NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the NCAB Group Q1 presentation for 2023. [Operator Instructions]Now I will hand the conference over to the CEO, Peter Kruk, and CFO, Anders Forsen. Please go ahead.

[Peter Kruk, executive]

Thank you. Good morning, everyone. So as described, it will be myself, Peter Kruk, and my colleague, Anders Forsen, who will be giving you the update from our first quarter. Feeling very good after a very strong start of the year for us. We can see continued solid customer demand. We have good net sales in the quarter despite very tough comparables from '22. Also a good indication for us is that we see a positive order trend within the quarter. We are reporting record results in this quarter with very high margins and profitability. So we have a record EBITA and a record EBITA margin and also a return on equity about 43%.Looking at our regions, we can see that Nordics and Europe have been the best-performing regions in this quarter. But we're also happy to see that China now start to show growth after a tough last year with the COVID restrictions. North America is somewhat weaker as we also saw in the fourth quarter. Cash flow continues to improve, both driven by the good EBITA result, but also a continued working capital decrease, and we have a very active pipeline of M&A targets. Some figures around the first quarter. So our net sales amounted to SEK1,146 million, which is just above last year. Our order book from '22 is still supporting our net sales in the quarter.Our organic growth was minus 2% in Swedish kroner. Order intake was at SEK1,030 million from -- which is an increase from quarter 4, but still year-on-year, a decrease from prior year as we have customers still adapting to the shorter lead times. But as we said, as I said before, very positive to see that now we start to see a positive order trend throughout this quarter. EBITA amounted to SEK184 million, which is an increase of 26%, and we have an EBITA margin at a record level of 16% compared to 12.8% in the last year. Operating cash flow, very strong at SEK202 million compared to SEK24 million in 2022. And we have from NCAB, the Board has suggested a dividend of SEK1.10 per share to be compared with SEK0.60 prior year.So just some brief background around NCAB. We are a supplier of printed circuit boards. That is the product you see to the far left, which is the fundamentals of all electronics. So our customers will amount electronic components like semiconductors and microprocessors to create intellectual modules in any electronic product. And we are supplying printed circuit boards globally with an 100% outsourced production. And over the years, we have now built ourselves into a global company with a very well diversified business, both geographically, but also in terms of industry. So we are serving a lot of different industries with no specific reliance on any specific industry. And we can also say that we have a very well-diversified customer portfolio where there is no specific reliance on any significant larger accounts.Anders?

[Anders Forsén, executive]

