NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the NCAB Group Q3 Report 2019. Today, I'm pleased to present CEO Hans Ståhl; and CFO Anders Forsén. [Operator Instructions]Speakers, please begin.

[Hans Ståhl, CEO & Director]

Hello, it's Hans here. Hello, everybody. And I'm sitting here with Anders and Gunilla, and we're going to present NCAB, who we are and what we are doing and what's our Q3 report.So we'll start with Page 4, describing who we are. And we can see that we are 17 companies around the world, and we are 403 employees, and we prefer to call ourselves specialists. And also, one can see that we are aiming for demanding customers. So that's our mission, selling circuit board to demanding customers and, of course, with 0 defects and sustainably at the lowest total cost.So at Page 5, what circuit boards using for? So we are selling the bare board. Our customers has marked in the components and the components or the printed circuit board assembly is then mounted, placed in the, what we call, the end product, the final product.And on Page 6, one could see some samples of products that where we make circuit boards for. And at the top -- at the left, there is high-speed trains in China, where we supply circuit board for a braking system, door opening system. And mid-top, it's a heating camera we supply boards for. And at the top right, there is actually a new gadget for trucks and coming on the cars also with a rear mirror camera instead of ordinary mirrors that it's kind of making high air resistance. And we are have entertainment system. And we also have a golf monitor that can actually see or project where the ball will wind up. So that's what many watching the golf on TV, it's because of our products that makes that comes true. And also a fare meter sourcer for taxis, that's just a small kind of selection of end products we supply.Page 7, we are working in a niche. We don't supply high volume. We supply high mix, low volume. And that's the important thing because high volume, there is a big risk, very low margin. So we are supplying boards to a high -- where it's a high product value and quality demand is extremely important, and it's a little bit less price pressure.At Page 8, we have low customer concentration, which also is important. So we could say, the top 50 customers stand for 50% of our revenue. And the Industrial segment is the biggest segment from our sales.Our journey, the history. The company was founded back in 1993 of 3 gentlemen from Sweden, and they rather quick realized that you have to go out of Sweden to make more business to grow. So we kind of started in Scandinavia and then went on further to Russia, China, Spain, Poland, Germany. And then we made some acquisitions. The first acquisition we made 2012 in the U.S., and the second one in U.S. 2014, and then it's -- we made -- Multiprint, we acquired in March this year. And that's our last acquisition, or latest, I should say.And also in the revenue, you can see we have grown every year since 2008, except for 2009, where all businesses went down, but we were rather proud of, we could also make a profit 2009, and that's kind of explaining our business concept as we don't own any factories. So when business goes down, it's rather easy for us. We only have one the fixed cost, and that's the staff.We have a customer case, customer we work within the U.S., Kimball Electronics. It's a company that has 7 locations in North America, and they also have in Europe and Asia and we are working with 4 of these companies. This case is described in the Tampa location in Florida. And they use us for medical project here and where they are important for the design expertise. So we support the customers with design and also high reliability. It's extremely important for medical purpose.So one could see on Page 11, you can see the development for this project, which we are very proud of. So looking at the quarter, the quarter 3, we can see we have a growth. We are very proud of this result. We have a growth of 5%. It's a little bit slower than anticipated. And we have -- we measure in the U.S. dollars, it's minus 3%. But what's extremely good is that the EBITA has gone up with 10%, and also the margin has gone up. If we look at the whole year, it's also plus 12% and plus 2% in U.S. dollars and the profit plus 15%, which is -- it's fantastic.So highlights. During Q3, we have received our first orders from Malaysia and Netherlands, great, and very successful integration of Multiprint in Denmark. And actually, the synergies has been actually much bigger than we anticipated. And then also, I don't know if it's a highlight, but anyway, I've decided to retire next year. So the Board has initiated a recruitment process and to install -- the aim is install successor in mid-2020. So I will stay in the company until we find best possible replacement for me. And I will also be a part of the company on a long-term basis as a shareholder and also in the Board. So Anders?

