NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, good morning, and welcome to the NCAB Group third quarter conference call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Anders Forsen, CFO. Please go ahead.

[Anders Forsén, executive]

Yes, hello. Good morning, everyone. I'm happy to present the third quarter results for NCAB Group. I'm not joined by Peter Kruk today because he's in recovery after a minor sport injury, but you have to take this for me instead.

So if we go to Page #3, rough summary, we see a rather solid and good demand continuing from our customers. We also can see that the component situation is improving for the customers, which is good, of course. We're also very happy to present a record EBITA result and highest margin ever for NCAB. All segments is doing very well, except East. That's still struggling after the disclosure of Russia and from the lockdowns in China.

In connection to our profit, we're also very happy to present the strong cash flow. Since we see lead times decreasing, we also see that our working capital is going down step by step, which is very good. And we still believe that we have a positive acquisition climate going forward. So overall, a very positive report from our side.

If you go to Page #4, we can dig in some deeper in the numbers. We reported a net sales of SEK 1.168 billion, which was a growth of 35% or 10% in U.S. dollar. Organic growth, taking away the acquisition impact, it was flat in U.S. dollar, but increased from 23% in SEK. We see still order intake at a good level. I mean we still have the situation where we had very high order intake during 2021. And we also have a situation right now where customer lead time is going down, meaning that customer doesn't need to order as much as before. So we can deliver on the previously made orders.

So we are happy with the situation even if we can see a decline in U.S. dollar. Also very happy to see that the integration of our acquired companies is doing very well. We see the synergies we have expected, and that also adds on to the improved EBITA margin. And EBITA reached SEK 184 million, an increase of almost 50% compared to Q3 last year. And we also are very happy to report the high EBITA margin, 15.7%. To some extent, it is connected to the stronger U.S. dollar since we are buying and selling U.S. dollar and have a lot of operating costs in euros and SEK and NOK and so on.

And finally, of course, the very strong cash flow. I mean we had showed that the SEK 212 million is a strong number and connected to reduced working capital and the strong profit.

So next slide and a short recap of NCAB. I mean what we are producing is the bare board that you see to the left in the picture. Then our customers mount all the components in the middle and then it will become a final product to the right. And of course, what is important to note that we don't own any factories. We only have relationship with the factories and with the customers. And also all PCBs or printed circuit boards are customer unique or product unique. So it's not the shelf goods that we are selling.

And then next page. We work in our niche which we call high mix, low volume. And that's the area where we can add much more value. I mean that's a higher profit value, it's much higher demand on quality, less price pressure and it's more difficult to buy directly. So that is the area where we can sort of really give our customers a good added value. And I mean, PCB market global is about USD 80 billion and we say that the high mix low volume is something between 25% and 30%, meaning that we still have less than 2% market share. So there's a lot of opportunities to continue to grow in the PCB market. And it's important to be in the right area where we see we can make profits.

Going into the next slide, talking about -- more about sustainability. This is, of course, getting more and more important. I think we have to note that NCAB has been working intensively with sustainability since 2014. We do a lot of work together with our customers. We're having a lot of seminars. We are discussing with customers how to design and how to produce the printer circuit boards in a more sustainable way and so on.

And the important part is that we can actually prove that what we are saying is true with the factories because we have more than 3 people in China working only with sustainability audits. They are visiting our factories on a daily basis. They are doing audits. They can control that everything we say is actually true and not just a note on the paper. And of course, choosing the right factory from a sustainability point of view has been more and more important. And as I said, being on site is crucial. So I think we can take this many, many steps further.

And we also started to mention now the energy consumption, the water waste from the factories so we can, together with customers, really go make sure that we make the right choices to have a better sustainable production.

Going forward to the next page, a little bit of our industrial segments. As you see, we're not working with consumer products. We're much focused on industrial, medical, telecom and power, and what we say in power is a lot of EV-charging. That is an area that is improving a lot.

Also on the customer mix, it's very, very healthy. I mean our top 50 customer represents only 44% of our revenue and the 2 biggest customer, about 7%. So we have a very good mix. And also the bigger customers have several sites we're working with and often in different countries.

Next page, a little bit about the story of NCAB that started in 1993. And then we set up a number of greenfield companies around Europe and the USA from 2012. We have since 2008, had an average growth of 20%. And after the IPO in 2018, we have intensified the work with more acquisitions and seen the synergies from that kind of growth and also have a CAGR of 29% since the IPO. And the last acquisition in 2022 has been META in January and Kestrel in the U.K. end of June.