Yes. Hello. Anders Forsen here. Just to give you a small recap on the history of the company. NCAB was founded in 1993. It started in Sweden and then expanded into the Nordic countries and then into other captives in Europe. In 2012, we went over to U.S.A. with an acquisition of P. D. Circuits. And then 2018, we made the IPO. And we have shown a constant growth in the last 10 years, 22% on average per year. And since the IPO in 2018, we have been growing about 25% per year. After the IPO, we also made a number of acquisitions, which has been a successful strategy for our growth and our way to conduct new customers and to acquire new customers.And as Peter said about the results, we are, of course, happy to see that the revenue even if it's not growing, it's tough comparables in 2022, and we see a stable and good revenue. But we are very proud of the EBITA that increased 26% to SEK184 million. And as Peter said, we had a record high EBITA margin of 16%. And also going into background by [ either behind the ] results, it's very much connected to continuously improved gross margin where we have been on a journey where we year-by-year improve our gross margin, showing that the customers really value, our value add on what we are selling.The downturn we could see in 2020, '21 was due to acquisitions with lower margin. But now we are back again on a growth journey on the gross margin. And we are proud to see that 33% LTM numbers for '22-'23. And going into the results again. We said that SEK1,146 million is the revenue, a little bit higher last year, but it was tough comparables in '22. We also had some revenue from our Russian activity that was closed down in February '22. As Peter said as well, order intake is down a little bit compared to last year, but we see a positive trend month by month. And we are in the situation where many customers, especially in the European segment have placed orders with long lead times before. So we are still delivering on those.And I think we can see lead times are back to normal, we will see a more normal situation going forward. And then going into the results, which we are very proud of for this quarter, it was a strong increase. And we can see that we have been able to utilize our scale in many, many areas. Of course, we can see that the revenue grew a lot since last quarter, quarter 4, and we have about the same costs. Of course, that gives us a positive impact. We've also been able to work with the purchase price as well. So that many areas where we can see advantages and sum up to a strong profit level. Also, we see when the lead times is going down, we can reduce our inventory and we don't need to have as much working capital as before. So still, we have a very strong cash flow connected to strong results but also to reduce working capital.And then, of course, you can see that we almost doubled earnings per share. And as Peter said, the dividend is adjusted to SEK1.10 compared to SEK0.60 last year. Looking into the segments are performing here and starting with Nordics. One thing we have done now for this year now as we have fully integrated our acquisition in Elmatica is that the Elmatica business which also had business in both Nordics but also other regions that knew that business has now been integrated into the respective regions.And that means that we will see that some business from Nordic has now been moved over to other segments to segment Europe primarily. So if you look at the adjusted order intake, we can then see that our order intake has decreased by 7% in Swedish kroner and 16% in U.S. dollars. And this is, as we mentioned, something that we see in all regions. It's largely related to the order lead times changing but also to some extent where customers has had extra inventory, they are now adjusting their inventory levels. And this is something we're probably going to see some effect from also potentially in the next quarter.Net sales increased by 5% in Swedish kroner to SEK261 million but decreased 5% in U.S. dollars. We've seen particularly strong development on the sales side in Denmark and Norway and EBITA has grown to SEK56.2 million compared to SEK43.1 million last year. And it's a combination of a number of things with driving efficiency in our cost structures but also a positive product mix. And our EBITA margin was raised up to 21.5% compared to 14% in 2022. Looking at Europe, which has then been the recipient of some business from our Nordic segment. The sales has grown to SEK674 million from SEK567 million or SEK631 million in form factors in the business from Nordic.Adjusted sales -- net sales for comparable units, excluding these transfers and also acquisitions made were flat in Swedish kroner, but showed a decline in U.S. dollars by 12%. Our order intake was at SEK560 million versus SEK567 million. And we also here see an order intake for comparable units decreasing by 19% in Swedish kroner and 28% in USD. And in Europe, particularly, we saw a lot of these effects were customer-face orders in advanced during '21 and '22, which impacts the order intake but say have a different stability in the sales numbers and deliveries. EBITA increased to SEK99.6 million compared to SEK71.9 million, and it's a margin increase now to 14.8% from prior year of 12.7%.Looking at North America. Here, we can see we saw also in quarter 4, a softness in the market. And I think it's been largely related to EMS market. We have a large share of our EMS business in the U.S. and they have been just similar to ourselves, been working on improving our working capital, and we see that impacting orders and deliveries in the midterm. So our orders intake decreased by 14% to SEK170 million and in the U.S. dollars, a decrease of 23%. Net sales also went down by some 14% to SEK159 million and by 23% in U.S. dollars. Still, we have a positive book-to-bill, which is positive for the coming year. And we have an EBITA that also did very well with increasing by 32% to SEK26.2 million compared to SEK19.7 million. And the EBITA margin went up from 10.7% to 16.5%. So a good financial performance in North America.And then we have an East where we have seen increasing customer activities after the Chinese New Year and after China had dropped its COVID restrictions in late 2022. We also have here the effect of that in 2022, Q1 still had Russia in the business for the first 2 months of the year. But if we look upon comparable units, we can see that our order intake now shows a growth by 8% to SEK62 million, but decreased in -- by 2% in U.S. dollars. Comparable unit sales was flat, but showed a decrease by 10% in U.S. dollars. But here, we show now a positive book-to-bill of 118% and EBITA, which decreased to SEK11.6 million from SEK15.4 million, but an EBITA margin, which increased to 17.1% compared to 11.5%.So overall, a strong performance.Looking into the future activities. I mean, as we said before, acquisitions is important -- is a very important part of our growth journey, growth strategy. And we still have a lot of possibilities in that market. We have identified many, many companies working with PCB trading, and we have long time about roughly 40 target companies that we are approaching. And we are in discussion in a number of -- with a number of companies. So it is a very positive market for that side for us. In 2022, we closed 2 acquisitions and announced one in Italy. So hopefully, that will be coming more possibilities in the future. And we have a very strong balance sheet also to handle future acquisitions. I think we should be proud of the return on equity, almost 44% in the quarter.We have a net debt of SEK0.6 million. We have said in our targets to not be more than SEK2 million, so we have more headroom to finance more activities. We also have a strong solvency and net working capital is going down to SEK441 million. So I mean we are running a very lean business in that way from a working capital point of view. And our net working capital compared to the last 12 months sales is down to 8%. And if we include the liquidity we have, including with loan commitments from our banks, we have more than SEK1.1 billion in firepower for further growth activities.Yes. And if we look upon last year, we identified or set financial targets for 2026 for the company, where we are aiming to be at revenue of SEK8 billion and an EBITA of at least SEK1 billion and at the same time, remain with an EBITDA -- net debt over EBITDA of less than 2x and that we would continue to sort of distribute available cash and that we would expect that to be around 50%. And overall, we are very well performing according to the projections to reach these targets. And as you -- as per the proposal, our dividend this year is specifically very close to the 50% that we have outlined here.And looking forward, we are continuing based on our basic strategy where it's about growing our market shares in all of our markets, but specific focus in Continental Europe, U.S. and East. We're also working to continuously develop our relationships with our customers to both serve with more technologies and more products and more services. We're also looking to expand to further geographies or strengthen our positions in geographies where there is room for further improvement. And as we looked at before, it's a very fragmented market in which we operate, and that means that there is also a lot of growth opportunities for consolidations through acquisition, which is also part of our strategy.And with that, I believe we close our presentation and are open for questions.

