NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the NCAB Group Audiocast with Teleconference Q1 2022. [Operator Instructions] Today, I am pleased to present CEO, Peter Kruk; CFO, Anders Forsen; and Head of IR, Gunilla Ohman. Please begin your meeting.

[Peter Kruk, executive]

Thank you very much. So if we move to Page #3, I think we are very happy to present a very strong first quarter. We have net sales of SEK 1,141 million, which corresponds to a growth of 85% in SEK or 66% in USD. Also a very strong organic growth of 42% in USD. And as we've mentioned before, USD is our main trading currency, which is probably the most relevant growth numbers to compare with.

Also on the order intake side, SEK 1,171 million, continued strong order intake, up 8% in USD. Comparable units, it is down 8%. But I think this is natural as we had in quarter 1, quarter 2 of 2021, very strong order increases due to increase in lead times. Lead times are now stable and actually slightly improving, which is also then meaning that we are working off our existing order stock.

Very good performance also in our acquired companies. And all in all, this is all contributing to an improving EBITA to SEK 146 million in the quarter, which is an increase of plus-151% leveraging our growing net sales. And our EBITA margin amounted to 12.8% compared to 9.5% in 2021.

If we move to the next page, we have some of the important events in the quarter, and some of them, we will come back to you in greater detail. We acquired the company META Leiterplatten in Germany, just here at the start of the year. We also, as a consequence of the war in Ukraine, decided to stop all of our deliveries to customers in Russia on the 28th of February. And on April 8, we have exited the business by selling the -- our subsidiary to the Russian management team for RUB1.

We can also see that the component issues that have been a factor in the market during 2021 is continuing to hamper some of our customers. We also have been experiencing freight and COVID restrictions in China, and that has further impacted the delivery situation, but something we have navigated through with reasonably good results.

We will have our Annual General Meeting on May 3rd, and we have a suggested dividend for 2022 of SEK 0.6 per share, and this is to be paid by 50% in May and 50% in October.

Moving to the next page. Yesterday evening, we also released updated business targets for the midterm. We have defined a net sales target of SEK 8 billion to be reached in 2026, and an EBITA target of SEK 1 billion also in 2026. Then we have remaining as before, we have a net debt adjusted EBITDA target to be less -- lower than 2x, and that we will also continue to distribute available cash, which we estimate to be in the order of 50%.

And to give some perspective, at the time of our IPO, we then had introduced midterm targets, which were of 8% organic growth and 8% EBITA. And if we look back 10 years prior to the IPO, we had, on average, around 15% growth. So despite an extraordinary strong growth year in '21, we believe we can continue to grow at a higher rate than our historically -- performance. And we expect that the growth is going to come equal parts roughly from organic growth as well as from acquisitions. And our profit target is that you also can see that it's significantly higher, around 12.5% compared to the 8%, but it reflects our stronger performance, while still continuing to make investments in further growth.

Anders, over to you.

[Anders Forsén, executive]

Thank you, Peter. Yes, and as you said, 50% of the expected growth will come from acquisitions. So we are happy that we could announce an acquisition in Germany, 1st of January. This is, of course, maybe now a little bit old information, but anyway, was done this quarter. META Leiterplatten was founded in year 2000, had about SEK 85 million last year and some 17 good employees. They have a business model which is very close to NCAB, focusing on high quality and low-mix-high-volume business -- high-mix-low-volume business. And we will see some synergies from supply and payment terms as well. This one, we paid less than, say, 5x EBITA. So it was a good acquisition from that point of view.

On the next Page, we come into our divestment of our Russian operation. So of course, sad to see the development in Russia and also the consequences for NCAB. I think we were rather quick to decide on stopping all the deliveries to our Russian customers, which we did already 28th of February. And I mean, we have been in Russia for over 20 years, and the Russian company stands for approximately 5% of both EBITA and revenue last year. Anyway, we saw it was impossible to continue the business, and we didn't see any real value in continuing for us in Russia. So we made a decision that 8th of April, we sold the business to our employees. And this is also a good way because we could secure the future earnings for our former colleagues in Russia, and it will limit our risks. Of course, it had a write-down effect, but no cash flow impact, and it takes away a lot of risks, future negative cash flow for NCAB. So all in all, we think this was a good decision despite the situation, and then we are limiting our risk going forward.