And going forward to next page, we can see the numbers for the quarter. As I said before, we are very happy of this number and see the strong growth. So as we said, we reached SEK 1.168 billion in net sales, an increase with 35%. And if we measure in U.S. dollar, it was an increase of 10%. EBITA was close to 50% improved from last year, up to SEK 184 million, and we have improved our EBITA margin at 1.4% units.

If we took the next slide, we all see the numbers in January-September, which are almost the same. I see the growth is about 53% in SEK and 31% in U.S. dollar. Also here, we see that the EBITA has increased a lot, 72% compared to first 3 months 2021. And that is, of course, connected to a strong growth and improved EBITA margin. And the EBITA margin comes very much from the scale impact from the bigger revenue and the acquisitions.

And on next page, we go into the different segments. Except for East, we see a very positive development in all segments. Nordic is improving revenue with 49% and almost flat excluding acquisition. Of course, it is the Elmatica acquisition that drives the growth here. EBITA margin continued to be on a very high level to 18.1% in the third quarter.

Europe also good growth, 14% including acquisitions and almost flat without. Also here, we have seen the improvement in the EBITA margin continues. So we are proud of the 13.2% in Europe. North America also growth both with or without acquisitions and a healthy margin. East end, of course, we have some issues. We know that we closed down Russia in April, but we also see a declining revenue and order intake for our Chinese and Malaysian operation, mainly due to the lockdowns in China. On the other hand, the business we are doing in China is very profitable and we keep up a very high EBITA margin.

Going into next page, you can see that the revenue continues to increase year by year and we are in a position where we can continue to also improve gross margin. So we see that we have an improvement compared to '21. A little bit lower numbers for 2020 and '21 is mainly driven by acquisitions we did during those years with lower gross margin, and we can see a positive trend in almost all those companies where gross margin is improving.

Going back to next page, #14. We see growth in net sales, 10% and SEK 35%, as I said. Comparable companies almost flat in U.S. dollar. We see the order intake, as I said before, is decreasing in U.S. dollar, but you see a growth in SEK. And the main reason is, of course, that we had all this order low that during last year, and now we see lead times going back to more or less normal.

So we expect that from fourth quarter, we are in a normal position where we can expect that order intake will be close to revenue the quarter after. And we expect these extra orders in Q3 about SEK 75 million in 2021. And if we count on that, we see an increase in SEK with 16%.

On the profit side, for the group, EBITA, as I said, increased 49% to SEK 184 million. And EBITA margin increased to a new record high for us of 15.7%. We've also been working a lot with reducing working capital. We see that inventory is going down due to shorter lead times, which has resulted in a very strong cash flow of over SEK 200 million for the quarter. And also earnings per share was up from 0.49 to 0.74 in the quarter.

Let's continue then into the segments on the next page, starting with Nordic. As we said, we continue to see a good growth in order intake. Of course, this is driven by the acquisition of Elmatica, which was made in beginning of October last year. But we also see a strong development in Denmark and Norway. We also here can see that it is a lot of EV-charging applications that's driving the growth for those countries.

Net sales were up 49% in U.S. dollar and 84% in SEK and EBITA increased from SEK 32 million to SEK 56 million. And also here, we saw a stable EBITA margin between the quarters. But anyway, we are very happy with the performance of the Nordic countries, and we are very confident on this will continue this high profitability level. And it's also good to see that we have been able to integrate Elmatica in a good way and see some cost synergies going forward.

Going into Europe, we see a net sales increase of 14% in U.S. dollar and with about 40% if we measure in SEK. We see also here a strong growth in our bigger customers like Germany and Netherlands and U.K. Order intake was here as well down in U.S. dollar, but flat in SEK. But also here, we had a very high extra order intake during 2021 in the third quarter.

And EBITA continued to increase. We're up to 13.2% for the last quarter. And here, we see some good synergies from the scale impact and also from the acquired companies. And we are happy to see that we have been able to onboard the Kestrel acquisition made in June in a very good way. And we have seen that we have got new prices from our common factories from -- already from August. We have got new payment terms, extending them from some 45 to 90 days, also valid from all orders placed in August and going forward. So we see a very, very strong synergies in that part.

Going in towards North America, we see here as well an increase -- a decrease in the U.S. dollar in order intake, but in SEK it was a small increase in orders. Net sales, on the other hand, grew 7% in dollar and 32% in SEK. And if we exclude the acquisitions, it was more or less flat in U.S. dollar.

Also here, we see a strong development of our EBITA margin and EBITA. And the main reason is that we are -- have been working hardly with the gross margin from the BBG acquisition made in 2020. So I think in average margin -- gross margin going from some 20%, 21% to well above 30% now for all customers. So been a hard work with that plan, but that has really paid off in a higher profitability in the U.S. market. So we are very so proud of the team in U.S. as well doing good there.