[Operator]

[Operator Instructions] The next question comes from Johan Skoglund from DNB Markets.

[Johan Skoglund, analyst]

Good morning, and congratulations on the very strong profitability. Happy to see that order intake has turned positive on a monthly basis. Are you able to give any more details about the magnitude of this?

[Peter Kruk, executive]

I think you have, of course -- in the quarter, you have some elements, which is kind of calendar specifics with Chinese New Year, which partly affect some of these aspects. But even discarding that, we can see that there is clearly a positive trend where if you could say in the fourth quarter, you could say we had a -- or in the second half of last year, the order intake trend was more like softening as the lead times started to improve, but we can see that, that trend turned basically in January, and we can then see a positive increase in the orders.

[Johan Skoglund, analyst]

Okay. Very good to hear. So just a final question then for me. How far along would you say the negative customer inventory adjustments are? Like how much more could we expect are they finished now?

[Peter Kruk, executive]

I think we can expect to see it at least during the coming quarter. I mean we can see that overall underlying with our customer base business is quite strong. We see a lot of activity with new projects and new business. But we also see individual customers going through different phases of their inventory adjustments. So I think the overall underlying market is stronger than what our order intake and also our sales numbers might reflect right now.

[Operator]

[Operator Instructions]

[Klas Danielsson, analyst]

Klas Danielsson, Nordea. Sorry, bit unclear with the operator there. So just to follow up a bit on -- starting with the order intake. There's, I think, been a lot of different things within that lately. I mean you spoke on the inventory corrections, but you've also had the time and price adjustments that you just talk about now. Could you maybe help us unpack -- because it sounds like inventory corrections are maybe a bit still with us. But then could you maybe help us unpack what's left going forward? And also, I'd be very curious to understand how much the pricing side has been impacting and if you're expecting that to kind of fully normalize in H2 again?