[Peter Kruk, executive]

Moving then to Page 8, some background around NCAB. So what we do is the foundation for any electronic product. So our deliveries are the green boards you see to the left. And our customers then mount components on them to create printed circuit board assemblies, which then fall with the intelligent part in any electronic product.

We have had a history, if you go to the next page, Page 9, starting the company in 1993, a continuous growth journey and the growth generally has been accelerating in later years, both through acquisitions but also through strong organic growth.

Moving to Page #10. We've also been able to demonstrate over the years that our growth, which historically was around 15%, and of that, maybe around 10% organically, has been clearly stronger than the general market of the printed circuit board market, which has, on average, been growing around 3%, 4%. And you can also see in the last year in 2021, the global market grew by some 23%, whereas we grew organically by close to 40%.

Our growth, on Page 11, you can see where it's partly coming from. We can see that overall, we are focused -- our focus is on high-mix-low-volume markets and focusing on highly demanding customers. And in the projected view of where the market is developing, we can actually see that a lot of the electronic growth is coming from industrial applications rather than from kind of customer PCs and mobile phones equipment, which maybe historically has been driving a lot of the growth. So a lot of the high-mix industrial applications where we are focusing are in the higher growth areas to the right, which is a good foundation.

And if you look on the following Page 12, you can actually see how we have grown and solidified our position as a clear #1 worldwide. To the graph on the left, you can see our position as presented before the IPO, so based on 2017 numbers, where we were the leader, but the leader with a number of close competitors. And now in 2021 or based on 2020 numbers, you can see that we have more or less outgrown our competition, are now almost twice the size of our second largest competitor. And part of this has been sort through stronger organic growth but also through acquisitions.

[Anders Forsén, executive]

On the next page then coming into the first quarter, and we are very, very proud of robust and good results from the first quarter. We had a net sales of SEK 1.1 billion, increasing actually 85% compared to last year. We see that we have some positive gains from the weaker SEK. So measuring USD, it's even 66% up. So very, very strong growth in the company. We have also been able to leverage the growth into good EBITA, good profit. So we had the result of SEK 146 million, which is actually 151% better than the first quarter in 2021. And that amounts to 12.8% EBITA margin, which also is a strong improvement from 9.5% 1 year ago. We are very happy for [ excellent ] results.

And on the next page, we can see the different segments. And also here, it's very positive to see that we can see the positive trends in almost all segments. We see that Nordic had about 118% growth. And if you exclude the acquisition of Elmatica, it's about 50% growth. Also, EBITA margin is good, 14%, but we have taken some onetime costs for -- in Elmatica. So if we compare the comparable companies, actually, EBITA margin was 17% for the old NCAB Nordic.

Europe continued to grow as well, 78%, including acquisitions and 69% comparable companies, which is also very, very strong. Here we see a good development in especially Germany, Benelux and U.K. Also here, we are happy to see that the EBITA margin is increasing and reaching at 12.7%.

North America, growth both before acquisitions and excluding acquisitions. The only segment that is going down is East, of course, connected to the divestment of Russia. If we should compare without Russia, we would be about 7% up actually. And also EBITA margin will be much higher, excluding Russia since they were making a loss during March.

And on next page, we can see that we -- the growth continues, as you can see, and also with a stable gross margin. And I mean this is also a very strong improvement that we have been able to handle all the price increases in a good way, so -- because we have seen price increases, both from factories and from logistics and the fact that we have been able to keep the gross margin on an even level. So we have -- we can transfer the prices further to customers, which is, of course, good for us.

Next page, looking further on, as we said before, growth in net sales was 66% and in SEK, 85%. And if we take the comparable companies, we saw a growth of 42%. So we are very happy to see a strong organic growth in all our operations. Order intake increased by 8%, but for comparable companies, it was a little bit down. The reason here is, of course, that we had a very, very strong order intake first quarter in 2021. And as Peter mentioned, the reason was that we had longer lead times, we saw a lot of orders before the price increases and so on. So it's tough competition with last quarter's order intake. But still, we have order intake at higher revenue which means that we are building order book.

And next slide then, we can see results and margin for the group. We are happy to present a 151% increase in EBITA and a strong EBITA margin at 12.8%. We did have some extra costs for final earn-out payment of Prevent. Excluding that one, it's sort of 13.1%. And earnings per share went up from SEK 0.22 to SEK 0.35. And of course, on this line, we see the impact from the write-off in Russia of [ SEK 43.2 million ]. But if we should exclude that one, earnings per share would have been SEK 0.58 per share. So overall, we are very happy for a strong quarter when we grow this out.

