NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the NCAB Group Q2 Report 2020. Today, I am pleased to present CEO, Hans Stahl; and CFO, Anders Forsen. [Operator Instructions]I will now hand you over to Hans Stahl. Please begin.

[Hans Ståhl, Director]

Good morning, everybody. I'm sitting in Sunny Stockholm together with Anders here, and we have the pleasure to present our Q2 results for NCAB 2020. So we'll start with Slide 3, where we have a summary. And of course, we have been affected by the corona pandemic -- pandemia. And we had a weaker order intake, but that was mainly due to preordering by customers during quarter 1. Then we had kind of a -- the factories where we didn't have the full capacity due to the corona in China. And we have made successful acquisitions that is driving the growth. And also we have had a good result in the U.S., We have seen the light in the tunnel with our U.S. operations.And also the cost savings we have done has given a very strong result. On the next slide, we have the events and highlights during after Q2.So 4th of April, we signed with Peter Kruk. And he was announced and to succeed me as the CEO, and he will start at 1st of October. 24th of April, we acquired BBG in Florida, in the U.S. That will be effective as of 1st of May. We made a direct share issue conducted at the market price, the 24th of April also.And we had the general assembly meeting. We had at the 5th of June, where we decided to not pay out any dividend.So that's the kind of event and highlights during the Q2. And then on Slide 5, we are describing here the effect we have from the coronavirus in the Q2 and the situation is that -- what's positive is that the factories in China, the factories we used, they are basically back to full production. And some of them are maybe 80%, but the main ones are back to 100%. But we also had the customer where we kind of closed in the southern part of Europe and in the U.S. from basically March to the end of May.But the customer deliveries has worked pretty well. It's despite a tough situation. So our forward had done a fantastic job and also together with us.And as we said before, orders in the first quarter was placed earlier. So that dropped a little bit in the second quarter. But what's the important part is what sort of activities we are doing.And we have been kind of building relations with customers via telephone, Webex, webinars, et cetera, as we haven't been able to visit them.And so that's a little bit different, but I think we have developed a very good system there. And also, it's -- we are working very much with our logistics, our forwarders. So we worked very close to customers. So they -- so we have prioritized, so they get the right kind of PCBs. And we're delivering -- and also with factories. And thanks to our purchase power, we have been prioritized, both at the factories and forwarders.We have also seek state support in a few European countries, and that's a total amount of SEK 3.6 million.And the cost reductions we have done has been very successful. And the future, what will happen in the future. Of course, it's very difficult to predict. But we believe that we will be a weaker demand going forward.So the second quarter numbers. So we had a net sales of SEK 581 million and that's plus 23%, which we are very happy of. And also in the U.S., if you count it in U.S. dollars, it's plus 20% and also the EBITDA is plus 60%.And of course, that is extremely good. And also on the EBITDA margin, it's plus 2.4% units.Then we have made some acquisitions. So I will let Anders talk about the acquisitions we have made.

[Anders Forsén, Chief Financial Officer]

