NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, welcome to the NCAB Group Q2 Report 2019. Today, I am pleased to present CEO, Hans Ståhl; and CFO, Anders Forsén. [Operator Instructions] I will now hand you over to Hans Ståhl. Please begin.

[Hans Ståhl, CEO & Director]

Good morning, everybody. I'm sitting here with Anders and Gunilla in the sunshine, Stockholm, which is very nice. And it's especially very nice to present our Q2 results also. So if we start on the Page 5. We can see what we accomplished in Q2 in 2019. And I'm especially proud of the profit, the EBITA, where we have grown line 17% compared with the same period last year, and it gives then the 7.9% margin. And also the net sales, we have grown 14% compared with 2018, if you compare in Swedish crowns. If one makes the same comparison in the U.S. dollar, it's a growth of 4%.If we look at our segments, we report in Nordic, Europe, North America and East. And Nordic has grown 25% with a margin of 13.1%; Europe 12%, 6.2%; North America, we are -- we have actually not grown, we have a negative growth, but we have a pretty good EBITA margin; and East was a very healthy growth and a healthy EBITA profit also.Talking about NCAB with NCAB in a nutshell and that's Page 8. And we are today 17 companies. We are selling to 45 markets, and we are almost 400 employees or specialists, as we call ourselves. We work together with 22 factories. We don't own any factories. We have collaborations with about 22 factories. And our mission is PCBs for demanding customers, meaning that we do like customers having tough demands. And also it's important with the quality that we can deliver zero defects products. And of course, this should be produced sustainable and at the lowest total cost.We can see on Page 9, it's the -- all the things we add to the business because we call ourself an integrated PCB producer because we are extremely integrated with the factories. We have people inside the factories. And we also have -- where we are also integrated with our customers. And we have today 1,700 customers around the world. And what's -- what I'm especially proud of is all the technical and engineering support we can give the customers because there are always -- we always need to modify the design, so it suits the different factories. And also we have unlimited capacity, which is -- I think is very important as we don't own any factories. If we don't get orders, we don't buy anything. And if we get a huge number of orders, we have an unlimited capacity to place them with. And also we have quality audits, we are inside the factories making quality audits basically every day. And what's so important when dealing with the external factories is the purchasing power. I mean we buy circuit boards for a lot of money, much more than any of our customers.If we go further to Page 10, we can see our journey here. So the company was founded in 1993 in Sweden of 3 gentlemen. They realized pretty quick that they had to go outside Sweden. It's a small country. So we have to go outside of Sweden. So we started with Finland, Denmark, Norway and then Russia came on. And I think a big step, we also go to Germany, into Europe, U.K., France. And 2012, we took a big step over the Atlantic water, where we made 2 acquisitions in the U.S., PD Circuits and M-Wave. So they're located in New Hampshire and Chicago. And then we started Italy, important market for us. And then the latest greenfield operation is Benelux. And we have actually grown every year, maybe except the 2009, which was quite interesting. And we'll be -- despite from the revenue went down, we made a healthy profit. And also when consider 2010, we kind of grown a lot, which is a part of our concept.Going further, financials, I will leave the word now to Anders.

[Anders Forsén, Chief Financial Officer]