[Peter Kruk, executive]

It is, as you say, quite a complex situation. And I think that was clear after our Q4 report as well. It's been difficult to understand the underlying demand in the market. But as I said, you haven't asked it where there's one element where a number of customers that have placed orders early and are adjusting their order patterns to now much shorter lead times. So that is one aspect that has an impact on our order intake. Then you can say that on order intake and on sales, you then also have the effect that customers may have excess inventory from the last 2 years, which we're now sort of working through.And that will be related to customer by customer where they are in that process. And I think we saw some of it starting already in quarter 4. We've seen in quarter 1, and I'm quite certain we will see effect of that in quarter 2 as well. And then we have the third aspect of pricing effects where we started to see price downs on the purchasing side for new projects during the latter part of last year. And I think we have seen continued or sort of continually lower pricing in '23 than what we saw in '22 in the first quarter. And it's a little bit hard. I think that primarily affects say, new projects, existing products running in production, not affected so much. But maybe that is in the order of, say, 5% on our topline right now.

[Anders Forsén, executive]

I think maybe you can say that pricing peaked in beginning of '22 due to the demand, et cetera, and now it was picked up. And then when China slowed down, the factories got free capacity then what leading us to push down prices. So we are comparing with the tough quarter '22 from a price point of view. And I think also, you can see that we somewhat offset the pricing with our lower purchasing prices, which also improves our profitability. So it is some kind of a mix there some way.

[Peter Kruk, executive]

And then you can see that actually now as China is starting to pick up, we see indications that an ingoing commodity material for PCB manufacturer has actually started to move upwards on price again. So I think this will be very much dependent on the way the Chinese economy picks up and that the loading or the utilization in the factories in Asia improve, then we will see more price stability here.

[Klas Danielsson, analyst]

All right. But I guess on the back of that, and you've been really confident, I guess, reaching sales growth for this year before and I guess your are still. Could you maybe kind of to be super clear, are you kind of expecting to reach organic sales growth again in H2 now?

[Peter Kruk, executive]

I mean, fundamentally, we still believe very much in our ability to grow continuously organically, and we have a basic organic target for our growth that we will be growing at the pace of around 10% per year organically over the cycle. A little bit, of course, will depend upon how the global economy develops, but we are very much still in the growth strategy is no change to that. And a little bit how quickly our customers and the economy develop will, of course, do govern to what extent we will see that in the second quarter or from when it starts.

[Klas Danielsson, analyst]

Okay. And then just on the margin side, clearly, really helped us in our expectations, I guess, there. But it sounds like you're more so on track with the synergy side now. Are you kind of expecting these levels to be more steady going forward? Or do you have still some more synergies to pick up or...

[Peter Kruk, executive]

I think, overall, we are continuously working on identifying and driving efficiency and synergies from our scale. Even if we have not shown growth of growth, sometimes the synergies come with a little bit of a lag of the growth and the growth we've seen in the last few years have given us opportunities to drive further efficiencies. And I think we have shown that in the quarter we're doing that well. And then, of course, then there's also a mixture of product sales, which has been maybe somewhat favorable in the quarter. And I think we've handled also this situation now with price volatility in some of that.

[Klas Danielsson, analyst]

Okay. And then just lastly from me also. I mean during COVID, you had a bit of an advantage one might say, to your competitors with having some ground in China and so forth. And now, when China is opening up, I was just curious to understand how is kind of competition developed from here? Is it still decent or are you seeing an increased competitive behavior or so?

[Peter Kruk, executive]

I think we regard and actually see our customers appreciate that the value we provide, they are very strong regardless of COVID. I think regard -- when the COVID pandemic were in the full bloom, I think it became maybe more obvious to customers, but even without COVID, the values we provide by being close to our factories as well as close to our customers, being able to work on securing quality, delivery and sustainability in those factories is very important, and it's not something that is easily replaced anyway.

