NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to NCAB's Q2 presentation for 2022. This conference call is being recorded and will be posted on NCAB and financial [indiscernible] webpages afterwards. [Operator Instructions] Today I'm pleased to present CEO, Peter Kruk; CFO, Anders Forsen; and IR Manager Gunilla Ohman.

With that, I'll hand over to Mr. Kruk. Go ahead.

[Peter Kruk, executive]

Thank you very much. So if we move to Page #3, a summary of the quarter, I'm very pleased to present a very good quarter for us in NCAB. We had sales amounting to SEK 1,122 million posting on organic growth of 15% in U.S. dollar, which is our main trading currency. With acquisitions, our sales growth is up to 25% in U.S. dollars.

We have continuously good order intake. Order intake at SEK 1,035 million which is down 2% in Swedish kroner versus prior year, and in comparable units, it is a decrease of 27%. However, one needs to bear in mind that during the first half of 2021, there was an increasing order booking related to both price increases and predominantly longer lead times or increasing lead times. If we factor out the estimated extra SEK 200 million of order intake in Q2 2021, then we will actually see that our order intake is still growing by some 20%.

Also, very positive in this quarter is that our acquired companies are all continuing to perform very well. This, and combining and leveraging our growth in net sales led us to improve our EBITA to SEK 160 million, which is an increase of 54%. And our EBITA margin reached a record high of 14.3% compared to 13.6% in prior year, which actually also included forgiveness of B2B loans.

Also, very good is that we had a very strong cash flow in the quarter amounting to SEK 148 million compared SEK 30 million prior year, which is a combination of the good EBITA performance, but also a small improvement in our working capital.

Over to you, Anders, on major events in the quarter.

[Anders Forsén, executive]

Okay. Good morning. Yes, I'm going to highlight for the quarter is that we made a decision about the dividend for 2022. It was decided to divide 60 [indiscernible] or SEK 0.6 per share, 50% was paid in May and the remaining part will be paid in October.

We also launched a new credit facility with Nordea. So we have another SEK 300 million, which boosted our possibilities for further acquisitions. And thirdly, on April 8, we had to sell off our Russian operation. We stopped all our production or sales to customers in already in February. But in April 8, we sold the business to the local management in Russia. That had a small order of write-down cost about SEK 43 million, but no impact on the results in the second quarter. On the other hand, we are happy to say that we made a new acquisition of Kestrel International Circuits in U.K., which we did in 24th of June just before the quarter ended.

So on next page, some information about Kestrel. They are based in the U.K., rather close to our patent office in U.K. They are a high-quality supplier of value-added PCB. They had a sales of roughly SEK 125 million, mainly for customers in U.K. And together, we will be the clear leading partner now in U.K. Kestrel launch had another good result. EBITA amounted to about SEK 17 million for last year. And the company has a long history that they found in 1995.

We have some 25 employees, 20 in U.K. and 5 in China and Hong Kong. And the purchase price was SEK 103 million for the shares, which amounted to an EBITA -- enterprise value, EBITA multiple of a little bit more than 6. And we believe that this acquisition will add on the result per share for 2022. Going back to you, Peter.

[Peter Kruk, executive]

So on Page #6, a little bit background about who we are. So NCAB, we supply the printed circuit boards, which you see on the picture to the far left. And this is the basic component upon which our customers mount semiconductors to create PCBAs, which in turn form the core electronic products.

Important to remember is that all of our production is outsourced, but we provide advanced technical support as well as production engineering services, and we actually have more than 100 specialists only working with factory management, and that enables us to secure leading quality and delivery performance for our customers.

We move to Page 7. We have a long-standing history starting in the early '90s in Sweden. And as you can see from the bottom graph, since 2008, when the original founders sold the company, there has been a continuous good growth in the company, an average growth rate in today of 19%. And you can also see that from our IPO in 2018, that growth rate has been, on average, 29%, which is a combination of continued strong organic growth and global expansion as well as an increase in activity in acquisitions.

If we move to Page 8, so you see here a summary of the key figures in the quarter. So our sales numbers SEK 1,122 million in sales, which is an increase of 47% versus prior year. In U.S. dollar, USD 114 million, increase of 25% and our EBITA of SEK 160 million, which is an increase of 54%. And you can see our EBITA margin of 14.3%, which is an improvement of 0.7 percentage points.