Okay. Going into next slide, looking into East, sort of the segment where we see some issues or not growing. Of course, first of all, it was that we stopped all our sales to Russian customers in February, and then we decided to divest the business in Russia in the beginning of April. So it was sold off to our local management in Russia.

Of course, that has an impact on the development in the segment, but we also see a slower activity in China. A lot of customers are in lockdown and then there are some issues to be meeting customers and so on. So we have seen a decline in order intake for the comparable units, about 34% in dollar, and revenue is also down compared to last year.

On the other hand, we have been good in to take good business and we are taking the right kind of business with high margin and high profitability. So we're still able to report a good EBITA margin and EBITA in East.

And as I said, a lot of the customers are in lockdown, but we have not seen the same kind of problems in the factory. There were only few factories which have been in lockdown, but more or less the production works well. So we don't see any issues or hiccups from the production side.

Continuing with the next page then, possible acquisitions going forward. We are still working and building up our pipeline with companies. We are focusing mainly in U.S., Europe, but also starting to look into Southeast Asia. We see a number of companies and we have found a number of interesting potential acquisition targets also in that region. And we also see that as a big growth area. So that could be interesting going forward.

Next page, a little bit of how we work with the integration of our acquired companies. It's, of course, important to make sure that we take care of the marketing, the branding, use the NCAB brand rather quickly. We focus a lot on these customers and on the sales, make sure that the customers understand and see the value of being part of NCA -- or customer to NCAB Group and of course, work with employees to make sure we can keep and attract the good people.

Then we look into the operations like IT and finance and find some scale advantages. And very much we see also a huge advantage with our big team we have in China and Taiwan. And with the support from that team, we can often find better factories or have my -- more high-tech factors or better position at the factories, which will be an improvement for the customers of the acquired companies. And we say that within 12 to 18 months, all acquired companies should be a fully NCAB office.

Then next slide, some highlight financial KPIs. Once again, strong return on equity, up to 42%. Net debt over EBITDA 1.0, a little bit higher than last year, but still down compared to last quarter. Solvency over 35%. Net working capital, we see a positive trend where we reduced working capital, which also means that we have working capital relationship. For the last 12 months, sales is down from 11% last year to 10% right now, and we expect that to continue.

The strong cash flow has also mean that we have seen -- have a good firepower for further acquisitions and so on. So we have available cash of SEK 950 million together with the new bank loan from Nordea that we also have taken during the quarter. So we are in a good and strong financial position.

As presented 2 quarters ago about our new financial targets, we said that 2026, our target is to reach SEK 8 billion in revenue and SEK 1 billion in EBITA, and that we should not have more than 2x net debt versus EBITDA. And also that we should try to have a rather good dividend targets and try to distribute available cash. And we believe that we are in a good path to reach this target and how to grow them.

On the next page, we still believe in our 4 cornerstones to grow the business. Of course, increased market share with the customers we have in Europe, USA and East. I mean in money markets, we still have a low market share. Deeper collaboration with existing customers and sort of an easier way to grow with the customers we have.

Expand geographically, it can be into new markets, new areas, new states in U.S., for example. And of course, acquisitions due to consolidation of the market. So we are working on all these 4 pillars to continue to grow the business and we see still good opportunities.

So a quick summary of the quarter.

Now we'll go back to some Q&A or questions.

[Operator]

[Operator Instructions] The first question comes from [ Paul Deatre ] from [ ARC Advisors.]

[Unknown Analyst]

I've got 2 questions, and I'll take them in order. You mentioned in your report that you're taking market share from competitors. Could you give some more details? You mentioned in your investment materials, your main competitors are Fineline in Germany, ICAPE in France, PalPilot in USA. Are these the competitors you're taking market share from? Can you give any more detail on the exact competitors and also which regions and how you see this developing in the future and why?

[Anders Forsén, executive]

Yes. Of course, it's difficult to say exactly from who we're taking market share, but we can see that in all markets, in general, are growing faster than the market in general. So that means that we believe that we're taking market share. And of course, it's difficult to see if it is from the other big players. I guess that it is locked from smaller players or from partly direct purchase in China and so on.

It's a bit tricky to know if it is from Fineline or from someone else. But we can measure and see that we are in most markets growing quicker than the market in general. And that's the sort of the proof that we believe is taking market share. And we believe as well that using the best factories that we can do to you our size, it will continue.