Hello. Good morning, everyone. So going further onto Page #12, of course, proud to see that we continue to have growth in our revenue and net sales. And also that we still continue to slightly increase our gross margin. So it's good to have a combination of increased gross margin and growth.And the next page, we can see that the number 4 Q2 is that we have the increased net sales of 14%. They're measured in U.S. dollar, which is the currency we mostly price our project. We had a growth of 4%. Order increase is a bit lower, 10% in SEK and 1% in U.S. dollar. But it's important to note that the increased tariffs had a huge impact on the revenue in -- on orders in U.S.A., meaning that if we take the order intake for all other segments except North America, we have 16% in SEK and 7% in U.S. dollar. So meaning that the orders, yes, it is a bit lower, but very much impacted by the increased tariffs in U.S.A. And we can also see somewhat lower (sic) [ higher ] cautiousness from customers in Europe.Results, as we said before, we continued to improve the result quarter-by-quarter. We also have a little bit higher EBITA margin compared to second quarter 2018. And it's important to note that we still continue to invest for future growth, which means that we add on more people, especially in each segment and in the European segment.Going into the different segments. Going back to Nordic, we had a strong growth. Net sales increased 25%. We did an acquisition of the Danish company, Multiprint in March this year. So excluding the Multiprint acquisition, growth was anyway 11%, which is good for Nordic markets. And we have seen a very strong performance, both in our own Danish operation and especially in Norway. EBITA for this quarter is slightly down. We reached 13%, and the reason is mainly that we have a different mix between the countries because Norway are growing a lot, including Denmark and also the Multiprint acquisition, and they have slightly lower EBITA margin than, for example, Sweden. So when those countries have a bigger part of the Nordic sales, that means that the EBITA margin will go down a little bit. But we don't see any trend that it would continue at the 13%. It will hopefully increase a little bit and stay about that level.Going to Europe. We see a growth of 12%, or, measured in U.S. dollar, about 3%. Here, we see a strong development in Germany, U.K., which is the most important market for us in Europe. While we have some slower speed in the smaller countries like Poland, Spain, France and Italy right now. We have also set up a new company in Benelux. We have employed the first person, and we will start working for that market in the coming quarters. I think we can see a little bit more hesitance from some of the customers in the European segment. And it's important for us to continue to believe in the market, and we continue to recruit. Because if we see some slowdowns of their local factories, which also see slowdowns, meaning that they will have much more problems, and we will be prepared and ready to take on that growth when the market goes up again. So it's important to continue to grow -- invest for growth in European segment because we believe in that.Going to North America where we see a negative growth of 11% or 20%, 21%, measured in U.S. dollar. And of course, the effect was very strong when the tariff was increased from 10% to 25%. We had actually a very good May -- month in April, and we saw a positive growth. And then when the tariffs increased, we saw directly much more cautiousness from the customers. And we saw also that the order per day or revenue per day fell dramatically. Of course, it's a question how long will this stay. It's difficult to say. But of course, it had a net big impact for the revenue for us in USA. Anyway, we have been working with the good cost control and with good gross margin. So we are able to improve our EBITA and EBITA margin in the North American segment.Going to East, which is representing Russia and basically China. We see a very strong performance. Net sales grow with 26%, and it's pure organic growth. We had strong growth both in Russia and in China, even if we saw some customers in China selling to USA were affected by the increased tariffs as well. But still, we see a very strong potential in China. We have set up more sales offices, and we see a growth from a lot of local EMS companies in the Chinese market. We have made a start-up in Malaysia. We started in February this year. We are now 4 people in that company, and we're still working for the first order very soon, I guess. EBITA is unstable, at just above 10%. We have taken on some extra cost for the new establishment in Malaysia and the new offices in China, but we still see a huge potential in growth in this region.Then going into some financial KPIs. Still have a very strong return-on-equity, almost 50%. We still have a good balance sheet -- strong balance sheet with very low net debt. And we also have a solid solvency of 36%. Net working capital is rather low for our business. We only have more or less trade receivables and some inventory. And we had always typically very small inventory in our business. So still, we are below 10% of last 12 months' revenue. IFRS 16 have had some effects on the balance sheet. It's very, very limited on the P&L, but about SEK 37 million increased balance sheet due to IFRS 16 or 5% increase. But still, we have a strong balance sheet. We have a strong financial position.

[Hans Ståhl, CEO & Director]

Good. So to summarize, the Q2 result is a good quarter for NCAB despite the raised tariffs in the U.S., but we have seen somewhat dampened top line growth due to the trade war and hesitance among some of the customers. But we actually have increased gross margin, and we have a strong profitability.So go to Page 22, we can see our strategies going forward. And as the first block here is the increased market share in Europe, USA and the East, which is extremely important, of course, to bring on new customers, to bring on new projects from old customers. And it works, we can see on the numbers. And also ensure profitability from existing customers. It's also important because it's easier to create profitability from the existing customers than new ones. And it's also important as long as we are working with the customers, we can raise the gross margin we have seen. And that we also see in the result where we raised the gross margin. Expand geographically, there are some red areas in the world we haven't been to, and the latest one we have done is Malaysia and Netherlands. The Netherlands, we started up 2 months ago. And also consolidate the market there. The market consists of a lot of companies, small companies, small trading companies that will struggle in the future due to the consolidation of factories in China. And the latest acquisition we have made is Multiprint in Denmark, we are very proud of, and it works beautiful.Financial targets on the medium term. We have 8% growth before acquisitions. An EBITA margin of 8%. And net debt under adjusted EBITDA, less than 2x. And dividend expected to correspond to at least 50% of the net profit. So that's what we are aiming at. Any questions?