Okay. So what we have done in first and second quarter is 2 major acquisitions for us, which is very great. And the first one was down in the mid of March, Flatfield in the Netherlands. They have always been a big competitor to us, and we have been looking at them for a long time. And I mean, they are a leading PCB supplier in Benelux area and also have a lot of customers in Germany.And of course, when it looks for sort of a white spot for us is also really perfect match, and everyone also would like to grow more in the German market.They had a revenue of roughly SEK 300 million last year, and EBITDA of about SEK 25 million. There are 50 people, 15 works in China.And they have already been integrated to our Chinese factory management team, and the rest are working mainly in Netherlands. And we buy the company for about beta multiple of 7, and it was consolidated from first of March.And actually, we did the acquisition. The last day, Netherlands was open after work, it was locked out, it was a bit strange, but we have been able to handle the integration rather well.We have had a lot of meetings over webex and Zoom, et cetera. And I think we have got a good win for the company anyway, and we are now planning for introducing our IT system, our way of working, et cetera.We have also tried to merge all the supplier agreements in China to get the best benefit from purchase price and purchase conditions, et cetera and also try to implement our way of working. And I think so far, it goes very, very well, and we do have a very positive reaction from the customers in Netherlands.And of course, we are longing to meet them face-to-face again. Second acquisition was done in 24th of April in U.S.A. in Bare Board Group, also a big competitor to us in the U.S.They also have a few customers in Canada, which, of course, is interesting for us. And what is very interesting is that the Bare Board Group had the main sourcing from Taiwan. And as you may know, that there are no tariffs from Taiwan to China, so it's all USA. So it's very good to have a different option for our customers to choose to buy from China or Taiwan. So that is also positive. BBG had a revenue last year of roughly SEK 280 million, a little bit lower EBITDA. They are 30 million -- 30 people where 10 people are working in Taiwan at the factory management team as we have.And they are consolidated from 1st of May. And also here, we paid roughly [indiscernible]. The integration process has started.We are not coming as far as in Netherlands, but it goes rather well actually. But also here, I mean, we cannot travel, neither our people in U.S.A. are allowed to travel of Florida. So we have to do everything over phone and Webex, but it works rather good actually.And we have been able to implement our China pricing to the customers, et cetera, for BBG as well. So we see some benefit there.And together, of course, we will double our site in U.S.A., so this is really important for us, to be a big player in the U.S. Then going back to some numbers for second quarter.In the different segments. Nordic, we had a flat growth, but the same revenue as last year, still continued to have a good EBITDA margin of close to 15%.We have not seeked for any state contribution in Nordic countries. Europe, we saw a growth of 26% due to acquisition. Excluding them, it was down 14%, mainly due to Southern Europe and one customer in the transport sector in U.K. But positive is that we see EBITDA margins increasing. In U.S. as North America, Hans said, we have more or less doubled the revenue. And the good part is to see that even if we exclude the acquisition of BBG and Altus, which we did in November, we see a growth of 9% in our normal business.So the transformation phase we have been in before going from some customers with high volume, low tech has been over, and we see that we have growth again, which is very positive.We also see a growing EBITDA margin. So that is a very good sign. And I think we also see some positive signs from Altus integration.East down 2%, mainly due to Russia, which was sort of locks down in April. And then we had a very good EBITDA margin.But here, we have some positive currency program -- profits in the second quarter. We had some negative in the first quarter, now positive now.So I'd say this is little bit too high, but anyway, it's good margin.Next slide. It's good to see that we continue to grow. And EBITDA -- gross margin is going down a little bit, but that's mainly due to the acquisitions, especially Bare Board Group had much lower gross margin than our operation. If we should have compared the comparable units, we would maybe in 31.9%. So we have actually increased the EBITDA margin for the comparable units, but together with the new acquired companies, is a bit lower.Next slide, growth. As I said, the growth is coming from our acquisitions. Of course, we are proud to present 23% growth in the quarter. But anyway, we are doing 3% down if you compare comparable units. We think that's very good despite the situation, and we have had a very strong growth in Germany than any other countries.As we discussed, orders -- order intake only up 8% and down 15% for comparable units. But we had a very strong order intake in first quarter, and we see the consequences of that in the second quarter.So I mean normally, we can see that the first quarters -- the one quarter's order is normally invoice in the second quarter. But since we got so much orders for customers who like to secure deliveries due to the close down in China, this will be transferred for the