[Peter Kruk, executive]

Very good. Then let's move over to the segments. So if we look at Nordics on Page 18, we can see that our order intake increased by 42% in USD and close to 60% in SEK. The growth is primarily, of course, driven through the acquisition of Elmatica, but also very strong development in the region and particularly in Denmark and Norway. Net sales in USD up 117% and in SEK plus-142% and reached a total of SEK 307 million compared to SEK 127 million last year. And also then a strong improvement in our EBITA to SEK 43 million versus SEK 18.4 million in prior year. Our EBITA margin came to 14.0%, and slightly down from 14.5% prior year. But then again, this is the positive effect of Elmatica. So excluding the Elmatica impact, EBITA margin in Nordic was 17%.

Looking at segment Europe. Strong net sales growth in all our markets, especially Germany and Netherlands and U.K. Order intake increased by 5% in USD and 17% in SEK. But in comparable units, we were actually down 9% compared to prior year. And again, this is the effect of increased ordering with longer lead times in 2021 in the comparables. Net sales increased by 78% in USD and 98% in SEK. And the growth in comparable units was 69% and 52% in USD. A very strong improvement in EBITA, both in absolute numbers to SEK 72 million, but also an improvement in margin from 8.2% to 12.7%, and also to be noted in the European segment was the acquisition of META that happened in -- on start of January.

Moving over to the U.S. We had order intake increase by 19% in USD and by 32% in SEK, and excluding acquisitions, we also here shows continued growth on the order side by 11%. Net sales grew by 40% in USD and 56% in SEK, reaching a total of SEK 184 million. And we do -- excluding the acquisitions, we still had growth of 33% in USD. Also good improvement on the EBITA, reaching SEK 9.7 (sic) [ SEK 19.7 million ] compared to SEK 9.6 million in prior year and a margin lift from 8.1% to 10.7%, which is also a good improvement.

And looking then at East, which has been the one most challenged segment in this first quarter, where we've seen the order decreasing by 46% in USD or 40% in SEK to SEK 85 million. And of course, here, the impact is, of course, that Russia sales stopped after the 28th of February. So net sales are decreasing by 14% and 3% in SEK. EBITA decreased to 9.4% (sic) [ SEK 9.4 million ] versus SEK 10.3 million in prior year, but still a very healthy margin of 11.5% versus 12.1% despite the issues of closing down Russia. So we've also been in China and seeing a lot of challenges on the customer side for -- with the COVID restrictions. I think we've been able to manage the supply chain in a good way, but we've seen many of our customers in China being affected by lockdown and therefore, being difficult to drive customer activities in China and keep production with our customers in China, which has impacted part of the numbers here in quarter 1.

Over to you, Anders.

[Anders Forsén, executive]

Thank you. And going back to future activities and more acquisition opportunities. We still will focus on continuing our acquisition path. And I think corona pandemic have created a lot of opportunities for us. I mean there have been difficulties for many smaller companies to travel to Asia and to China, and they have difficulties to attract the good suppliers. So there are many interesting opportunities for us out there. We are talking to many companies. And of course, it takes some time to reach an agreement. But we have identified, as I said before, some 170, 180 companies. We have shortlisted about 45 target companies. And we have done 4 last year, including the [ sas ], of course. And still, we are working with the short list here. So it looks promising.

And yes, going back to the next page on the integration process. I think it's important to note that we will really like to make sure that all acquired companies will be part of NCAB. They very quickly adapt to our marketing strategy, our way of working, make sure that the sales and employees are taken care of in a good way and that we can rather quickly change the names, marketing activities, [ translate ], et cetera. So that will be important for us. Then we look into operations. We see how we can benefit from our factory management team in China, how we can make sure that we get better pricing, better payment terms and so on. And long-term, we should also strive to have the same IT systems in all our companies. And normally, it will take 12 to 18 months to get the company fully integrated, but then they should work according to our values, our way of working, and we have a brand and so on. And that has seen, I think, historically, a bit rather good way to find synergies, especially on the supplier side, where we can see some opportunities in payment terms and on gross margin side.