[Operator]

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

[Robert Redin, Research Analyst]

So a couple of questions, if I may. On that comment on procurement prices, did they help gross margins in Q2 already? Or is that something for the coming quarters? Or what was the timing of that?

[Hans Ståhl, CEO & Director]

Yes. It is the coming quarters. And when we talk about reduced prices, it's mainly on new part numbers. So it doesn't happen overnight.

[Robert Redin, Research Analyst]

It's more of a gradual increase then?

[Hans Ståhl, CEO & Director]

Exactly, exactly.

[Robert Redin, Research Analyst]

Yes. Could you say something about the magnitude?

[Hans Ståhl, CEO & Director]

It varies very much. It depend on what sort of product, but a rough guess in our new part number is 2%, 3%.

[Robert Redin, Research Analyst]

Okay. Perfect. Then on demand in Europe, you're right that customers are taking a more cautious approach, at least some. Are there any changes throughout the quarter? Was sort of May-June worse than April? Or how do you describe that if you see a trend?

[Hans Ståhl, CEO & Director]

No. I think we have seen a little bit also starting in the first quarter, and I think it was rather the same level month-by-month. Maybe April was a little bit stronger, but I think it's not the -- the trend is not more negative. That's been on a rather stable level the whole quarter, I would say.

[Robert Redin, Research Analyst]

Okay. Perfect. And then on the U.S. demand, we have this situation with the tariffs and customers may be adopting a wait-and-see approach. But can customers hold off from buying very long? They don't have much inventory, do they?

[Hans Ståhl, CEO & Director]

No, it's a...

[Robert Redin, Research Analyst]

Or do you think that they're losing business underlying also?

[Hans Ståhl, CEO & Director]

No. I mean you are right. That's what we see also. I mean nowadays, it's very much just in time. So it's a question when they have run out of inventory. But it seems like -- I mean the customers' customer is also hesitant to place orders. So we really don't know 100% when it's going to pick up again. And we are -- we do get new part numbers, and no customers, as far as we know, have left us. We are still having good dialogue with all customers. So it's -- but we don't know exactly when it's going to kind of change.

[Robert Redin, Research Analyst]

Okay. So we're in some kind of inventory reduction in -- with your customers and your customers' customers?

[Hans Ståhl, CEO & Director]

Yes. That's what we think also and we have opened up with the Taiwanese manufacturers also. So it's -- I think we have done many activities to mitigate what's happening there.

[Robert Redin, Research Analyst]

Okay. Perfect. And then on the margins, I would say, given your statements about demand in Europe and the U.S., margins in Europe and the U.S. in the quarter seem to be sort of on the high side. So is that some kind of trend, margins improving underlying in Europe and the U.S. or is it something temporary, mix effects or something like that?

[Hans Ståhl, CEO & Director]

No. I think if we compare Europe with second quarter last year, yes, we are a bit higher. But we are running on about 6%, 6.1%, which we've been doing for a number of quarters now. So I think that is where we are aiming for European segments, and that gives us still headroom to continue to employ new people to meet the -- what we believe, the continued growth opportunities. So I would say that we will -- we should be on that level, around 6% -- or just about 6%. Going to North America, I think we have -- due to the situation, have been improvised. We have been focusing more on cost control and doing those kind of activities. So that is also seeing effect now in the EBITA margin. Difficult to say if it will continue to increase. Of course, if the volume goes down, it's difficult to increase the margins much more. But I think we should at least be on this level, coming quarters.

[Operator]

[Operator Instructions] And there seem to be no further questions at this point. So I will hand the word back to the speakers for any closing comments, please.

[Gunilla Öhman, IR Manager]

So Gunilla Öhman here. I just want to conclude that our next quarterly report is on November 6. So welcome back then. Thank you, Hans and Anders.

[Anders Forsén, Chief Financial Officer]

Thank you.

[Hans Ståhl, CEO & Director]

Thank you.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.