quarter.So anyway, if you look at the first half year, I think we are book-to-bill 1:0, which is positive. So we are not that afraid of that low order intake in the second quarter.It is a clear sign from the first quarter strong EBITDA. Next page then, EBITDA. Had a very strong EBITDA. If we take away the transaction costs for Bare Board Group, we are close to SEK 60 million or over 10% EBITDA margin.So we are very proud of that. And we have been very successful to sort of save cost situation.We have not recruited as planned before. Of course, no travel activities, no exhibitions and so on.We also have this SEK 3.6 million as contribution from some states support in mainly Spain, France, Italy and U.K. Of course, this cost is a little bit lower than normal.So when everything opens up, we will expect to start doing travel activities and sales activities to be able to grow in the future.But of course, we're very happy that we can control the cost in such a good way and make a good profit. Then going back to the segments. Nordic, as I said, they were flat revenue. Continued good EBITDA margin. We went up to SEK 20 million in EBITDA, still a strong gross margin. Order intake decreased 14%. But here, it's the same, we had very strong order intake first quarter. So we are still in a very good level for the future.About the most countries I would say we saw a little bit of a growth in Denmark. Otherwise, it was about the same as last year.So Nordic continues to deliver, which is good. If you then go into Europe, we saw an increase of 26% in revenue. Of course, that is due to the Altus acquisition. If we take away that it is 14% down. We have had some weak markets or demand in Southern Europe, but it's mainly one customer in U.K. in the transport sector, which affects the lower revenue. And of course, there we -- at some stage during the end of the year, we expect that they will come back to a little bit better level. We also can see a very positive development in Germany, which is really good. And we got to a lot of, I would say, [ medTech ] projects in Germany, which is fantastic. So Germany is a huge market, and it's really good to see this very little growth during this time.Also good to see that we managed to increase the EBITDA margin despite the situation. Almost all of the state contribution we got is in Central Europe. Come back to the U.S.A., North America, net sales almost doubled to SEK 125 million. That's, of course, connected to the acquisition of Bare Board Group and the acquisition did of Altus in November. But anyway, if you exclude that and exclude the tariffs that now are included in net sales, we had an ingrowth of 9%, which we're really proud of.This shows that the work we have done in changing the business in the U.S. has come through, and we see a result of that is very, very positive. We also have seen an improved profitability in U.S. in the last quarters.So we ended up at about 8.1% this quarter. Order take also increased a little bit lower than the revenue, but we are still in good shape. Of course, the big question mark is a little bit for the future, what will happen if USA close down more and more? There are some signs of risk that the market will close down. But still, we can see our customers seems to be open. So -- but anyway, it seems to be uncertain in the U.S. market right now.And last segment East. We had roughly the same revenue as last year, a small decrease. And that was connected to Russia, which had a big drop in April, but they recovered very quickly in May and June, so we are back to normal levels.EBITDA increased. A big part of this positive effect in the second quarter is that the ruble increased in value again, and that means that we got the positive impact then recalculating [indiscernible] versus liabilities. We had a negative impact first quarter and a positive one in the second quarter.So the average is still on a good level for East, I would say. We also saw lower order intake. It was mainly from Russia in April. I think we are -- seems to be back on rather normal levels last 2 months. And then some KPIs then, return on equity goes down. But of course, that is connected to the share issue we did in April of SEK 287 million, which also means that we are back on 0 net debt.So we have still have a very, very strong balance sheet, which is very positive. We have an equity ratio of 43%. And as you can see, working capital is still roughly about [ 8% ] of our last 12 months revenue, which is very good. The company we bought in Netherlands, they had a little bit more inventory than, say, the normal. But Bare Board Group was the opposite, almost new inventory and customers paying very, very early. So I think they even out in the way. So still, we are about 9% of revenue in working capital, which is very positive. And also due to the share issue and the increased bank loans, we do have a very healthy cash position and a lot of available cash.So we are -- possibilities for taking chances in the future, which arises. And of course, the financial targets, we keep them at the same.We will, of course, not meet the growth of 8% this year due to the corona situation. But over time, we still believe that 8% is before acquisitions, it's reachable.And we also say that we will keep the average adjusted EBITDA of 8%. And probably, for the future, if we would like to invest for growth, we also need to add on some costs in the coming quarters.And I think when back -- everything goes back to normal again, we will estimate to have a dividend of at least 50% of that traffic.[indiscernible]

