NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2019-Q1

[Hans Ståhl, CEO & Director]

Yes. Good morning, everybody. This is Hans Ståhl, CEO at NCAB. So we're going to present our Q1 results here, I'm here with Gunilla and Anders. So I would like to start with Page 5, where we had a great result for the Q1. Where [ everybody could ] see on the revenue, we're plus 19%, measured in Swedish krona, which we are extremely proud of. However, if we measure in U.S. dollars, it's slightly lower. But the really good number is the EBITA. That is plus 21% compared with last year same period. And that we think is a fantastic result. Going over to page 6, we can see the different segments where the Nordic segment has grown 34%, which is also a fantastic result. And also that have a profit margin -- EBITA margin of 16.5%. Europe has slightly lower growth with 17%, but 17% is very good on that market. And EBITA is 6.6%. North America is plus 1% and 4% in EBITA margin. And East also, which is a fantastic result, [decreased in] China and Russia plus 18% with a profit of 11.4%. So on Page 7, we can see the highlights during and after Q1. And we have started up in Malaysia, with a team there and they are -- [3 persons] in place and we have recruited an MD, a Managing Director for the Netherlands, and she will start in the end of June. And we have acquired Multiprint, a Danish company very similar to NCAB, and also we have decided to have a dividend of SEK 4.5 per share. And also we have that -- we will have more [ problem with tariff because the ] import tax is raised from 10% to 25% in the U.S. On Page 8, where we will describe a little bit more about Multiprint in Denmark. And they are actually doing the same type of business as we are, and they have been and they are the leader in Denmark. And it adds about SEK 60 million to the annual revenue, and they show a good profit also. And maybe most important thing, they have a matching culture, very much focused on quality. And going forward to Page 10, where we describe our -- what the circuit board is actually used for. So at the left-hand of the page, we have [ there a board, just a ] circuit board. And then the middle, we have made the assembly, so customers is making the assembly. And then we have a typical end products at the far right of the page. And Page 11 describes the size of NCAB, we have where today 17 companies, delivering to 45 markets and we have 388 specialists or employees. And we are working with the 22 factories, predominantly in China. And our mission is we love demanding customers. And of course, we all aim to have 0 defects and most important is also to produce sustainable because it's getting more and more important. And our vision is to be #1 producer wherever we are, for example we have [ product ] in Italy and our aim is to be the biggest PCB supplier in Italy. Going forward on Page 12. One could see that actually the cost of the printed circuit boards in the end product is very low, and it's as low as 0.5% to 2% of the end product. But normally, if something goes wrong with the end product, it's -- 50% of the cases it's due to the printed circuit boards or the assembly board. So that means, if you have a poor quality on the circuit board that's a huge cost for the end product producer. That's why quality's so important. And why does NCAB exist? We need to go back to the year 2000 in this case, where there were a lot of factories in Europe, in the U.S., [ the North ] in Sweden, actually had like 20 PCB factories. But as it became more expensive to produce in Europe and the U.S., the production moved to Far East. And today, I mean, China is [ standing ] for half of the production of printed circuit boards in the world. That left a lot of customers still having their factories in the Western hemisphere without any supply. So that's why NCAB was created, and that's why we have a very important part to play. And this is not [indiscernible] [this is more than half in ] all over the world. And a lot of production is [ out of ] China. If you look at Page 14, so we are not only [afraid] that we do add a lot of things to the customer that is important. And the part I would like to mention here is the technical and engineering support. We go through all of the information we get from the customers to make sure they are [ producing. ] Their purchasing power, which is extremely important as the factory is consolidated in China, and they need this power to be able to buy from the best factories. And also quality audits. We make quality audits once a year, and in fact, we have our own staff in the factories. And also we review, [call it], unlimited capacity. I mean, if we get huge or no problem whatsoever to find capacity for those orders. Our journey. We -- The company was founded back in 1993 in Sweden by 3 gentlemen, and all have been producing circuit boards and have seen the agony in producing circuit boards. So that's how they kind of came up with this concept to use non-owned factories for the production, and having the customer relationship instead. And [ once it clicked, they thought ] that Sweden is a little bit too small, so they start to export. And I think maybe the biggest step was taken in 2012, when we entered the American market by making 2 acquisitions, P.D. Circuits and M-Wave. And then we've made an acquisition in Sweden, and we started up also [indiscernible] in Italy, Malaysia and Benelux. And we also made the Multiprint acquisition this year. And on consumer revenue, we have grown every year except 2009, which is interesting because we still earned some money and the year after 2010, we -- I mean to basic all production [ proprietaries ] somehow had gone faster during that period or during 2009. And then we have a case here, and this is extremely interesting case. This Rayval is a Chinese subcontractor, EMS company, and they have grown extremely quick and one could think that where you have problems in selling in China because that's where all the factories are. But it has -- the developing China has been more and more to the high-mix, low volume. So the EMS companies in China, they are having problem to be attractive for the bigger factories. So therefore they -- you need us to be able to buy so many different type of part numbers. So we've had a fantastic growth with Rayval, and basically, [indiscernible] [ store]of attacking all the kind of high-mix, low-volume EMS producers in China. And as you can see also in the diagram, they grow extremely quick, and this is very much difficult China. So that's what we -- why we are setting up organizations in Shanghai, Beijing and Wuhan to attract all these EMS companies. We have competition, yes, but we are one of the biggest in the world. Fineline is a German company. CML also German. So I'll leave it to you, Anders.