If we go to Page #9, you can also see which is also very positive is that Far East segment. We see very strong growth in all of our regions and also very good financial performance. So in the Nordics, you can see growth of 78%, which includes also the acquisitions of Elmatica, but also good organic growth, excluding acquisitions and a very healthy EBITDA margin where our markets are performing well, but we all start to see some synergies from the Elmatica acquisition.

In Europe, also good organic growth, 22% organic, 30% growth, including acquisitions and a very good margin of 12.4%. Also in America, good growth, very positive margins close to 15%, and it's important to remember that only a few years back, we could see that both Europe and North America were steadily more performing somewhere between 5% and 10% EBITA margin. So it's good that we have now for a number of quarters been able to lift the performance in these regions.

And finally, East, where we see a big drop in sales, of course, relates to the fact that Russia is no longer part of the business here from quarter 2. And we -- but we also saw that our business probably in China was impacted by COVID lockdowns in quarter 2 in China, and we also had some quite tough comparables from last year where our business in Asia was the first region to really take off after the pandemic. Nevertheless, a very strong performance by the team in our East segment, delivering close to 19% of EBITA margin.

Moving to Page 10. We're also happy to see that we are continuing to develop our gross margin. Continuously, we've seen in the graph, you can see a decline from 19% to 20%, but that is all related to acquisitions of Flatfield and Bare Board Group in 2020, which were both running in lower margin gross margins. But back on that, we're now continuing to develop our gross margins in all of our regions.

And then we move into the sales growth here, we can see in the front chart. You also see that the grow 25% in U.S. dollars, 47% in SEK and comparable unit 15%. Order intake going down in SEK, but only going down 17% in U.S. dollar, 2% in SEK. And again, this is related to the additional or the high order intake we saw in Q2 of last year. And comparable units, you can see we saw a decrease in U.S. dollars and in Swedish krona.

Moving to our EBITA side. Here, again, you can see we're continuing to develop and grow our EBITA result. In the quarter, it was improved by 54% to prior year. EBITA margin of 14.3% versus 13.6%. And if we look excluding transaction costs for transaction onetime effect, we had a 14.7% EBITA margin versus 12.3% in prior year, and our earnings per share was SEK 0.75 versus SEK 0.42 in the prior year.

Over to you, Anders.

[Anders Forsén, executive]

Okay. So will start on the next page, Page #13, looking into the different segments. Let me start with Nordic. We see that orders increased by 30% in U.S. dollar and 53% in SEK. The main driver here is the acquisition of Elmatica that we did in October last year. But we also see a very strong development in our Danish operation. If we compare comparable companies, the order intake is down compared to last year, but we had a very strong order intake second quarter due to the increasing lead times.

Looking back to the net sales, we saw a steady growth 78% in SEK and 109% in SEK and 78% in U.S. dollar. Also positive to see is that we had a positive book-to-bill. So even if the order intake was lower than last year, we had a positive book-to-bill.

EBITA has been strongly improved. We had some onetime costs for the integration of Elmatica in first quarter. And we see now that as a result is going up towards the market acquisition as well, and they are in line with all the other companies. And we also see growth in Denmark, Finland, we see possibility is increasing. So we are very happy for the strong EBITA margin of 20% for Nordic. We can also see that we have some customers here suffering from component shortages, especially in our old Norwegian business, but it looks like it will ease up a little bit for the third quarter.

Okay. Going to next Page #14 about Europe. Also here, we see a strong net sales growth in all our markets, especially our main markets, Germany, Netherlands and U.K. And net sales increased by 30% in U.S. dollar and with more than 50% in SEK. Growth for comparable companies was 22% in U.S. dollar. So still, we see a very positive and healthy growth on the revenue side. Order intake, the same thing here, is a bit lower than last year, but Europe was a segment that really had very high extraordinary order intake in second quarter.