Okay. Going into the next page, looking into some financial KPIs. Return on equity was up 37% in the quarter, seems good. Our net debt has increased due to the acquisitions we have made last year, but still, we have a solvency of 32%. Our net working capital has increased in the last year due to the -- mainly due to the freight issues and longer lead times and we have seen a lot of disturbance on the sea freight and so on. So we are now running about 11%. That has been stable for the last quarters, about 11% of last 12-month sales. Before that, we were down to 7%, 8%, 9%. So still, we believe there will be some opportunities going forward to reduce working capital. But as long as we have the freight issues, they will be on this level probably. And we still have plenty of firepower for further acquisitions.

[Peter Kruk, executive]

So then wrapping up, you can say that we have a very strong quarter behind us on the back of a very strong 2021, and we are continuing to deliver on our strategic plan, where we are continuing to see a lot of opportunities to increase our market share in Europe, U.S.A. and in the East regions. We are also working continuously on deepening our collaboration with existing customers, broadening our scope and moving to high technology applications. On top of that, we are expanding geographically, adding new markets to our portfolio as well as strengthening our positions in markets where we have a foothold where maybe we can increase our presence. And then finally, a lot of activities in a very fragmented market. It gives us opportunities to consolidate. So acquisitions is one part of our clear strategy for growth, which is also then reflected in our updated financial targets.

And with that, we wrap up, and I would be happy to take any questions you may have.

[Anders Forsén, executive]

Just a few comments on activities going forward. So we have our general meeting on May 3, the next Tuesday, and then we will release our second quarter report on July 21st.

[Operator]

[Operator Instructions] And we have first question from Klas Danielsson from Nordea.

[Klas Danielsson, analyst]

Yes. A few housekeeping questions and then maybe just looking at your targets a bit. But if we start on the order intake side this quarter, could you maybe help us a bit more what's in the kind of mix there? What's the kind of growth from lead times or decline from lead times? How much is price? What's volumes, if we start there?

[Peter Kruk, executive]

I would say, I mean during last year, we had a special situation during the first half of the year where we saw both big movements on pricing as well as big movements on lead times. And I think that generates a situation where we have customers not only placing normal demand orders, but also needing to place orders with longer lead time further out in time. And that sort of boosted trade [ today ] and larger than demand, really, driven order situation. I think what we have said before is that from Q3 and onwards, we started to see this situation normalizing again. And I think now we're in a situation where we are partly still enormous. We are working off a little bit our existing order book, and we see signs of potentially improvements -- some improvements on the lead time side.

Pricing, there are not so much movement. If anything, we likely see some increases, but not very much. So it's primarily now that we can see that we have a big order book with us, which our customers are partly working off and then also some improvements on the lead time side, which is really behind the expected [ defining ] orders. I think we have been waiting for when this will happen, when we will see a correction on the other side as we would sort of see the net sales and order books starting to converge. So we still see this -- we don't see this at all as any sign of weakening demand. In fact, we have good opportunities to grow, and we expect net sales to continue to grow.

[Klas Danielsson, analyst]

All right. So just kind of boiling that down, just to be very, very clear, if we look at the kind of average lead time in the order intake this quarter, is that starting to kind of come down from the 5 -- because I know you had 5 months basically around that level. So that's starting to come down a bit.

[Peter Kruk, executive]

Yes. Yes, we're starting to see improvements now. And I think it's been -- we started to see improvements partly on the factory side and also on the logistics side. Then, of course, we've had some setbacks with COVID in China, which has partly impacted some of the logistics, Klas, on how you can transport goods to your shipping location, et cetera. So I would say the underlying trend is positive, but there has been some temporary setbacks from COVID outbreaks in China. So we expect and hope to see further improvements in the coming months.

[Klas Danielsson, analyst]

Yes. Okay, that's very helpful. That's very, very helpful. And then, I mean, looking at -- because you're talking a bit about your order backlog there, I mean, looking at that as a whole, how has that kind of developed in Q1? Could you give us any clues on how we should expect kind of deliveries to develop into Q2 and in Q3 and Q4 and so forth?

[Anders Forsén, executive]

I think the good part is to see that we -- even if we see that lead time is slightly going back, we [ keep ] to have a order intake which is higher in revenue, which I think is a positive sign from the market. I think it's tricky to say when everything should be delivered. But step-by-step, we see that we are sort of delivering out of this high order intake that we got in the first half year last year. So hopefully, we're getting back to some kind of normal lead times by end of the year.