[Anders Forsén, Chief Financial Officer]

Okay, good morning, everyone. Continuing on Page 20. As Hans said, we are of course proud to present the solid growth for the first quarter. And what makes it even more interesting is that we continue to grow our gross margin, so I think that is a very important that we continue to grow the business and that we continue to [indiscernible] value added for the customer result [indiscernible] cost more money. On the next page, net sales for the quarter, we have a growth of 19% measured in SEK, and measured in U.S. dollar, we have a 5% in growth. And [ as already mentioned by Hans Ståhl that in fact the North ] of our business is actually down in USD, we buy everything in USD and we have invoiced and note everything in U.S. dollar. So that means, [ adopt ] more organic growth, but that's also the reason why we can have a stable [drop] in gross margin, so that will not fluctuate very much reflected [indiscernible]. Order intake in the quarter was about -- was 20% up or 5% measured in U.S. dollar. And we have a stronger order intake in all segments, except our North America. The other [indiscernible] in Europe, Nordic and East. North America was a bit lower than last year. But generally, we see a positive underlying market and no [indiscernible] to grow [indiscernible] profitability. So we don't see any negative cash flow [indiscernible]. Next page. As we said, we managed to increase our gross margin, and we also managed to increase EBITA by 21% compared to last year. We continue to employ people. We are at 10 people more, 10 employees more now than in end December and we are about 30 employees more than 1 year ago. [ And as ] people is important for our organic growth, of course. And adjusted EBITA margin went up to 9.1% compared to 8.9% last year, and we also made some IFRS 16 adjustment. They have very limited impact on our results. The EBITA was increased by SEK 0.2 million due to IFRS 16, and operating profit was SEK 100,000 lower. Going into the segments, starting with Nordic. We had a fantastic growth in the Nordic region, 34%. It’s mainly growth in Norway and in Denmark, which has been very, very strong. And in Denmark also added [indiscernible] the Multiprint acquisition, of course. [ And essentially, ] the Multiprint part of the growth was 27% for Nordic, still very, very healthy. And the [ growth -- we continue -- ] despite the growth we continued to deliver over 16% EBITA margin, which is really good. Going back on Europe. You see Europe was 17%. We have much stronger growth focus in Europe, but I think it [ trends ] very heavily in lower growth numbers this quarter due to a very strong fourth quarter for Europe. So we have a lot of deliberately [indiscernible] end of December last year, which might have an impact a little bit on the growth number in Europe this first quarter. But this has been a positive [ sign, ] where we have seen a stronger order intake and revenues for the quarter. Profitability is increasing in the [ moment ] and EBITA percent or EBITA margin is also increasing a little bit. We are having a lower EBITA margin in Europe, due to that reinvestment in the markets, we're investing in [indiscernible] organic growth. And going then on North America. We have discussed this before, but we are in [indiscernible] of where we are [ essentially ] from some customers with low tech and high volume and moving into our core area, which is high-mix, low volume. We [ have bit of ] lost customers going away now for the high-volume business, and we [ haven't ] really see that compensation from the high-mix, low customers. But we do have a lot of new customers and we're seeing a lot of potential with those customers. So we see any way positive churn value is lower than we have expected. Profitability, we are on the 4% level. Better than last year, but still on the [indiscernible] level. But then