So of course, we can see that we are hit in 2 ways. We have very tough comparables for '21. And we also see that orders are lower right now due to that retain normalizes, that the customer doesn't need to place the same amount of orders. In some way, you can say that we are hit in 2 ways. But we see a very stable business from our customers, and we are not worried about the market situation. Also here, we can see a good improvement in EBITA from SEK 38 million to SEK 68 million. Of course, it is due to the acquired companies, but we have also improved profitability and so on. So we're very happy to see the development for our European segment.

Going into next page, North America. Here we see order decreased 6% in dollar, but increased 11% in SEK that are a little bit lower in -- for comparable companies. We had a smaller RedBoard acquisition then in October last year. But we can see that the market in U.S. needs to be more stable or more growing a little bit more than we have seen in Europe and Nordic. They did not have the same extraordinary order 2021 either. Also here, we're happy to see that EBITDA is increasing.

We have a strong margin of 14.8%. And you have to remember that in 2021, we had a onetime impact of this forgiveness of the PPP loan, which was about SEK 11 million to be. And then going back to East, which of course is a little bit of a crazy quarter for East. This is the first quarter without our Russian operation. And of course, that has a big impact on the revenue. We also have had the restraint situation in China with a lot of lockdowns. So we have seen a lot of low activities in our Chinese operation.

On the other hand, we see that in the end of the quarter, it seems to ease up a little bit, and it seems that the customers are starting to act more in a positive way. But therefore, sales decreased, both excluding Russia and also probably Chinese operation. On the other hand, we were very good in handling the EBITA margin. We managed to increase the EBITA margin to almost 19% for the base in China. And hopefully, we will see less lockdown in the coming quarters for our China operations.

Then going to the next page, talk a little bit about our acquisitions. We are happy that we can continue to do acquisitions and the market seems to be very positive for us. We are in discussions with there's a number of more potential acquisition targets out of this sort of pipeline that we have created. So we still have some 40, 45 companies to meet up and discuss with. And I think that the market right now is already positive for us.

Still, I mean the smaller competitors are not allowed to travel to China or cannot travel to China. They have difficulties with meeting the factories and so on. So the market is still very good for us to do further acquisitions and the interest for the companies to sell is also rather good.

And looking to the next page, just to repeat how we work with our integration of acquired companies. We focus in the beginning very much on marketing, sales and people and culture. We would like to rebrand the companies to NCAB because we believe that's the way going forward. And then, of course, what we are buying is customer relationship and good employees. It's important that we really take care of the employees that we work with the customers in a good way. And then we're looking into operations, how we can make that maybe more efficient, how we can use the same IT tools and how we can find some large-scale activities on finance side. And of course, normally, we can see benefits in our factories.

We have often better pricing or better payment terms and we try to implement that as quick as possible. And I think we can see all our acquisitions done last year, we have seen improvement in gross margin and in EBITA margins, and we have not made many savings on the employee side. So important part is to see the benefits of growing acquired companies.

We've changed slide then to Page #19, on more financial KPIs. Return on equity in June was 43%, which we are happy for. Net debt has increased to SEK 1.6 million in relation to EBITA, and we have our financial target to be around 2%.

Solvency, a little bit lower than last year. But of course, we also done the extra dividend in December 2021. Net working capital has been increasing, but we see now a slightly positive trend. I mean, the net working capital increased when we had the increasing lead times, we have more in [indiscernible]. We have more sea freight and so on. But we can now see that it slowly, slowly starts to go down when the normal -- the lead time is more normalized.

And net working capital versus net sales 10.7%. It was 8% last year, but it was about 11% in third quarter. So we see a positive trend. And including the new loan facility, we have available liquidity of over SEK 700 million for further acquisitions. And then, of course, we are very proud of the cash flow in the quarter of almost SEK 150 million.

Peter, back to you.

[Peter Kruk, executive]

So if we just want to summarize our strategy and how we want to move forward. So we as a company, we are a global leader, but we are operating in a very big fragmented market amounting to roughly USD 20 to USD 25 billion of the high-mix, low-volume printed circuit board. So our first focus is focusing on growth and increasing our market shares in Europe, USA and East. We're also working to develop or deepen our collaboration with existing customers.

