NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the NCAB Q3 Presentation for 2024. [Operator Instructions]

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

[Peter Kruk, executive]

Good morning, and welcome to our Q3 presentation. My name is Peter Kruk, and I'm very happy today to have Timothy Benjamin join us as our new CFO.

[Timothy Benjamin, executive]

Happy to be here. Thank you.

[Peter Kruk, executive]

Thank you. Starting up with a little bit of background about NCAB. NCAB is a company focused on printed circuit boards, and it's the product you see to the far left, the basics and the foundation for all electronic products. We are focused on serving high-mix, low-volume industrial segments, and our customers will then mount semiconductor products, microprocessors to create the intelligence in these products. Important to remember is that all of our products are bespoke, so unique to the end product they go into and no standard components.

As a company, we are focused on serving printed circuit boards for demanding customers, delivering on time to them with zero defects, produced sustainably at the lowest overall total cost for our customers, even if we may not be the lowest in the price for the product. Our vision is to be the #1 PCB producer wherever we are. We are already the globally leading supplier of printed circuit boards with outsourced production. We are working with partner factories with some main [ 30 outsourced factories ]. We deliver more than 90% of our spend to our customers.

We also believe in being local. We are present in 19 countries with local sales companies serving our customers in those markets. And as a company, overall, we are a little bit more than 600 specialists, of which more than around 120 are working only with developing the factory pipeline and securing quality and on-time delivery for our customers.

We are a company focused on, say, what we call integrated PCB production, so quite different from a traditional trading company. The strength of being local to our customers in our local companies enables us to work with our customers, help them optimize their design, give advice on how to best plan their production setup and then match their needs with the best manufacturing location globally to supply the products they need and the quantities they need at the time they need.

We are also, in our model, local in the other end of the value chain. So we have a very strong presence with the factories even if we don't own any factories ourselves. That enables us both to secure leading quality, on-time delivery performance, but we're also working to continuously develop these factories, both in terms of their technical and quality capabilities, but as well as sustainability. And we also have a qualified sourcing team to continuously look and qualify new factories, supporting new technologies in new regions, meeting the needs of our customers.

Moving into the third quarter. Clearly, we have seen that demand in Europe has been -- continued to be very soft, especially weak demand in Germany, and we can see that the weak German economy has had spread-on effects over to other countries in the European region. Nordics also seeing effects of a weaker economy, but with mixed performance. We have seen growth in areas like defense, but we also see lower activity in areas like green energy with EV charging and heat pumps. However, we can see growth in the positive way in the segments of North America and East, where we continue to grow winning of new projects. And these markets, even if they are not positive, they are more stable and enables us to show year-on-year growth.

We are maintaining good gross margins even if our EBITA is lower as a consequence of lower sales. Gross profit is maintained at a good level. Factory pricing still remains at a low level. EBITA and EBITA margins, as mentioned, are affected by the lower top line. Cash flow still remains strong and is close -- is around SEK 100 million. We also have had a good activity in M&A in the quarter, and I'll report on that shortly.

So we have had 4 new acquisitions announced in the latest quarter. So we had first 2 acquisitions in Switzerland and Austria, which were announced in early part of July. We also had a smaller acquisition in Denmark in September. And in October, we closed the acquisition of DVS, which we announced around the 20th of July, and we now closed this on 10th of October, which brings in another SEK 230 million of annualized sales and 31 new employees who joins NCAB.

If we look upon Q3 a little bit detailed in numbers, we can see that our order intake is down 4% to SEK 887 million versus SEK 924 million. If we look upon order intake in U.S. dollars, however, we will see that we are flat versus last year. Book-to-bill is 0.99. Our net sales is down 11% versus prior year to SEK 808 million versus SEK 1,005 million. Organic growth on comparable units is down 8% in U.S. dollars. One needs to remember, however, that in Q3 of 2023, we still had a legacy order book that we were shipping from and that sort of boosted or supported the overall invoicing and sales in Q3 2023.

