NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to the NCAB Q2 presentation for 2023. [Operator Instructions]

Now I will hand the conference over to the CEO, Peter Kruk; CFO, Anders Forsen; and Head of Investor Relations, Gunilla Ohman. Please go ahead.

[Peter Kruk, executive]

Good morning, everyone. So my name is Peter Kruk, and my colleague, Anders Forsen and Gunilla Ohman, will -- through today's presentation.

Starting by looking at key -- some key takeaways for the second quarter. We have seen generally weaker markets in all of our regions. Net sales and order intake are decreasing, mainly because of lower pricing but also inventory normalization with our customers. We can see Nordic and European regions performing slightly stronger. And you also have pockets markets like EV charging markets and Aerospace & Defense that continue to perform well.

Despite the lower top line, we have developed an improved result with higher margins and good profitability. So we've been able to offset lower pricing with record gross margins. And with that, we have a strong EBITA, which improves year-on-year despite the lower top line.

We have also, in the second quarter, concluded 2 acquisitions of Phase 3 Technologies in the U.S. and db electronic in Germany here in early May. And here, the integration process has been initiated. As continuing from previous quarters, we've continued to improve our cash flow. Our working capital has continued to decrease, which builds a very strong healthy cash flow. Also, besides the 2 acquisitions we concluded, we have a very promising pipeline of M&A targets and continued discussions ongoing.

So looking at some key figures. Net sales decreased by 6% to SEK 1.057 billion. The order book from '22 has continued to support net sales in the quarter. Our organic growth for comparable units is down 14% in Swedish kroner. Looking at the order intake, we also see a decrease by 11% to SEK 924 million, and that corresponds to an organic decline of 19% in Swedish kroner. Again, as we mentioned, largely tied to pricing, changes and inventory adjustments.

EBITA still reached SEK 168.2 million, which is an increase by 5% over last year, and that generates an EBITA margin of 15.9%. One should also bear in mind that in the quarter, we have taken additional transaction costs related to acquisitions of SEK 8.4 million. Factoring that out, our EBITA margin would have been at 16.7%.

Gross margin, as reported, was very strong. It was a new record level of 36.4% versus 31.3% in prior year, and a very strong cash flow of SEK 153 million in the quarter as well.

As we mentioned, we have 2 new acquisitions. We have db electronic, which is in -- based in DACH region, so Germany, Austria, Switzerland. And we have also Phase 3, which is based in Silicon Valley, which both represent 2 key markets for NCAB. Both these companies complete -- complements our existing business quite well. Their focus is very much on quick turns, so shorter series of typing work, development work. And quite often, this can also be an important first step for new customers. So with these customers, we see opportunities to also grow sales of volume production for these customers. Combined, they will add some SEK 350 million in a yearly basis.

So a brief background around NCAB. We are a company focused solely on printed circuit boards. We are serving demanding customers, supplying them on-time deliveries with zero defects produced sustainably at the lowest total cost. We believe in serving our customers locally. We are operating with local companies serving their customers in their markets, but we also have a strong factory base. We are using only with factories outsourced productions. We have no in-house manufacturing, but we have a strong manufacturing team supporting the production in those factories.

So we describe ourselves wise. We don't have in-house production as an integrated PCB producer where we have a very strong presence with the customers, providing them with technical support. But we also have a very strong factory presence through our factory management team, which represent more than 120 people in our total organization. And from that perspective, when a customer deals with us, they are dealing with us as we would be in full control of the full supply chain.

Our focus is on demanding customers, and we are also focusing on what we define as high mix, low volume segments. These are typically customers whose product value is quite high where the printed circuit board is a smaller item of the building material. They still have very high demands on quality in their products. And given their volume, even though they might be globally leading companies in their specific fields, in terms of printed circuit board needs, they have struggling to get access to their -- to the leading factories due to their small volume consumption. So by using us, we can consume -- combined many customers' needs and get access to the leading factories. And this being in the same, it also gives less -- lower price pressure for us to operate in.