This is both an opportunity for further growth and providing more value to those customers, which also in turn can help us improve our margins and move up in technology. We're also looking further to expand into more new geographies or strengthen our position in parts of geographies where we already have a presence. And finally, it being a very fragmented market, many of our competitors are smaller, local, regional players like Kestrel that we just acquired. So there's a good opportunity for us to consolidate the market through acquisitions, which is part of our core strategy.

And by that, I think we close our presentation.

[Operator]

[Operator Instructions] Our first question comes from Klas Danielsson, Nordea.

[Klas Danielsson, analyst]

So a few questions from my side. Starting off with the order intake side, that's obviously growing quite strongly in SEK still if you exclude the lead times and so forth. But could you help us give a bit of additional color on how that's growing, if you kind of adjust for FX and acquisitions on that basis, to start off?

[Peter Kruk, executive]

Yes, I think we can start by [indiscernible] and you can follow up on this. But I think overall, we see a good strong demand from our customers. I mean even though we can hear the news about lot of the worries in the market, we don't see any decline in demand from our customers at this time.

I think what we're seeing is a number of customers are still struggling with component issues, but demand is very much still there for us. So it's a positive outlook from that perspective. And as we said, we had a quite a significant order intake during the first half of last year. And in Q2 of last year, we expected it was around SEK 200 million of additional orders that was placed just from the effect of increasing lead times. So therefore, we feel that we are in a good position to continue also our growth going forward.

Anders, do you want to...

[Anders Forsén, executive]

And I think caveat of the thing is I mean, we saw that we in the first quarter had maybe roughly the same amount, up close to SEK 200 million in additional orders due to the longer lead times and then another SEK 200 million in second quarter last year. And of course, when we now see that the lead trend is going down, customers doesn't need to place orders with such long lead time as before, meaning that they can postpone the order in the next quarter. So in that way, you can say that the orders for this quarter is hit by 2 ways.

It's tough comparison last year, and it's also a little bit lower due to that they've already placed the needed orders. So based on that and the comments we hear from the customers, I'd say that we still see a positive trend even in U.S. dollar. If you have to take away the USD 200 million in U.S. dollar, it is still a small decline for comparable companies versus last year, but we strongly believe that that is due to that customers don't need to place orders since they already placed orders last year.

[Klas Danielsson, analyst]

Okay. Okay. And is that -- because I guess the backlog for you guys has I guess in Q3 or so been about 4 months or so. So is that still the same kind of amount now or I guess by the logic that you're kind of presenting, it sounds like it's perhaps back to being around those 3-month levels? Or am I misunderstanding?

[Anders Forsén, executive]

Much closer to at least. I think we still can see that we have some more [ seepage ], I think, than we had before the pandemic. So maybe that will add on a little bit. But I do believe that we are very close to be back on 3 months or the lead time again.

[Peter Kruk, executive]

And I think what we can see is what I said we saw an order increase during the first 2 quarters of last year and then maybe a part of that was led out through the system in Q3, Q4. And then you could say Q1, you had a renewed COVID risk in China with logistic issues in Hong Kong, et cetera, which I guess think -- I think that even though maybe production was slightly improving, it made our customers cautious and that we do not really see a decline in the order intake in Q1.

But I think now in Q2, things have stabilized more than I think more customers will step by step are adjusting to the better lead times. So I think it's a gradual process where there's an improvement in the lead times. And then not all customers change their ordering pattern day 1. They will maybe still want to make sure that they have stability in those supply before they will readjust their ordering methodology.

[Klas Danielsson, analyst]

Okay. Okay. That sounds logical for sure. And then, I mean, clearly fantastic performance on the EBITA margins in this quarter, particularly, I guess, in the Nordics, but there's also strong performance across the board, so that's that. Could you maybe give us some additional color what's driving that? I guess there's some seasonality in that, but I mean, should we extrapolate 4 percentage point higher margins in the Nordics and some 3% in North America and so forth? Or is there anything kind of special that's going on there?

[Anders Forsén, executive]

I think, I mean in Nordic, I think we see some scale advantages. I mean we have had some lower revenue streams in Norway and Denmark before. We see that those countries have been growing rather positively last year. And we have more or less the same number of employees and same staff. So of course, that we have a good leverage on the EBITA.

We also see that [indiscernible] market acquisition also driving more profitability was good in that way. So we believe that will be good add-on to the profit level. Then of course, I mean, we must say that we have some positive things from the currency.