[Hans Ståhl, Director]

Good. Going forward, the future for NCAB is actually rather simple. So we explained it in 4 square here. And the first one is, of course, increased market share in Europe, U.S.A. and East.As of today, we have about the market share in the market of 1%, which is basically nothing. So there is such a big potential in growing on these markets.Also, secondly, deeper collaboration with existing customers. I mean, the market share we have with the existing customers is also rather low. So we have so much more to do with existing customers to gain more growth. And also expand geographically, of course, there are many countries where we are not present. But also what we are doing now is that we expand within the countries. Like in the U.S., we are setting up offices around the country. Whilst in Germany we are setting up more offices. So we are closer to the customers because that is an important factor to understand the customers' needs. And also the last one, but maybe one of the most important ones, we see a possibility in consolidating the market because they are quite many smaller traders that are struggling now especially when the Chinese factories are growing and becoming bigger and bigger and the smaller ones are disappearing.So one need to be big to get this -- to be attractive for the big factories.So that's a fantastic potential sale. So I'll just also want to say that I kind of -- on a personal level, this is my last report as the CEO for NCAB. Which is, of course, I feel it's a bit strange, but it still will continue as working in the Board of Directors. But I would like to kind of express my gratitude to our fantastic dedicated employees and also the Board of Directors and as well for the trust shown by you all shareholders that has made it possible for us to get a flying start to become a public company.And also my replacement, Peter, he will begin in October. So he will present the next quarterly result. And that next quarter results will be presented in November 10, 2020.To say that, we are ready for questions.

[Operator]

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

[Robert Redin, Research Analyst]

Yes. Congrats to great results. I have a couple of questions. Maybe I could take them one by one. First one is on the order. So have you been taking order by the book? I mean, order intake was obviously lower than in Q1. Could you say something about the order book, if it's sort of shorter or longer than the one well? And what sort of order intake in Q2 -- with some kind of guide for sales in Q3 or not really?

[Anders Forsén, Chief Financial Officer]

Yes. I would say that the order book is still longer than normal. And I mean, typically, we normally see that orders one quarter will be revenue in the next quarter. That is sort of a little bit of the standard.And the order for Q1 was much higher than the revenue for second quarter, meaning that we still have a lot of orders left to be delivered during third and fourth quarter.So yes, I think the situation in China in the first quarter when they had a factor locked down, a lot of customers placed orders with much longer lead time to make sure that they have the deliveries on time.So yes, we have -- we are not that worried about the low order intake in the second quarter because it's a little bit logical to the strong order in first quarter.Then, of course, on specific market, you can say that in Southern Europe, it has been lower, and that just means there has been lower demand.But in general, I think we are still in a rather good shape from order point of view.

[Robert Redin, Research Analyst]

Okay. That's more positive than what one could think looking at the numbers. Okay. And the margins, of course, they were very impressive in the quarter. I guess, on EBITDA margin level, were the acquisitions dilutive in Q2? Was the underlying business up more year-over-year, mortgage wise?

[Anders Forsén, Chief Financial Officer]

Yes, it was. Bare Board Group was below average in EBITDA margin for the group. Flatfield was also a little bit below, was closer to the average [indiscernible], but we had a strong development for the comparable units.It had increased gross margin and also, of course, a lot of cost saving activities. And I mean we have not add on new recruitments as planned.And we've also had no travel costs and no activities. But you have to see this as a onetime quarter some way because this is not sustainable long term. We need to have more actions to create growth in the future.

[Robert Redin, Research Analyst]

Right, right, right. And government support, I calculate that 60 basis points sort of margin health, that's not the max.Was there any sort of underlying or sustainable cost savings in the quarter? Or...

[Hans Ståhl, Director]

And I mean, our intention is, of course, when things get more, like, normal, then we're going to push the button and start to grow. And that's of course, then we need a hire people. We need to take probably -- we need to travel, et cetera. So it's -- yes, parts of it, but the majority of the cost will actually hopefully come back, and that is a part of the strategy to grow.

[Anders Forsén, Chief Financial Officer]

But I also think that we have learned to do business in a more efficient way, maybe. I mean a lot of Webex meeting or Zoom meetings, et cetera. So probably, you can do more activities online in the future.So hopefully, we have learned to be more cost-effective and do the business in a different way.But we also need to meet our customers, but maybe we can partly use this new way of taking customer contact in the future.

[Robert Redin, Research Analyst]

Okay, right, very great. And East had the 16.8% margin in the quarter, you had that ruble effect that I calculated 1.8%. So with 15% adjusted for that. So it's still sort of highest on record. Is that sustainable? Or was it just a next one quarter or so on the line?