Anders, will you please take over.

[Anders Forsén, executive]

Yes, absolutely. So let's us take a look on the growth journey that NCAB has done. I mean the company started 1993, started mainly in Nordic and then grew more and more into Europe and then with some acquisitions in U.S. 2012. And we have been growing all years, except 2009 when the financial crisis was. And also, we made the IPO in 2018. And looking at the growth, we have about 21% annual growth since the last 10 years and about 25% since the IPO. And also after the IPO, we have done a number of acquisitions. We increased the speed of acquisitions, which is a good way for us to grow the market, take on good customers and be able to grow them organically and also to get a whole lot of good people.

And coming back to the numbers for the second quarter. As Peter said, we saw a small decline in revenue, about 6% measured in Swedish kroner and 12% in U.S. dollar. Despite that, we are happy to see that we can continue to improve our EBITA. So we reached 5% higher, up to SEK 168 million, which represents 15.9% EBITA margin. And then in this number, we also have SEK 8.4 million in transaction costs for the 2 acquisitions. So the underlying EBITA margin was actually 16.7%. And looking also in the revenue side, we see a price decrease in the market. So at least 50% of the drop is connected to prices.

And take a look on this picture then, we see that we saw a little bit drop in revenues, as I said, but we managed to offset very well with improved gross margin. And during the quarter, we reached over 36% gross margin. That means that even if we see a lower revenue, we actually improved our gross profit by 10%, meaning that is a strong way for us to continue showing good profit and healthy results for the market.

And a little bit the reason is that we see that the factories in China have very low utilization. I mean they have built a lot of new capacity after the pandemic. And also there are a softer market, especially on the consumer side, which means that a lot of factories are really chasing for volume and that means also lower prices. And I think we have been able to -- as in the same situation as previous years, when we have this situation, we've been able to really use that and improve our gross margin to compensate for lower prices. So we can see that, even if you see a lower top line, we see gross margin going up.

Yes, I think we mentioned most of these areas. The net sales was down in U.S. dollar for comparable units, 12%; and order intake decreased by 11%; book-to-bill, 87%. And as I said, it is a little bit volume from inventory adjustments, but it is a big part of prices. And we are also back to the lead times that are very normal now, and lead times are maybe shorter than normal due to the situation at the factories.

And as we have mentioned, I mean we have been able to keep up the result and even increase the result. And as we said before, we have added about SEK 8.4 million in transaction costs to acquisitions. And we are also investing in new IT platforms that is planned to be launched here during the fourth quarter. And that has also added some extra costs, about SEK 10 million for this quarter, which was not there last year. So if you take that in consideration, the result might look even better. And important is to see that even if we have lower revenue, we have improved or increased our gross profit. And we continue to see some advantages from scale in the European segment and also U.S. where we have managed to improve our profitability.

And we continue to work hard with the working capital. As the logistics is working much better, we don't need to have the buffer stuff. We don't need to have so much goods in transit. So we're able to constantly improve our gross -- our working capital. You can see that earnings per share was down compared to last year. But last year, we had a very strong positive currency gain in the result. So that amounted to the strong result last year.

Peter, back to you.

[Peter Kruk, executive]

Yes. So if you start looking at our individual segments, looking at Nordics. Here, you have first an explanation. We have some business that in 2022 was all booked as Nordics, but which from 2023 split within Nordics and Europe. So if you look upon adjusted order intake, we are also seeing a decrease by 15% to SEK 242 million. Net sales decreased to SEK 207 million, which is a decrease by 10% for comparable units in Swedish kroner.

Within the Nordic countries, you can see Norway performing slightly better than the other countries at the moment. EBITA is down compared to last year to SEK 45 million versus SEK 59.7 million. But if we were to again factor out the adjustment of business being moved out, we would also show an increase here in the Nordics year-over-year. And our EBITA margin improved from 19.9% to 22% in the quarter.