[Klas Danielsson, analyst]

All right. All right. That's helpful. And then thirdly, if you kind of go into the target side, I mean, could you maybe go over a bit what your assumptions are within those? I guess the organic growth side sounds quite reasonable and the acquisition side as well. I was perhaps a bit kind of surprised on the margin side, which -- that's a bit cautious, seeing that sort of margin development has been very, very good over time there. But if you could just kind of go into that and how you're thinking about those assumptions essentially.

[Peter Kruk, executive]

So I mean on the growth side, as you said, we continue to believe that we can continue with a double-digit organic growth. And on top of that, we see an opportunity to continue with more acquisitions than maybe we've done historically. And that will lead us to be able to generate a high growth base over a longer period of time than what we've done historically. As we said, historically, maybe we were overall around 15% for quite some time. Then we've had a very strong '21 behind us, but we believe that we can actually come to a new higher level of around 20% is achievable for us going forward.

And then on the margin side, as you said, we've been improving our margins, and we came to basically around 12.5% in 2021, although, of course, there we had some very significant scaling effects with a rapid volume increase. But if we look forward, going forward, we will be continuing to drive this higher growth rate. We will be continuing continuously in a strong organic growth, which means also opening up new markets, as we have in our strategy, as well as acquisitions. And we believe that looking at acquisition companies, we see very few companies which are matching our profitability levels as a starting point. And that means that they -- being able to grow at a higher rate, while still keeping the -- or having a profit margin target of around 12.5% is quite aggressive, but still attainable.

[Klas Danielsson, analyst]

All right. So it's perhaps a bit [ glued on ] on the acquisition margin side, I guess, that's part of it. Okay. And then, I mean, just digging into the kind of organic growth side, how do you -- how kind of lumpy do you think that will be? Because obviously, in 2022, it's likely going to be quite a lot higher than the kind of organic growth base that you're implying. I mean, just looking at maybe 2023, 2024, '25 and so forth, are you seeing basically that you'll have organic growth rates in line with what you've had historically then rather, and a bit of a boost kind of in 2022? Or how should we kind of think about the phasing of the organic growth rates, I guess?

[Peter Kruk, executive]

I think just on the fact how we saw the growth starting or accelerating during last year on the order side, et cetera, and the comparables, we will, of course, have a -- from a comparison situation, we'll have a weaker sort of H1 in '21 to compare with. So we have good comparables on quarter 1. So you could expect that for 2022, overall, we could have higher than that average growth rate going forward. If you look more on the quarter 3, quarter 4, that is when you'll be looking -- comparing with very strong quarters in '21. But we still believe that there is a very strong underlying demand in the market. I think the fact that we have grown in terms of size is in itself helping us become the natural choice for many of our customers. We see opportunities to grow there.

And it's always difficult when we are partly struggling with component issues or our customers are struggling with component issues. And still, I think it's been something that was problematic in '21. I would say it's equally problematic in '22, maybe even slightly worse in some cases. But I think we can see that the underlying demand is very strong. And of course, that gives a good opportunity that -- as expectations are that component issues will become less of an issue in '23 and '24, that we can see -- just start to see this demand materializing also and support our strong organic growth.

[Anders Forsén, executive]

And I think also you can see a plan that we get more and more nearshoring or that some assembly work is moving back from Asia to Europe, and that will also support our ways to grow further in the coming years.

[Klas Danielsson, analyst]

That's very interesting. But just to be very clear, it's not like you're assuming basically 30% net sales growth this year and then basically 5% for the remaining years? Or how should we kind of think about that division, I guess?

[Peter Kruk, executive]

No. I think we are looking from it more than overall that we would sort of -- our historical growth rate of around, say, 15% could be more in the order of around 20%. Then of course, there will be some years which will be stronger and then there may be some years which are weaker. I think that -- so I don't -- we don't expect, but we're quite sure we will not be, on the average, 20% all these years. There will be some years which are stronger, maybe some which are [ weaker ]. We believe it's -- over a longer period of time, it's something which should be attainable.

[Operator]

So we have no further question. [Operator Instructions] So it seems that we have no further questions.

[Peter Kruk, executive]

Okay. So well, we thank you all for listening in, and wish you a good day.