And we also see that many smaller players are struggling. They are not able to visit the factories in China as we can do. I mean, we have so many people based in China and Taiwan meeting the factories all the time, which always has prioritized us in some way. So that makes it easier for us to do good business and deliver on time to the customers.

[Unknown Analyst]

Okay. Yes. That makes sense. And my second question, and forgive me if I misunderstood this, but you said in the presentation today that your customers in China are not affected -- sorry, your customers in China are affected by lockdowns, but not your production or suppliers. Can you tell me why that would be the case that you've got no problem sourcing the product but your customers are having problems ordering?

[Anders Forsén, executive]

Yes. I think I mean the most PCB factories we're using are in the southern part of China, and I think they have been less impacted than, for example, the Shanghai, Suzhou area. And also, I mean, if there are some outbreaks of COVID in some of the cities, many of the workers in the PCB sectors are living in dormitories and in the factory, which means that they can continue production.

So even if the specific area located have been in lockdown, the production has not been harmed because they have so far not had any outbreak of COVID at our factories. So that is one reason. And I think the customers -- main customers we have in China are located in the Shanghai, Suzhou area where there was much more lockdowns. So we think that is one of the reasons.

[Operator]

The next question comes from Klas Danielsson from Nordea.

[Klas Danielsson, analyst]

Yes. Please tell Peter a quick and steady recovery as well. And so starting with the question on the order side. I think the effect from lead times is quite clear, and you explained it quite well. But I guess it's also been burdened a bit by over ordering in earlier quarters. And I was just wondering, could you maybe detail where you think you would be adjusted for this as well? And maybe when do you expect to return to organic year-on-year growth in the order side as well?

[Anders Forsén, executive]

I think -- I mean, as we said before, we are sort of hit from 2 directions. One is, of course, that we have some extra orders last year, which we calculate roughly SEK 75 million. And then we also see now that customers are not ordering due to that we are delivering out to the existing orderbook.

I mean we have a number -- for example, we have a number of forecast orders where we -- they placed sort of yearly forecast for us. And then we accept the orders, and we did that for 44 weeks before delivery time a couple of months ago when the lead times were long, we've been -- now we're down to 22 weeks. That means that the number of customers with that kind of system, we have more or less to see the order intake this quarter. So there is also an impact on that side.

But we believe that that will ease up right now and we think also that we are back to a normal position from this quarter, for fourth quarter. So we see that with this -- most of the orders taken last year are now delivered, and we believe that we are back on a more normal lead time situation where we can see this quarter-by-quarter development.

[Klas Danielsson, analyst]

Okay. So looking at Q4, should we expect a more or less flat organic growth in comparable numbers? Or is it still burdened, I guess, a bit by the lead times in Q4 '21 being a bit higher?

[Anders Forsén, executive]

Maybe a bit slightly. But I think, I mean, that might be fair to get close to flat development.

[Klas Danielsson, analyst]

That's good. And then secondly, I guess the only weakness on the net sales level, apart from East where it's quite obvious, I guess, that's in the Nordics. Could you maybe detail a little bit what's bound to decline and give us some color on the outlook there? Is it just strictly comparables? Or is there anything certain in the Nordics?

[Anders Forsén, executive]

It's mainly strictly comparables. We can -- maybe have seen some kind of slowdown in the Swedish market. But I would say the other markets is going rather well. You also note that some of the business from Elmatica that we acquired one year ago, they have a lot of business outside Nordic, and we are step-by-step now trying to move around a little bit to make the business land in the right segment. So it's not very much impacted this quarter, but might be some minor impact that we have moved business from Nordic to Europe, but that's a minor impact.

[Klas Danielsson, analyst]

Okay. That's interesting. And then maybe as well because you talked a bit about it during this presentation on the different growth rates and so forth in each customer segment, so for instance looking at power and so forth. Could you maybe detail or give us some extra color on what is the type of growth in the power segment? Do you expect that to be a bit more cyclically sustainable for instance? Or if you could maybe give us some idea there?

[Anders Forsén, executive]

It's of course tricky. What we can see is that we get more and more customers, and more and more projects in the EV-charging area. I mean we started maybe 2 years ago with Easee and Zaptec in Norway, and they were the main drivers. And then now we can see that we have more customers in Sweden coming in. We have more customers in Germany. We have in U.S. a few. We have in Netherlands and in Italy. So we see more and more projects coming in for EV-chargers.

It's difficult to predict exactly how much it is and we don't measure it that well, I would say. But we see the trend is rather clear that we see a growth in that area. And there are also much more interest now in energy control for a lot of heating system, solar panels and so on. So there are many projects which is still in a very low level, but we are in discussions with many projects to that side. So of course, there will be a big interest in the energy control sector and greentech area going forward.