Europe then received some business from previously Nordic. It shows an adjusted net sales for comparable units, which decreased by 11% and 17% in U.S. dollars. Order intake at SEK 513 million. And adjusted, it was again also showing a decrease by 16% and 20% in U.S. dollars. EBITA, however, increased to SEK 94 million, corresponding to a margin of 15.4% over 12.4% in last year.

And then moving over to Americas. You Americas and East are our countries or regions, which are seeing the biggest sort of challenges right now. In the U.S. market, we see -- we have a higher share of contract manufacturers and their sort of adaptation to shorter lead times, and reducing inventories is creating kind of bullwhip effect, which has a bigger impact on our order intake and net sales in that region.

So our order intake decreased by 40%. And adjusted, if we're factoring out the additional Phase 3, it decreased by 30% to SEK 242 million. Net sales decreased by 11%. And adjusted, excluding Phase 3 comparable units, it decreased by 24% to -- in Swedish kroner. EBITA still increased to SEK 31.6 million over SEK 30.3 million and our EBITA margin increased to 17.3% over 14.8% in the quarter.

East, clearly, this is the region where anticipations were higher. I think we started to see up during Q1 as the pandemic restrictions have been lifted. We saw a lot of customer activities picking up. However, as we can see, we can also see in Global PMI indexes the manufacturing industry in China is still not picking up. It's primarily a service industry that's picked up in China. And that has had a ripple effect also to the other regions who are trading with China. So we can see order intake has decreased to SEK 43 million over SEK 60 million the previous year. Net sales decreased by SEK 28 million to SEK 56 million. And EBITA decreased to 10.8% versus 12.6 million. However, we were able to preserve or actually improve our EBITA margin to 19.2% over 18.9% in 2022.

Anders?

[Anders Forsén, executive]

Thank you. Of course, I mean, this market situation gives us even more opportunities to give you good discussion with further acquisitions. Of course, we are very happy that we managed to close Phase 3 and db in the second quarter. And we are in a number of really good discussions for further acquisition, especially in the European market. I think many other smaller competitors face the same market conditions. And of course, they don't have the same ability to negotiate on prices and so on as we have. So they are struggling much more. So this opens up for possibilities on the acquisition side, which will boost growth further on.

So we have right now about 44 companies that we have shortlisted. And as I said, we are in a number of discussions. Of course, it's difficult to know where they will close or when they will close and if and so on, but we are -- I think we are in a good position. And we also have a very strong financial -- strong balance sheet, which means that we are well geared to continue to invest in further growth both organically and through acquisitions.

Yes, some other key figures. I think we managed a good return on equity, almost 40%, a little bit down compared to last year, but it's mainly due to much higher equity. We still have a very healthy net debt versus EBITA of 1.2. We have said not to have more than 2, so we have still more headroom to grow there. Strong solvency of almost 38%. And as we said before, we have been able to reduce our net working capital. So we are now down to SEK 419 million versus over SEK 500 million last year. That means also that net working capital relationship to last 12-month revenue is down to below 8%. And I think this also shows that we have a very, very strong flexibility, and we can manage all different kinds of market situations. And still, we have over SEK 700 million in firepower for further potential acquisitions. So I think we are in a very good shape.

Okay. Peter?

[Peter Kruk, executive]

Yes. Sorry. So bringing back our financial targets that we launched in 2022. We are aiming to get to SEK 8 billion in turnover in 2026 with an EBITA of at least SEK 1 billion. We also aim to keep our net debt over EBITDA less than 2x. And we will be distributing available cash that we don't need to sustain our growth, and we approximately expect that to be in the order of around 50% of net profit. So whilst 2023 is the market conditions are proving to be more challenging, we have a strong belief in the long-term growth opportunity for the company and for us to reach our financial targets.