[Anders Forsén, Chief Financial Officer]

It's difficult to say, but I think we have been able to increase the margin both in Russia and in China.And China is focusing more and more on high-tech projects. We are getting into some of these 5G projects, not 5G itself, but for test equipment, et cetera.And when we are going into the high tech, we are able to take better payments and better margins. So difficult to add what is normal level, but it's not 16%, of course, it's a bit below that, but it's well above 10%.

[Robert Redin, Research Analyst]

That sounds good. So finally, on those net financials that were high in the quarter and the FX impact, as you have seen that in several companies. Is it basically the SEK strengthening or maybe pound weakening? And are you going to realize those? I guess the non-cash in the quarter, but could there be cash later.

[Anders Forsén, Chief Financial Officer]

Sorry, one time. I missed that question.

[Robert Redin, Research Analyst]

This also higher-than-expected net financial and the FX in that. Are those going to be a cash cost? Or can you say something more about those?

[Anders Forsén, Chief Financial Officer]

Yes. Probably I think -- what is that? I mean, we are -- our business is very much built on U.S. dollar.We are buying everything in U.S. dollar, and we are invoicing most of the customers in U.S. dollar. And that also means that we will have time-to-time a lot of excess cash in U.S. dollar.And of course, at this quarter, when the U.S. dollar went down, that was negative for us. So hopefully, that was a little bit of a one time. We're trying to minimize the exposure more and more in the future.But in this quarter, we had too much excess U.S. dollar cash on the accounts, which had a negative impact.

[Robert Redin, Research Analyst]

Okay. Okay. Right. So FX trading, okay.

[Anders Forsén, Chief Financial Officer]

That's not our business, really. But of course, when we have this big changes it might happen. So I mean normally, since we do buy and sell in U.S. dollar, we try to keep that on a stable level, and we have normal hedging in the transactions.But of course, if we do have excess cash in U.S. dollar, and this happens, then would have a negative impact.We had a little bit positive impact in the first quarter of the same reason.

[Robert Redin, Research Analyst]

Okay. Right, right. Okay. Those are all of my questions. And of course, I have to say thanks to Hans. It's been a pressure covering the stock when you've been at the helm here from the IPO onwards. And talk to you later also.

[Gunilla Öhman, Head of Investor Relations]

A question from -- on my e-mail from [ Anders Evelson of DNB ] and is congratulations to a very good report. Great job. And you have 3 questions. Firstly, margins, very strong. Is this a new level? Or how should we think there?

[Hans Ståhl, Director]

Yes. Again, it's very difficult to say. But of course, that is what we're aiming. But still, it's -- our focus is 8%, what we have kind of total market. And it was difficult again to say because when we do push to grow, what one has to consider that this is -- we are not growing right now organically.So when will start to grow for the future, we need to spend some more money. So it's -- I think the 8% is a good target. Anders, I don't know if you want to add something to that.

[Gunilla Öhman, Head of Investor Relations]

Okay. And his second question is, how is the second half of the year historically versus the first half year regarding demand?

[Hans Ståhl, Director]

Well, I think revenue-wise, we are roughly the same or a little bit weaker. Normally, we do have a little bit weaker revenue in beginning of third quarter and also in December.So the half years are revenue-wise, pretty much the same, but maybe a little bit negative trend for second half of the year normally. But -- so they're still very close, revenue-wise.

[Gunilla Öhman, Head of Investor Relations]

And then his third and last question is: any of your competitors that have problems and could be an acquisition target?

[Hans Ståhl, Director]

Absolutely.

[Anders Forsén, Chief Financial Officer]

Yes. But of course, we are absolutely looking for more acquisitions. I would say, the thing is now that we need to be able to go out to travel again to meet the people.We don't -- we have a pipeline of potential targets. And we have maybe initiated in the very early stage, some discussions. But of course, we need to be able to travel and meet to be able to do something. But there are opportunities in the market. Absolutely.

[Operator]

And as there are no further questions at this time, I will hand it back to our speakers for the final comments. Please go ahead.

[Hans Ståhl, Director]

Thank you very much for listening. And again, it's -- we are very proud of the results for Q2.

[Operator]

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