[Operator]

The next question comes from Anders Rudolfsson from DNB.

[Anders Rudolfsson, analyst]

Congratulations to another strong report. I have a question regarding the slide #9, where we can see that the gross margin continues to grow pretty much every year and every quarter. And I suppose this is kind of a high -- new high level that we can see there. What do you see this trend? Can you expect it to continue? Or is it just because when you sort of get new companies into your model, hopefully, they, of course, will deliver. Can we see that the better gross margin coming from the new acquisitions you made? And what is kind of the target for you?

[Anders Forsén, executive]

I think we can see a positive journey both from acquired companies and from our old NCAB companies. And of course, there might be a bigger opportunity to increase the gross margin in acquired companies because they are typically on a lower margin. But then also, I think we are in a situation where we see -- we have talked a lot about this a little bit price softening in Asia and of course, due to our size and our presence in Asia, we are probably stronger in that negotiation part. So I think we have done a very good job on that and to take a look at all our cost structure and be able to also raise the margins in general. But of course, there are always opportunities in the acquired companies to improve the gross margin. We have seen that in almost call cases.

[Peter Kruk, executive]

And with our continued growth, we continue to get scaling effects, whether it is in procurement or product or whether it's in logistics solutions and other things. So I think these things is also something that helps us to improve our gross margin over time.

[Anders Rudolfsson, analyst]

And the last one for me is that if you look into all the industries you delivered in Q2, is there any specific industry that was very strong at the moment?

[Peter Kruk, executive]

I think we can see overall positive development in our industrial automation companies. But you can, of course, also have pockets which maybe are not so big for us, but we have a presence in aerospace and defense. And of course, that is an industry right now where the investments are increasing, and that is also something we are seeing.

[Anders Rudolfsson, analyst]

All right. Thanks a lot and good luck.

[Operator]

[Operator Instructions] The next question comes from Robert Redin from Carnegie.

[Robert Redin, analyst]

Could I ask on acquisitions? I mean, you say us before that the pipeline has about 40 companies in it. How are those discussions progressing? Can you say something about the pipeline and your outlook for doing acquisitions this year? Because maybe one quick [ assumption ] could be that you're becoming underlevered almost with cash flows being strong.

[Anders Forsén, executive]

Yes, exactly, it's a risk. We will try to solve that. I think -- I mean, the market looks very good, and I mean it's always difficult to predict when things will happen. It takes a long time sometimes to do the discussions. But I would say that we've seen an increasing number of dialogues. We see increasing interest for more companies. And we do focus a lot on Europe and North America. And I would say that [ top best ] market right now is Germany, where we actually got some requests from other companies as well. So there are many opportunities. But sometimes, it is a long process. So it's difficult to predict. But I would say we are in a good position, and we do have some good dialogues.

[Peter Kruk, executive]

I think we still have an overall discussion as I mentioned before that we believe that we will do maybe 2 to 5 acquisitions in the year, and that still remains.

[Robert Redin, analyst]

And how do you feel competition has it been heating up? I mean, I've seen some of your competitors buying businesses in Sweden even -- or is the competitive landscape acquisitions, similar you think?

[Anders Forsén, executive]

It's -- I think it's under stable and has not changed a lot. Of course, we will know that ICAP defense company had done a few smaller acquisitions and they did acquire [indiscernible] in Sweden, which is a sector and the trader. But I would say, in the testing cases, we are looking into -- we don't really see a salvage from them.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers.

[Gunilla Öhman, executive]

So there are no more questions from the web either. So I just want to remind you of our financial calendar. Our AGM is on May 9 and our Q2 on July 21. And we also, for the first time, we'll invite to a Capital Markets Day on September 4. So please book that in your calendar. Thank you so much.

[Peter Kruk, executive]

Thank you.

[Anders Forsén, executive]

Thank you.