[Anders Forsén, Chief Financial Officer]

Okay. Good morning, Anders Forsén here. So on Page 15, you can see a short summary of the different segments. We can see that this quarter, we have a big difference between the segments from a result point of view, and we still have a lot of good development in Nordic and mainly in Norway and Denmark, it is growing a lot. Of course, some positive effect from the Multiprint acquisition. We also have a very healthy and good result, the EBITA margin in Nordic. Europe, a little bit slower. I think we are following the market trend, and then we're seeing weakening market in Germany. So that also have seasonable growth. North America was hit by the tariffs, start -- was increased in second quarter. It's having a negative impact on our revenue. And East is not as stable, but we see an improving profitability.So next page then, even if we see a little bit weaker growth, we are growing and we are increasing our gross margin, which we think is positive. So that's also important that we continue to increase our margin despite the tougher market conditions.So Page 17. As I said, a bit slower growth, but we -- anyway, we are doing a growth in order intake. And you can see that the increased tariffs to U.S.A., which was imposed in second quarter, they had a negative impact on the order intake second quarter, which is what we can see in the revenue this quarter.On the other hand, we had a growth in all other segments, which is good. And what is positive as well is that we can see order intake for the third quarter was growing more than the revenues. We have a positive book-to-bill, which is anyway a positive sign for the future. So we had a 9% growth in our order intake and that in USD is 2%. In general, we can see continued strong activity and development in the Nordic and a positive development in East, where we see much more hesitance from the U.S. and European market. So I think in many ways, we're following the trend from other companies in that perspective.So Page '18. Even if you had a slower growth, we are happy to present increasing profitability. EBITA increased by 10%, up to SEK 46.3 million and an EBITA margin of 10.5%, which we are, of course, proud of. The reason is that we continue to increase our gross margin. And we have also slowed down a little bit in our recruitment activities. We are still recruiting in Europe and East for growth, but in a little bit slower pace than before, you have to adjust to the market. Also, good to see that earnings per share increased 19% to SEK 2.29. So in general, we are proud of the results for the quarter.And coming into the different segments. If we start with Nordic, which is our operation in Sweden, Norway, Denmark, Finland and Estonia, we had a growth of 25%. If we exclude Multiprint, it's 10% growth. It's still a very healthy and good growth. And it comes a lot from good activities in Norway, as we see very strong position in Norway, and we are growing there. Also, our old Danish operation is growing, and we have seen a very positive impact from the Multiprint acquisition.Our EBITA margin, once again, is up to 18% and increased a lot compared to last year. And I think we have seen very strong financial synergies from the Multiprint acquisition, where we have been able to raise the gross margin due to our better purchasing prices. We have also been able to adapt our payment terms of the factories. We've had a very positive impact on working capital. So all in all, we see a very good benefit from the last acquisition.Going into Europe. As we saw in second quarter, the order intake was rather slow, and that is what we see in the revenue this quarter. We have also rather weak or stable order intake this quarter, and it is driven -- it's mainly Germany, which is a little bit weak at this time. We have some bad results in the U.K. and the other countries are more or less in line with last year.EBITA is decreased compared to last year, but we had a little bit enormous strong results second -- third quarter 2018. So a margin around 6% is more what we should expect.North America, on Page 21. We have a slowdown, and we have a negative growth. We saw huge impact on the orders when the tariff was increased in May. And of course, that has an impact on the revenue for the third quarter. However, we have been able to adapt our cost structure, and we also have been able to increase our gross margin. So the impact on the profit is not that much. And I think hopefully, we can see slightly same strength in the orders. They are still weaker than last year, but you might see a little bit positive turn in the end of the quarter.And last but not least, segment East, Russia and China. The growth was rather stable compared to last year. And also here, U.S. is impacting what we had a lower order intake in second quarter from EMS companies in China exporting to U.S.A., but we have a healthy gross margin, healthy profit and increased profitability, and we are very proud of the order intake that we had in third quarter, which actually grew 25% compared to third quarter last year. And it's mainly our business with local Chinese EMS companies that are growing again. So we see that's a very, very positive sign, and we have a very healthy margin on the Chinese business. So even if you don't see the big revenue impact this quarter, we see a very good growth in orders and profitability for East.And then going down to some financial balance sheet KPIs. The return on equity ended up in 45%. We have a very low debt level. So we have a strong balance sheet, and we have a lot of accessible cash. Solvency 40%. And also net working capital, as usual, below 10% of our LTM revenue. Of course, we do have rather low inventory levels. We have rather good payment terms, to the fact that China eases out to trade receivables in a way. So we are an asset-light business, and we have possibilities to -- and that means we have a good cash flow. And of course, we have a lot of strong balance sheet for further growth activities.