Overall, our strategy, we have a strong position, and we are continuing to focus on growing our market shares in the markets where we already have a presence. We are with our customers -- then developing our relationships. It generally means that we will increase share of wallet with customers, but it was a move up in terms of the services and technologies we work with our customers, and with that, also grow our margins with them and the value we provide them.

We see a lot of opportunities still continue to expand geographically. The acquisition of Phase 3 greatly is an excellent example of this, which strengthens our position in the American West Coast. And we also see a lot of opportunities to consolidate the market. It is an extremely fragmented market still with a lot of opportunities for consolidation, which we will be exploring.

And with that, we open up for questions.

[Operator]

[Operator Instructions]

[Johan Skoglund, analyst]

It's Johan from DNB here. Happy to see EBITA improving given the environment...

[Operator]

The next question comes from Johan Skoglund from DNB Markets.

[Johan Skoglund, analyst]

It's Johan from DNB here. Happy to see that EBITA is improving given the environment you're in. So my first question is about some more color on current order and price trends. I mean in what magnitude are prices down? And are they down for all segments?

[Peter Kruk, executive]

You could say that, yes, there is a -- predominantly, it's -- Asian factories are clearly down. You can see that there is still cost inflation upwards in some of the European factories. But in Asia, the drop in, I think, the larger -- the weakness in the Chinese economy locally as well as some more slower world economy has had an impact on the factory loading. And the reaction generally from factories will be to try to keep their production running and maximize that. Producing printed circuit board is a capital-intensive industry, and there are also certain processes which you will not want to sort of shut down or run intermittently. With that, that has led them to a price decrease in the market. And we believe, at least maybe half of the decline we are seeing in our top line numbers is related to pricing overall.

[Johan Skoglund, analyst]

Okay. Very good. And even though you have lower volumes in the quarter, have you added any new customers in the quarter?

[Peter Kruk, executive]

Yes. I'd say, actually, the progression of winning new customers as well as winning new part numbers is very positive. And that, of course, bodes very well for our future long-term growth. But as always, with us winning new customers, it's a slow business growing with new customers. So winning new customers does not really impact very much the sales within the given quarter, even maybe sometimes a given year. But actually, you'll see the volumes 1 or 2 years later in the numbers. So what we're winning now in terms of taking market share and winning new customers and projects is very positive for the long-term growth, but has little impact on the next 1 or 2 quarters.

[Johan Skoglund, analyst]

Okay. Good. So are you still seeing decrease in prices now in July? I'm realizing it's only a month in Q3, but are you seeing any signs of stabilization?

[Peter Kruk, executive]

I think we're coming to a situation where prices will not move down very much unless there's something happening in the currencies, which would sustain that because I think the factory situation is not sustainable for the factories to be running at the current pricing they have. I think this has been more of a kind of short-term bridge for them. So we don't see really indications of further movements on the pricing, but prices still remain low. We don't see a rebound yet. But long term, it will not be sustainable for the factories to remain. So we -- over time, we do expect pricing as well as then probably our gross margins to normalize.

[Johan Skoglund, analyst]

That sounds surprisingly positive. And just for my last question, are you able to say anything about customers' inventory adjustments? Are they still ongoing? And how much would you say is left? If you can comment on that, that would be helpful.

[Peter Kruk, executive]

I would say it's still ongoing. It's difficult to say exactly where they are. I think we did a lot of improvement on our own working capital throughout 2022. I think a number of our customers are on the same journey, but maybe a few quarters behind us. So it's a mixture. I think we start to see some effects of that, maybe already partly in Q4 from customers. I expect that we will see effects from inventory adjustments in the next 1 or 2 quarters as well. But hopefully, we should expect that to start to be declining.

[Operator]

The next question comes from Klas Danielsson from Nordea.

[Klas Danielsson, analyst]

So starting out with a follow-up here on the pricing side. I appreciate markups are increasing by quite a bit, which is impressive. I was just wondering, are you seeing any sort of pushback from customers on the pricing side currently?