[Klas Danielsson, analyst]

Okay. And then looking at China, I think it's a rather interesting topic at the moment, so with regulation and so forth. So starting on the side of the U.S. restrictions on ship sales and so forth. I know that you supply, I don't know, not the most intelligent equipment, so to speak. But could you maybe detail if you're expecting any kind of spillover effects or so forth? Or what you're seeing from this?

[Anders Forsén, executive]

We haven't seen any kind of that. I mean, we have not seen any PCB factories in U.S. growing or expanding. Of course, we see that the existing PCB factories are rather fully loaded in U.S., but we have not seen anything that someone would invest in new production capacity. So from that range, we still believe that the Chinese production will be very valid.

I mean there are a lot of talks of building production capacity for semiconductors and understaffing in Europe and USA, but so far we haven't seen anything below for the PCB. And what could happen in some way is that the PCB assembly will be done more and more in Europe and USA, and then they need the PCBs. And it might be easier for us to sell to those customers in Europe and USA than in China. So yes, it could be a small positive impact, but we haven't seen any negative impact so far at least.

[Klas Danielsson, analyst]

And just kind of follow up on that. I guess it's -- do you think your kind of competitive advantage and the reason for NCAB existing is less on the production of PCBs were to move more to Europe from China and to I guess other Asian parts or whatever? Or do you think the kind of more tricky industrial picture makes for still some quite good opportunities for you to keep your advantage or if you understand what I mean?

[Anders Forsén, executive]

Absolutely. I think -- I mean the more high tech and the more -- a lot of -- there would still be a lot of high mix low volume assembly work in Europe and U.S.A. And of course, then they need good support from supplying the PCBs. So we still believe that that will be a good opportunity for us to support. And if we see more assembly and that can -- I think we're going to see in the menu the EMS companies are also growing rather well. That means also that our customers are growing, which means that there are a need for companies like us. So we foresee a positive market going forward there as well.

[Operator]

[Operator Instructions] The next question comes from Robert Redin from Carnegie.

[Robert Redin, analyst]

Just maybe I missed what you said, but on North America and the margins are 17% in the quarter. Was it something sort of temporary positive there? Or what were the drivers for the strong margin development in the North America?

[Anders Forsén, executive]

I would say the main driver is that we have been constantly working with the gross margin from the Bare Board Group acquisition in 2020, and we see a positive drive quarter-by-quarter, and it was extremely good here in the third quarter. So it's no really onetime impact. Then I know that we have had some really high-margin business on the West Coast for some customers. That could have, of course, pushed this to this top level.

But in general, we have been working very much together with our team in improving the gross margin for the customers. So that is the main reason. So if 17% is sustainable, I won't promise that, but we will be on a much higher level than before.

[Robert Redin, analyst]

Sounds very good. And I saw you had similar comments about Elmatica. So it seems like those large acquisitions, they worked out really well in terms of the margin development prospect acquisition?

[Anders Forsén, executive]

Yes, they have excellent, yes. I mean in the Elmatica case, we also have reduced some headcount and we have seen some work as we have been much more efficient on the cost side and when we are operating. I mean they were sort of a medium group and now we have some head count left, which were rather expensive on the payout side. So that also gives some profit improvements going forward.

[Robert Redin, analyst]

And on acquisitions, you wrote that your pipeline is strong and that you have a lot of discussions ongoing and so on. Are you seeing any acceleration in that at the moment? I'm thinking about maybe other buyers being less interested in buying companies now if you have weaker balance sheets and so on. Are you seeing any changes there in the trend there?

[Anders Forsén, executive]

No, no, not really. I think maybe we see the same kind of interest in the ones we have been meeting and talking to. We still try to approach a number of companies and it's not easy to get a good dialogue. Then of course, it sometimes take -- takes some time before decision is made by the seller, but still see it's very -- seems very positive. And I think that many other companies we are talking to, they see a lot of hassle by not being able to travel to China last couple of years. So they see a huge advantage and possibilities to joining our group in that way. There are some more reasons for them to sell right now than maybe 2 years ago.

[Operator]

Thank you. This concludes our Q&A session. I would like to turn the conference back over to Ms. Gunilla Ohman for closing remarks.

[Gunilla Öhman, executive]

Thank you. And thank you all for listening in. I just wanted to kindly remind you that our Q4 report is on February 17 next year, 2023. So [indiscernible] and have a good day. Thank you.

[Anders Forsén, executive]

Thank you. Thank you for listening.

[Operator]

Thank you. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.