[Hans Ståhl, CEO & Director]

Please continue.

[Anders Forsén, Chief Financial Officer]

Okay. So a short summary then on the third quarter is that we see growth, it's flattening out a little bit in sales, but still we see a positive trend in order intake and especially for Nordic and East. Gross margin and EBITA margin continue to increase, which we're happy for. Nordic is growing very, very strong and especially then Norway and the acquisition of Multiprint in Denmark. China, you mentioned before and still we see some weaker market in U.S. and North America. But in a way, you can see it's good to have operations in many areas because something always can -- have something that's growing and something that maybe not as growing as much.

[Hans Ståhl, CEO & Director]

Yes. On Page 25, we can see our strategy going forward. And we have kind of built it on 4 cornerstones here. And the first one, increased market share in Europe, U.S.A. and East. We have so small market share. So there is so much we can do on the existing markets where we are to capture new customers.And also, secondly, I mean, the customers we have also have a huge potential. Normally, maybe -- we are maybe 10% we have of their TAM, total available market, for us. So there is so much we can do there. And also, of course, we can expand geographically and the latest one we have done Malaysia and the Netherlands.And the last one, consolidate the market. That's basically acquisitions because we think that our smaller trading companies, they will struggle as factories in China is being consolidated. They're going to have a huge problem in buying the products in China. So we think or we know that there will be a lot of companies that they are willing to sell their companies -- similar companies to NCAB.And on the last page, we have the financial targets, which we are following, aiming at. That's all. Any questions?

[Operator]

[Operator Instructions] First question we have is from the line of Robert Redin from Carnegie.

[Robert Redin, Research Analyst]

So a couple of questions, if I may. So one on those gross margins. They're improving quite a bit in the quarter, but what were the sort of main drivers there? And do you think that development is sustainable?

[Hans Ståhl, CEO & Director]

I mean gross margin is something we work very much with. And it's -- I think it's basically 2 reasons: as we are adding more value to the customers, we have been able to charge a little bit higher prices; and also due to our purchase power, we have been able to bargain with the factories also. So that has kind of created a better gross margin.

[Robert Redin, Research Analyst]

And that doesn't sound like something which is very temporary?

[Hans Ståhl, CEO & Director]

No.

[Robert Redin, Research Analyst]

Okay. Perfect. So second question would be on Europe and Germany or Germany seems to be the weak spots in the Europe business area. And you said that there was sales growth, I think, in Europe, excluding Germany. So I guess Germany was not so good in Q3. And I thought I wanted to ask if you could say something about order intake sort of trends throughout Q3 and maybe in October, if there's any flattening out for the development in Germany?

[Anders Forsén, Chief Financial Officer]

No, we -- as I said before, we had a rather weak situations in the third quarter. But we actually saw in the end and also you can see in the beginning of this quarter, a small upwind churn for order intake in Germany. So it's not continuing down at least, so that feels a bit of confident.