[Peter Kruk, executive]

I think we have to be fair. I mean prices are going down, so we are giving price downs also to our customers. But of course, we are taking care of that. We are protecting the gross profit to have a cost coverage for what the services we provide. So in that perspective, we are in dialect with our customers and we are being able to generate savings for our customers. But in that process, we are still being able to preserve a healthy gross profit for ourselves.

[Klas Danielsson, analyst]

Yes. But -- I mean, correct me if I'm wrong, they do have quite decent visibility on your purchase prices, right, in the order base.

[Anders Forsén, executive]

No, not really. I would say not. Of course, the customers also know about the market situation and they know about the pricing changes that happens in Asia, but they do not have really any transparency to our purchase prices. But of course, they didn't know the market situation in general and understand that the pricing is going down.

[Klas Danielsson, analyst]

Yes, cool. And just wondering on the gross margin and the improvements that you're seeing. I mean you mentioned part of it is that you're renegotiating and improving your pricing structure as well due to the situation being what it is. So just trying to understand here what is sort of sticky in this gross margin increases when those purchasing prices start to normalize?

[Peter Kruk, executive]

That is, of course, somewhat difficult to exactly judge. But I mean if you look back on our history, we are continuously working on sort of adding value to our customers and improving our margin over time. And I think we've done that successfully as we can prove through our history. Right now, we are seeing sort of specific effects where purchase prices are dropping fast, and so part of that has been sort of transferred immediately to the market. But some of it is being pocketed. I guess if we would have had a normal situation, we would not have seen this kind of margin increase. We may have seen sort of more the traditional move up that we've seen historically. So it's a bit hard to understand exactly how much of this may go back. We expect a big part of it to go back if we would have been in a normal market.

[Klas Danielsson, analyst]

Okay. Okay. That's fair. And then just backing out a bit and looking at the net sales growth over the last, I think, 5 quarters here. We've seen negative growth, and I appreciate you have really tough comparables in 2021 and then you're seeing some of these inventory pricing issues and so forth. Could you maybe help us understand sort of barring a significant macro drop, which is an outlier here, I guess? When do you actually expect to be back to sort of growing net sales?

[Peter Kruk, executive]

This, of course, is the $10,000 question, I believe. I think, right now, we expect 2023 to be quite turbulent. I know there are projections from industry organs like Prismark following the market that are expecting a pickup here in the second half of this year. I think for us, our key ambition is to be flexible and to handle whatever the market will bring us. So let's say, if we have a weaker market, we can still protect our profitability development. And if there is a pickup in the market, we'll be able to leverage that.

I think we've proven historically that we are quite resilient to downturns in the market. And when there is a pickup, we are one of those players in the industry who can really benefit from that pickup and then grow rapidly. So whilst we are anticipating a pickup in the market sometime in the future, which would hopefully then benefit us in a good way, we are also prepared to handle a couple of quarters more of turbulent times.

[Klas Danielsson, analyst]

It sounds like you're basically quite confident in growing gross profit at least this year continuing that.

[Peter Kruk, executive]

Yes, we believe we can handle sort of the gross profit side and our cost structures quite well in a down market as well, which gives us resilience. And also means that we have a very strong financial situation, which gives us opportunity to be very active on the M&A side during these times as well.

[Klas Danielsson, analyst]

Okay. And yes, last question from my side. I mean, you mentioned and I think you talked quite a bit about the sort of acquisitions in the quick turnarounds here. And I'm just trying to get some color on what the sort of upselling opportunity actually is here. Could you maybe give some color? I mean, how many customers do they have typically? As well, how big is sort of the business with these customers in the sort of part of the value chain that they do not address today and that you do? So basically, I guess, what would be maximum upselling opportunity this year?

