago and our team is doing a great job and we are growing the business and making money.

U
Unknown Analyst

Okay. Perfect. And we also discussed the new factory in the U.S. And I have a question about how -- what percentage of the capacity, when it's up and running has already been contracted by customers and to what extent we have to source the customers once the factory is up and running?

F
Frank Gad
executive

Well, this is a little bit of a question about the egg and the chicken because when we come and say, dear customer, we want to produce for you in the U.S., then he says, show me the factory. And we are not showing him the factory before we got any orders. So here we are leaning out and actually building a factory without having firm orders. But we have customers who said to us that they want to be customers when we're up and running. And then we have tried to reduce our total exposure by finding a local company in Atlanta who has rented half of the space for the first few years. That's a logistic company. So you can see what we plan in the long run to have a [indiscernible] in the beginning and then we can maneuver in the other part of the business until we have filled it up. And then we can win back on the inventory to do that before the first 5 years [indiscernible] space to keep our balance.

So it is a big risk we are taking on to invest in a new factory. But we have a strong customer base and they all have a strong market position in the U.S. and they have plans for growth. And that's why we have decided to go for it. But I do not expect that we make profit in the first couple of years.

U
Unknown Analyst

I think that's a great explanation. I don't see any more questions.

F
Frank Gad
executive

But I am convinced that on a 10-year horizon or a 20-year horizon it is the right thing to do. And then you might ask whether or not you support an existing factory. And that's because we have not been able to find a good candidate and if you look back at what has happened in North America over the last many years, then the big injection molds are steadily growing with the big consumer companies or the big components companies of our size and with the customer portfolio like ours, a lot of that production has been outsourced to Asia. And I think -- and then it has been difficult to invest at home when the customers were moving to China, Vietnam, Malaysia, Indonesia and Taiwan. And I think a number of that production now wants to return to the U.S. and they need to find a good home and we hope we can provide them with a good home [indiscernible].

U
Unknown Analyst

That's great. I guess it makes very good sense with higher cost of energy in Europe compared to the U.S. and the nearshoring trend which we've heard a lot about in the market. I don't see any more questions from the audience. And I think we've covered most of the questions I had. So unless there's any last minute questions, I'd like to say a big thank you to Frank and to all of the listeners.

F
Frank Gad
executive

Thank you for joining us.

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2024
2023
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