[Robert Redin, Research Analyst]

Okay. Sounds hopeful. And then on the U.S., I guess, order intake was down year-over-year, but was it up quarter-over-quarter? And what are the sort of trends throughout the quarter there in the U.S.?

[Anders Forsén, Chief Financial Officer]

I think it was down year-to-year, but I think it was rather stable quarter-to-quarter, and also to say that we saw a little bit change in the end of third quarter, so it's difficult to say. But hopefully, it -- I mean we believe, of course, that at some stage, the customers need to start ordering again because they have emptied the warehouse with inventory. It's difficult to see that yet, but it must come at some stage.

[Robert Redin, Research Analyst]

Okay. And then on East, I mean, the margins were very good in Q3. I guess, they can go up and down a little bit quarter-to-quarter. But do you expect, let's say, the year-to-date margin level in East, is that sustainable sort of going forward?

[Hans Ståhl, CEO & Director]

Yes. We think so, especially with the customers we have been able to capture where we believe it's going to be rather stable. And actually, our gross margin is rather stable over all countries.

[Robert Redin, Research Analyst]

Okay. Perfect. And then on Multiprint, I mean, positive to hear that you think synergies are sort of bigger than anticipated. Would you want to specify how much of synergies you expect to realize? And with this [ 1 billion ] sort of seemingly affect us, could you say something about your pipeline of acquisitions going forward?

[Anders Forsén, Chief Financial Officer]

But what we have seen, of course, is that we -- from a gross margin point of view, it's a number of percent [ geo mix ] increased for the Multiprint operation, mainly due to that we have been able to use our prices for the factories. So that has improved the profitability. We also see that we could take away some costs that they had in the operation before because we had our insurances and business stuff that could be useful then without any add-ons. So they also saved some cost in that respect. And then I also think we can see a big impact on the working capital, where we have mainly strong trade liabilities, where we adapted our terms of mainly 90 days instead of the roughly 30 days they had before. So of course, that gives also some kind of positive effects.And going forward, as we said before, yes, we are actively looking for further acquisitions. So we are looking into a number of markets. And -- but anyway, we need to find the right partner and we need to find the right company. So that's a lot of discussions and so on, but that's high on the agenda. And it might be as well that if the market is a bit weaker right now, that might also open up for new possibilities. And I think some smaller companies might have even more troublesome to go to the customers and also to find good projects at the factories in China. So this could be an opportunity, so it can give us more companies in the pipeline.

[Robert Redin, Research Analyst]

Okay. That sounds good. And with that, one being good, of course, it would be possibility [indiscernible] and you have the financing. So okay, those are my questions.

[Gunilla Öhman, Head of Investor Relations]

There is one question from Anders Øksendal at DNB on the e-mail here. And he asks, you mentioned strong order in China, are you taking market share? Or are the market close to bottoming out?

[Hans Ståhl, CEO & Director]

I think China is growing, of course. But one of the biggest projects we are running there, we have actually taken from another factory that couldn't do -- give the same service as we have done. So now China is growing, growing, growing.

[Gunilla Öhman, Head of Investor Relations]

And in China, how does the seasonality looks like over the quarter?

[Anders Forsén, Chief Financial Officer]

It is not the same. It is, of course, we share the first quarter because February, we have the Chinese New Year, when it slows down a lot. But on the other hand, then January is strong and March is very strong, again. But you can see some impact on the Chinese New year in the first quarter.

[Operator]

[Operator Instructions] There are no further questions at this time. Please go ahead, speakers.

[Gunilla Öhman, Head of Investor Relations]

Yes. So then we just want to remind you that the fourth quarter report will be published on February 19, next year, 2020, so welcome back.

[Hans Ståhl, CEO & Director]

Thank you very much for listening.

[Anders Forsén, Chief Financial Officer]

Thank you.

[Operator]

Thank you, ladies and gentlemen. That concludes your call for today. We thank you for joining and ask that you disconnect your lines. Thank you.