Our EBITA amounted to SEK 118.5 million, slightly better than our -- the guidance we announced here recently or in the upper end of our guidance at the profit warning and an EBITA margin of 13.2%. Gross margin remains at a good level of 36.4% versus 36.2% prior year. We've had a strong operational cash flow of SEK 190 million, even if last year's number were even stronger, partly based on the fact that we were still working down an higher working capital. Our working capital is stable at 7.5%.

So over to you, Tim, to continue.

[Timothy Benjamin, executive]

Thank you, Peter. And I think I'd also like to take this moment to say thank you to my predecessor, Anders Forsen, for a good handover during the third quarter.

But diving into the numbers, if we look at sales, we ended up with SEK 898 million, which is down SEK 11 million versus the third quarter of 2023. Bearing in mind, there was some FX impact here, which was about 4 percentage points. You see around minus 7% in U.S. dollars. You heard from Peter also that our EBITA ended up around SEK 118 million, which is down 33%. That's primarily linked to the volume decrease that you heard about on the revenue side. But bear in mind, there's also a one-off last year with regards to an earn-out, which resulted in around 2 percentage points impact to the EBITA margin. So you see 4.3 percentage points down versus prior year, of which 2 percentage points were related to the earn-out.

As you can see, we've had a very nice revenue trend over the past years. We had some decreases in the past couple of years as the market itself slowed down a bit, but we've been able to maintain gross profits at a very nice level over the past year too.

When we look at the total top line, order intake, as mentioned, decreased about 4% to SEK 887 million, in the comparable units decreased by 1%, so fairly stable. What we did note was that we had some positive developments in Nordics, North America and East. So all 3 regions there moving upwards, but some weak demand that you heard about from Peter in Europe very much linked to the overall economy there. Net sales decreased by 11% to SEK 898 million in the quarter. So I think what's important to remember here is that quarter 3 of 2023 was very much impacted by a strong order book at that time, whereas now we don't have that same benefit in place, but we do have a book-to-bill now of 0.99, which is stabilized and in line with quarter 2. And we also see a good continued trend with regards to new part numbers and customers won, which is a good thing, especially for our customers as NCAB offers stability for customers, especially in weak market conditions.

When we look at EBITA, we see a decrease to SEK 118.5 million versus SEK 176 million last year. I think again, what's important to remember here is that we did have a one-off item with regards to the additional purchase consideration of SEK 21 million, which again was around 2 percentage points of EBIT. That resulted in a full quarter impact of around 13.2%, which was quite close to the guidance that we gave. And gross margins were also stable year-over-year with only 20 basis points in difference there. [Audio Gap] from negative transactional FX. So that was part of the impact there when we compare versus prior quarters. And then we also had earnings per share at SEK 0.27, most of which was again related to volume and then a small amount also related to the earn-out in the prior year when we look at the difference.

Over to you, Peter.

[Peter Kruk, executive]

Thank you. So if we look into the specific segments a little bit more in detail, we can see that also just first to comment that we are in -- since 2024, including Poland as part of Nordics, and that is also restated in the Q3 number -- Q3 and Q4 numbers of '23 in this graph.

Our order intake was up some 9%. I'd say, overall, the market in Nordics is still somewhat muted, but we have been able to be successful in some of the aerospace and defense projects. Some of these projects have longer lead times. So the majority of the revenue from those orders will fall into 2025. Other sectors like green energy and construction sectors are weak. We can see both EV charging and heat pump business is still on a low level due to primarily inventory situations with final products at the dealerships.

Net sales amounted to SEK 202 million, down from SEK 223 million last year, so decreased by 9%. We've also seen, in the quarter, a bit of a customer product mix and also some negative FX that has impacted the gross margin specifically in the quarter. EBITA amounted to SEK 26.3 million versus SEK 42 million last year, and EBITA margin decreased then to 13% versus the prior year, 18.9%.