of course, we now have the raised tariff. We got this [ announcement ] last Friday, they increase the tariffs from 10% to 25%. It's difficult to say what the impact will be, of course. But I think the good part now is that we had much more turbulence when they put in the 10% tariffs. Now we have a good routine to handle it, our customers seem also to have a good routine to handle that. So they transfer all the new tariffs to that end customer. But of course, what will happen with the demand is the question mark in the future. [ Roughly, ] if we have any way [indiscernible] to handle this one, and the customer can [indiscernible] negative as they were in September when we imposed the tariffs the first time. And going into East. We still have a good growth this quarter, it was mainly growth in Russia, we saw also many positive signs in China, and as Hans said, we see that we can take home more and more [ long-term ] Chinese that are EMS customers. When we saw the [ vast operation ] in China, it was focusing mainly on European-American customers, but we see now that all growth in China are for local domestic in China. And that's what's important with all [ of these is to stay touch with what ] we have in China, to be close to the customer. Also in [indiscernible] we haven't [ closed ] the first order yet, but fortunately, canceled. We are now - we have people working in the [ working capital here ]. And we still have a stable profitability in East. Some financial KPIs on next page. [ Return on equity is ] over 50%. Our net debt to adjusted EBITDA is 0.3. We still have a very healthy balance sheet. And we still have a good cash flow, and we do have available cash to continue with acquisitions plans when we find the right target. And also [ call the ] [indiscernible]. And net working capital is [ significant increase ] this December, it's still below 10% of last 12-month revenue, which is very good, and [ in general ] have too much need of capital [indiscernible] we have a [indiscernible] balance sheet. So I'll give it back over to Hans.

[Hans Ståhl, CEO & Director]

So [indiscernible] Page 29. We have described the future for us, and basically, it's built on 4 strategies: the first one is, of course, increased market share in Europe, USA and East. We have a very small market share in those markets, so it's important, the strategy here is to get new accounts, new customers, and that we have shown. Also we have a double-digit growth. The second one is, of course, the customers we have, to ensure the profitability and growth on existing customer, that's also fantastic potential. And that's what you're seeing that we're increasing the gross margin for existing customers. And also core expand geographically. The world is big. Many countries. And we've got -- Last year and this year, we've started on Malaysia and Netherlands, and also, the market consists of a lot of smaller companies, like NCAB, and we see a potential in consolidate that market, which will happen sooner or later. And we will be the company who's driving that consolidation. And the first step is the Multiprint in Denmark acquisition. Financial targets growth 8%, the EBITA, 8%, and the net debt through the profit should be less than 2x. And the dividend expected to at least 50% of the net profits. That was our Q1 presentation. So questions?

[Operator]

[Operator Instructions] Our first question comes from the line of Robert Redin from Carnegie.

[Robert Redin, Research Analyst]

A couple questions, if I may. So on Europe, of course, you can say in terms of growth, it was a tough comparison, I think, it was 28% or something last year in Q1, but still, it was -- sales was also quite slow in the quarter. Do you expect to pick up? How did the order intake develop in Europe specifically in the quarter? And what do you expect for the coming quarters there? That would be my first question.