Of course, revenue is driven by U.S. dollar, as you all know, and gross profit -- since we buy and sell most of the goods in U.S. dollars, gross profit will be increased by the strong U.S. dollar. And I mean, we had most of our costs, at least in the European segment, of course, in euro. And before U.S. dollar, euro been unstable. But for this quarter, the U.S. dollar is much stronger than euro as well. And of course, that give us an advantage that we have cost in euros and gross profit in U.S. dollars. So for sure, there are some positive impact on the currency on the profit side as well.

[Peter Kruk, executive]

And evaluating the effect there, I guess, on the currency side or currency movements.

[Klas Danielsson, analyst]

Okay. Okay. And I think lastly, I hate to be that guy focusing on the downside. But clearly, I think the markets are currently focusing on recession risks as of now. So I think if we look back at NCAB, it was -- you were down about 15% in sales during 2009. I mean could you comment on how you think you're positioned today versus that period? And also kind of what your levers on cost and so forth are in such a scenario?

[Peter Kruk, executive]

I think we have a very good structure as a company. I mean, we are extremely well-positioned that we are very asset-light. We have strong cash generation. I mean a lot of our costs are variable, and that enables us to flex quite significantly with the market. I think in 2009, what was seen then, was that they -- when there was a big market decline, so top line went down, but it also meant there was a lot of opportunities to bargain with the factories for lower pricing in purchasing, which also meant that we can offset part of that volume decline by improved gross margins.

So I think historically, we have proven that we can handle these potential decline very well and I think that remains also going forward. And I think today, we can also see that those who might struggle in those kind of situations will be a lot of those smaller traders. So I think it may even also on the upside open up more acquisition opportunities for us.

[Operator]

Our next question comes from Robert Redin, Carnegie.

[Robert Redin, analyst]

Just a few follow-ups on the same themes. I think those currency impact in margins, you had a text in the note saying that there was a SEK 10 million positive impact estimated. Is that it basically on that theme for margins? I mean that would be a percentage point of margin improvement all else equal.

[Peter Kruk, executive]

Yes. Yes, it is. It's, of course, it is tricky to be exact, but we will try to make the estimate. So we believe around SEK 10 million is the onetime impact on the current situation for the quarter. And the main thing is that you see as we have a gross profit in the result, which got stronger, and we have a lot of operating costs in Europe via [indiscernible] and so on. So it's an order of magnitude thing on percent, yes.

[Robert Redin, analyst]

Good. And then those margins increased. I mean, they were really strong despite those China lockdowns. And is that a function of Asia margins being sort of better than Russia margins and sort of sustainable then or a mix shift? Or is it something -- from temporary also to somehow in this segment?

[Anders Forsén, executive]

I want to say partly at least, I mean, I think we have always been more -- have a higher EBITA margin for our China operation than our Russian operations. So partly due to that. And then I think also we were in a situation that there were a very strange quarter in China due to all these lockdowns and there have been shortage of components and so on. And I think we have a very smart businessman in our China operation, and they're also taking advantage. So the business we have taken has been maybe more profitable than normal.

But it is a combination, I'd say. Normally, we have a very strong EBITA margin in our China operation. And Malaysia still very small for us. So East is more or less only China right now.

[Robert Redin, analyst]

All right. Perfect. Sounds good. And then, yes, I mean, we talked about this order intake adjusting for comparisons and whatnot. Could you say something about that trend throughout the quarter? And have you seen any sort of slowing down in order intake trends monthly or...

[Peter Kruk, executive]

No, we can't say that it's a trend. If anything, maybe we can see some positive signs in East. I think they were struggling quite a bit at the end of first quarter and beginning of second quarter. I think maybe here, there are some positive signs that sort of the lockdowns still occurring in China have been less detrimental to the business climate, so -- but otherwise there is no trend that we are diving down a slope or anything like that.

[Operator]

There are no further questions from the telephone line at this time. I'd hand over to Gunilla Ohman, IR Manager for closing remarks. Thank you.

[Gunilla Öhman, executive]

So I just wanted to kindly remind you that our first quarter report is on November 8, and thank you so much for this meeting today. Thank you.