Looking at Europe, we can see the segment which is most heavily impacted by a weak economy. Order intake was down by 14% to SEK 421 million versus SEK 490 million last year. Net sales down by 20% to SEK 435 million versus SEK 545 million. And we can see it's primarily the German market, which is the biggest in Europe, which remains very weak and impacted. And we can also see that this weak economy has also spread to neighboring markets like Italy, Benelux, part of U.K. as well. However, we see positive development in our sales to truck and bus industry as well as to aerospace. We have also noted that there has been a number of European PCB factories closing down here in 2024, and this may create future opportunities for NCAB to capture further market share. Our EBITA decreased to SEK 57.6 million versus SEK 82.1 million, and that corresponds to a margin of 13.2% versus 15.1% in the prior year.

Moving to North America. Here, we can see we continue the positive trend of order intake growth. We grew by 5% to SEK 185 million versus SEK 176 million last year. Our net sales was up 10% to SEK 205 million versus SEK 186 million. I think we are investing here to continue to strengthen our own organization and way of working as well as our external sales network. We're also able to leveraging our technical support capabilities, which is giving us good success with high-tech applications. And we also have another benefit of being able to supply PCBs from Taiwan and meeting requirements of the U.S. aerospace and defense industry, and this is a positive. And we can also see some positive effects from our Phase 3 acquisition in 2023, where we can see spin-off effects that we are generating further sales growth with this entity. So our EBITA increased to SEK 31.7 million, up from SEK 25.6 million and our margin increased to 15.4%, up from 13.7% last year.

Moving to East. We can see also here good growth. Order intake was up 10% to SEK 52 million versus SEK 48 million last year. I'd say that overall, the market conditions in China remain challenging, but I think we are, as NCAB, very much focused on high-tech niches where we can add a lot of value and technical support, and that helps us to outperform the market at this stage. I think we can also report some positive signs in consumer confidence as we can see some of the recent stimulus by the Chinese government is starting to maybe have some minor impact. Net sales was up 7% to SEK 56 million versus SEK 52 million last year and EBITA down at SEK 8.2 million versus SEK 10.9 million with an EBITA margin of 14.6% versus 21.1% last year.

Over to you, Tim.

[Timothy Benjamin, executive]

Thanks, Peter. So just looking at our return on equity, 20.7% for the quarter versus 32.4% last year. And that's with a very stable equity year-on-year. So a lot of that change comes down to volume, which we talked about earlier. When we look at the net debt to EBITDA, we're fairly stable year-over-year at 1.1 versus 0.9 last year. That does give us room for opportunities as we see them in the marketplace.

Looking at the equity-to-asset ratio, 41.3% versus 40.5% year-over-year, fairly stable. And then I think you heard a little bit from Peter earlier on that we're working on keeping our net working capital fairly stable and fairly low at 7.5% versus 6.9% in the prior year. When we look at available liquidity, you may have noted in quarter 2, we expanded our debt facilities to take this up to SEK 1. 4 billion versus SEK 0.9 billion last year. Again, here, this is so that we can be ready for acquisition opportunities when they come to play.

[Peter Kruk, executive]

Thank you. As I said, I mean, acquisitions is an integral part of our strategy. Our focus has been mainly on Continental Europe, U.S. and East, and we now have, say, a long list of identified companies trading in printed circuit boards of around 300 companies. We use -- we look for companies that fit our model. So we're looking for companies who are active in high-mix, low-volume segments, generally working with more high technology and as a quality supplier. We are also not interested in acquiring companies that have in-house production. And we're also looking for companies that are generally well run and well managed, making a decent profit.

We have -- on our short list, we continue to have around 50 companies that we are actively looking at and approaching. And I think we're very happy that now in this year, we've been able to close 5 transactions, and we continue to have a healthy degree of number of companies in which we are in dialogue with.

Summing up our strategy, we are a company working in a large global market. The global printed circuit board market is more than USD 70 billion. The high mix low volume share of that market is estimated to be somewhere between $20 billion and $25 billion at present. So our aim is to continue to develop our share within this market and you doing that with an asset-light model without in-house production. So we are investing instead more in our ability to serve our customers by providing better technical support and developing the factory's performance as well as sustainability to further gain market share in existing markets. We're also continuously looking to how we can expand the number of markets where we are locally present. And I think we see M&A as one step to accelerate that process of entering new markets, but we also see M&A as an important part of market consolidation.