[Anders Forsén, executive]

I think you figure to the db acquisition we made in Germany, Switzerland. I mean, they had the philosophy that no customer should have more than EUR 300,000 in revenue because they would like to really have a huge number of customers and not be dependent on the customers. And a lot of these customers are sort of on our target list in Germany. So for sure, there will be many customers with opportunities to also say sort of the NCAB normal volume deliveries to. So I think that is a good opportunity. Some -- a few customers were, of course, we already had. But I think we got the connection to many new customers with possibilities to sell much more than just a quick turnaround.

[Klas Danielsson, analyst]

And then could you maybe kind of -- is there any rule of thumb of how much bigger sort of normal sales prototyping is in relation to the prototyping phase, which I guess these guys are more incentive to...

[Anders Forsén, executive]

Tricky. But it could be -- it depends on the tip of the customer, of course, but it could typically be, I guess, in total, maybe 10x or more. But then of course, there will always be competition and everything, so you cannot expect to get everything.

[Operator]

The next question comes from Anders Rudolfsson from DNB.

[Anders Rudolfsson, analyst]

Perhaps you already kind of discussed both of them actually. But I've been listening to a number of calls during this quarter 2 presentations, and some companies actually mentioning that April was very weak, May a little bit better and June being the best month in the quarter. Is that something that you have seen as well? Or where do you think -- is this rather stable all the way or rather weaker? How do you see it?

[Peter Kruk, executive]

I would say it's been rather stable. As said, during our first quarter then, we actually saw a positive trend. However, then I think China slowed down and we did not really see that trend continue into second quarter. So we had a bit of a setback. But within the quarter of second quarter, I would say it's fairly stable. If anything, slightly positive in the quarter. But I would be -- after our first quarter, I'm a bit cautious to read too much into that.

[Anders Rudolfsson, analyst]

Okay. And there is, as you mentioned, China is weaker than expected and there's a number of companies talking about that as well. Do you have an explanation for that?

[Peter Kruk, executive]

It's difficult to say. It seems like the -- as economy has opened up in China, consumers are eager to spend money but they're spending money on services. They end up going to restaurants, dinners, cinemas, whatever, but consumption of product is lower. And that has had the ripple effects to industrial production. And then, of course, you have parts of economies in Europe like Germany has a lot of their trade versus China, which is then also partly suffering. So I think the whole world was partly anticipating that China would say storm out of the blocks after the pandemic, and that they will start to help pulling parts of Western industry also. But I think clearly, we're not seeing that happening right now.

[Anders Rudolfsson, analyst]

All right. And the final one. You touched a little bit on that before perhaps, but book-to-bill is 87% now. And this is a tricky question for you, perhaps. But when could we see book-to-bill being back at 1 or above?

[Peter Kruk, executive]

I think we started to approach that point quite soon because, overall, I mean, one thing is that right now with the, say, good availability of capacity in the factories, lead times are extremely good. And that means, of course, that customers can now delay their ordering patterns at the same time as they're working with their inventory management. So I think that still has an impact on the relationship between sort of book and billing, and we will expect that to normalize with -- in the not too distant future.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any written questions or closing comments.

[Gunilla Öhman, executive]

So this is Gunilla Ohman, and I found one question from Hamish Edsell on the web. And that regards if we can comment more on the prices that we are getting from the factories also in comparison with the years '19, '20, '21 and not just '22, which he imagine was impacted by supply chain issues. So would you like to start, Peter?

[Peter Kruk, executive]

Yes. I think we saw in -- during the spring of '21, we saw price increases, which we are summing everything up, but we believe we're in the kind of double-digit orders of around 10%. And I think we are basically seeing those price increases reversed or at least in that order would be my guess.

[Gunilla Öhman, executive]

Okay. Good. So there are no more questions from the web. And I just want to remind you that we have our Capital Markets Day on September 4, and we will send out an invitation where you can register later on today. And then our third quarter report is November 7. So very welcome, and thank you very much for today.