[Hans Ståhl, CEO & Director]

Yes. [ So it will come. ] It goes a little bit up and down, and well we don't see, we don't hear anything that it's saying -- telling us that it's -- the [ water ] will go down. We'll only hear positive things from customers. So, yes.

[Anders Forsén, Chief Financial Officer]

I think the important part is that we have order intake for first quarter [ Europe which was not much ] stronger than revenue. And I think also as you mentioned that we have a very strong growth fourth quarter for Europe in revenue, meaning that we have a lot of deliveries end of the quarter, which maybe normally could have been done in the beginning of the quarter this year. So something that we've talked on all [ the effect upon. ]

[Robert Redin, Research Analyst]

Okay. But the -- so order intake in Europe was much stronger than sales in Europe in Q1?

[Anders Forsén, Chief Financial Officer]

It was stronger, yes, yes.

[Robert Redin, Research Analyst]

Okay, so that sounds hopeful for the year. And then, generally speaking, on demand, did you see any sort of stronger demand at the start of the quarter or slower demand at the start of the quarter? Was January, February and March kind generally speaking the same?

[Hans Ståhl, CEO & Director]

No. It's about the same. We haven't seen so much difference. It's always a little bit [ better ] [indiscernible] the East they were under the holiday period, but it's now -- we haven't seen anything weaker [ alone. ]

[Robert Redin, Research Analyst]

Because I'm thinking, if Q4 was stronger than -- maybe January was weak, and there was a pickup through the quarter, but -- any other...

[Hans Ståhl, CEO & Director]

Maybe you can say that the order intake in fourth quarter is normally not as strong because the [ other ] customers prepare for the Chinese New Year. Meaning that they, they place orders mainly a bit earlier so [ they should ] have the deliveries before the Chinese New Year. So that typically -- we typically have a lower revenue in fourth quarter and higher order intake in fourth quarter, and the opposite in the first quarter.

[Robert Redin, Research Analyst]

Okay, right. You also had a comment about the gross margins in East and in Europe? They were up, is that sort of a sustainable development? Or was there something peculiar in the quarter?

[Anders Forsén, Chief Financial Officer]

No, no. I mean, we're making good business, and I think you can say also that we're now, many countries in Europe have been in the group for a long time, and we're getting to have more and more mature business, even if we take only new customers who then maybe have little bit lower-margin. We also have a lot of customers who have been having [indiscernible] for long time on [ average ]. In the same way, the same [ situation in ] Nordics, slightly -- step by step, slightly increase the margin, which also has been happening. And we have seen an increased margin in -- especially in Germany and so on, I think that it, it [ trends over. ]

[Robert Redin, Research Analyst]

Okay, very good. Just trying [ to figure out things. ] So final question for you guys -- for me. On M&A, so basically you did this Multiprint acquisition, it looks like its contributed really nicely in the quarter. So I guess really, you're happy with that acquisition? So that will be my first sort of part of that question, and the second would be, what do you think about the pipeline? How is that developing? And what are your hopes for doing one or a few acquisitions a year going forward?

[Hans Ståhl, CEO & Director]

Yes. We hope to do many acquisitions. And of course, we have focus on it much more than we did during the IPO years, so to speak.

[Anders Forsén, Chief Financial Officer]

Yes. I'd say, we're very happy with the Multiprint since the acquisition. It's a [indiscernible] very well together and we have seen good growth synergies and their team is working very good together. So we have formed [indiscernible] a very strong team now in Denmark, which is positive. And yes, we do have a sort of [indiscernible] potential acquisition targets, but they're always [ along with cash outs. ] And difficult to predict when it will happen and so on. But there are a number of potential targets in the pipeline.

[Operator]

And if there are no further questions from the phone lines, I will hand the word back to the speakers.

[Gunilla Öhman, IR Manager]

Okay, thank you very much. Just want to remind you that our next quarterly report is on the 30th of July. So we'll come back then. Thank you very much.

[Hans Ståhl, CEO & Director]

Thank you.

[Operator]

Yes. This now concludes.