Many companies of the -- that are trading in printed circuit boards today started their business maybe 20, 30 years ago as a lot of the manufacturing in Europe and North America moved to Asia. Many of these companies have remained smaller local regional players, and many of them have been quite successful at that. But at the same time, they are struggling to meet increasing demand from customers, whether it be technical, quality and sustainability. And it's a good opportunity for us to help these companies move into the future. And it's also quite often a transition stage for these companies where the people who started the companies in their 40s or 50s, 20, 30 years ago are now approaching retirement age. So there is an opportunity for us to consolidate this market, which is very fragmented, and that is why our acquisition strategy is an integral part of our strategy.

And with that, we close the meeting and open up for questions.

[Gunilla Öhman, executive]

Yes. So welcome, and thank you, Tim and Peter, and welcome to your questions.

[Operator]

[Operator Instructions] The next question comes from Jacob Edler from Danske Bank.

[Jacob Edler, analyst]

Just a first question on capacity utilization. I mean historically, Chinese manufacturers have dictated the pricing in the industry. We have now heard the announcement of stimulus programs in China. Are you seeing capacity utilization in your supplier base already creeping up? Or is that something yet to be seen, so to speak? And maybe historically, prices have started to be hiked at, let's say, 80% utilization. Where are we now? Can I get some indication on that? That's the first question.

[Peter Kruk, executive]

Yes. I would say that the utilization with our main partners have improved somewhat. So I think you could say we are not back at, say, an 80% or plus 80%, I think, but I think they've come up from maybe 50%, 60% to maybe be around -- maybe more around 70%. So I think the situation has improved somewhat. But we are still sort of a step below where they are on a kind of an average level. So they're still sort of low in terms of utilization, but it has improved slightly versus, say, 6 months ago.

[Jacob Edler, analyst]

Okay. Perfect. And then just hopping on to price then. You write in the report that the price effect in net sales was a minor negative. Is that like a low single-digit number? And how was it in order intake? Is it relatively neutral there right now?

[Peter Kruk, executive]

Yes. I would say on order intake, there is almost no impact. On revenue, maybe a slight impact because a large part of the price decreases happened from, say, end of '22 down to middle of 2023. Since then, prices have largely been stable. I mean there are some ups and downs for sure between different technologies, but largely stable in the second half of 2023 and onwards.

[Jacob Edler, analyst]

Perfect. Then I just had two more questions. First, on North America, the order intake is down a bit sequentially. Is that mainly related to that you received, let's say, an extraordinary amount of projects in Q2 related to aerospace? Or is there any deterioration underlying in the trend here sequentially in North America?

[Peter Kruk, executive]

No, there's no underlying deterioration. It is exactly as you said. I mean, we had certain larger projects in Q2 that sort of further boosted the already good development in the second quarter. And now we have not seen those same projects fall into the third quarter. So underlying progress is good, but we had some specific orders in Q2 that boosted the numbers a bit.

[Jacob Edler, analyst]

Perfect. And then just on Nordics then. On the electric vehicle chargers, you're seeing some signs that the market has bottomed out. And I agree with you that if we look at, for example, electrical vehicle registrations, that appears to have bottomed out. But looking at some of your customers, for example, Zaptec, their inventories are still very high. So when do you think we'll see the demand come back for you, so to speak?

[Peter Kruk, executive]

It's a little bit hard to predict specifically. But as you said, I think it's -- we're still going to see a weak development of EV charging in the near term. So I think it may be a couple of quarters before we really see that sort of flush through the system.

[Operator]

The next question comes from Gustav Berneblad from Nordea.

[Gustav Berneblad, analyst]

Yes. It's Gustav here from Nordea. Maybe just to start off with the gross margin. I mean it's up 20 basis points year-over-year, but down 150 basis points from Q2. So I was just wondering if you could help us understand what is sort of driving this and if there's other factors impacting this rather than just the lower volume, so to say, because it sounds like the pricing is still relatively suppressed, as you say.

[Peter Kruk, executive]

Yes. No, I think pricing is still sort of fairly stable in the market. But I think we -- there's always -- you can always have some mix influences that we saw, particularly, say, in Nordics, especially in the third quarter, which is a little bit lower generally from seasonality. And then we've also had some negative FX. I think dollar versus SEK, for instance, moved sort of down in the third quarter versus second quarter. So we get some transactional FX effects, which are a little bit complex for us to quantify specifically exactly how big they are, but that has some impact to the sequential development there.

[Gustav Berneblad, analyst]

But on an overall basis, what are the largest drivers? Is it the volumes? Or is it FX? Or is it the mix? Or is it all of the above?

[Peter Kruk, executive]

I'd say it's a combination of the above. To some extent, it's a mix combination between both, say, different segments, how they're playing out between the different regions as well as an FX effect that sort of comes on top of the other mix effects. But we see a fairly equal spread between the two, yes.

[Gustav Berneblad, analyst]

Okay. Perfect. Then I was just thinking longer term, I mean, it sounds like some of these are more temporary. So how would you think about the margin? It feels like you have been quite confident that you would potentially maintain a higher than historical margin for the gross level, so to say. How are you looking at the gross margin if we are to see also prices increase? Should we see another leg down on the gross margin from here or?

[Peter Kruk, executive]

I think, I mean, as you said, I mean, we've moved up from historically, we were, say, in the low-30s, around 31%, 32% for a number of years, and we're moving up like 0.5% every year. And then we made a jump up from 32% to 36% from '22 to '23. And during '24, we have been higher here in the year, so maybe even slightly higher, but maybe stable from second half of '23. I think you can expect, maybe as we said before, that maybe can we keep all of that margin hike that we have had in between '22 and '23 if prices start moving upwards? I think our view is that we believe we can maintain majority of that, even if we maybe cannot keep all of it.

[Gustav Berneblad, analyst]

Yes. Okay. Perfect. And then I was just thinking if you could give any more color on sort of the comments you are making regarding signing of new customer contracts because, I mean, can you set this in perspective sort of to 1 to 3 years ago? Has it increased dramatically here? Or are you taking market share organically? Or what are you seeing?

[Peter Kruk, executive]

Yes. I mean we are measuring the number of, say, if you talk part numbers, article numbers, which basically reflects the number of products we come into, and I think we can see that on overall, we are up and have been up the last couple of quarters. We're up roughly, say, 20% versus prior year. And typically, that is a good indicator of the amounts of different product versions you're coming into. So it generally indicates a good foundation for future growth as well as also adding new customers to start buying from us. So from that perspective, we feel that we're making good inroads into new markets and gaining market share position.

But what we can see is, let's say, with a general weak economy in -- basically around the world, all customers are quite cautious. They're uncertain about the future demand of their end customers, and thereby, they also very -- sort of place only, say, smaller orders in maybe more frequent manner, which gives us a little bit less of visibility. And until they see, say, a second follow-up pickup from their end customers, we don't really see the pickup in volume from our side.

[Gustav Berneblad, analyst]

Yes. Okay. That's clear. And then just a final one. I was just wondering if you could give any more color on -- as we are now heading into Q4, it sounds like September was also weak, similar to July and August. So just wondering if you can say anything about the momentum here going into the fourth quarter.

[Peter Kruk, executive]

I mean we cannot really comment on the fourth quarter. But I mean, the third quarter, generally, September is the month that sort of really picks off in the second half of the year because, I mean, July, August are vacation months. And I think clearly, September was a lot weaker in our industry, as I think we've seen with other companies as well. It's a little bit too early for us to have a view on what that translates into the Q4 for us. But we're not expecting that the, say, the market is turning around within the next two quarters.

[Gunilla Öhman, executive]

So we have no questions from the web. So I would like to thank you all for listening and watching and remind you that our Q4 report is on the 12th of February. Thank you.

[Peter Kruk, executive]

Thank you.

[Timothy Benjamin, executive]

Thank you.