NCAB Group AB (publ)

STO:NCAB

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to the NCAB Q4 presentation for 2022. [Operator Instructions]Now I will hand the conference over to the CEO, Peter Kruk; and CFO, Anders Forsen. Please go ahead.

[Peter Kruk, executive]

Thank you, and welcome, everyone. So speaking today will be myself, Peter Kruk and my colleague, Anders Forsen and joining us also is Gunilla Ohman, our Investor Relations responsible.Starting with summarizing a little bit where we are. We can see that we are in a market with continued solid customer demand. We're continuing to grow despite very tough comparables in 2021, although we are also seeing some temporary softness in the order intake, and which we will comment on later on.Good improving margins and profitability throughout the company. We see improvements in all of our regions. And in the quarter, especially Eastern North American regions, we're showing standout performance. Throughout the year, we have been working on a strong cash flow, which has continued also in the fourth quarter. This is a result as lead times are improving dramatically, and that has also helped us improve our working capital. Acquisition climate remains positive. We announced an acquisition in the fourth quarter of Bare Board Consultants in the quarter, and we have a number of discussions ongoing.Some more details around the quarter in numbers. So again, a stable quarter in net sales growing by 5% to SEK 1.26 billion, showing a growth of 5%. Organic growth was 2%. Order intake is stable at SEK 1.09 billion, which is 5% below last year. Book-to-bill is still showing a healthy 98% given that lead times are improving. EBITDA amounted to SEK 141 million in the quarter, which is an improvement by 17%, and our EBITDA margin was 13.7%, an improvement from 12.4% in prior year. And again, with a strong cash flow of SEK 189 million compared to just $19.8 million in the fourth quarter of '21. And we had, as we mentioned, the acquisition of BBC in Italy.Summarizing -- sorry, for BBC. Again, it's a company in Italy, Bare Board Consultants found in 1990, serving domestic customers in Italy. Sales in '22 amounted to SEK 90 million for the company and showed an EBITDA of SEK 9 million for the year. We paid a purchase price of EUR 5.6 million. And the company is very much like NCAB focused on printed circuit boards and in the high mix, low volume segments, focusing mainly on industrial applications and medical sectors, so very much in the sweet spot of where also NCAB is trading.For this company, we expect synergies in the areas of suppliers and payment terms and our factory management as well as in logistics. And the transaction was now closed here in January on January 10. So looking back at the full year for '22, we can see we had another record year for NCAB. Our net sales amounted to SEK 4,458 million, which is a growth of 38% in Swedish kroner and 70% in U.S. dollars. Organic growth was 26% in Swedish kroner and 6% in U.S. dollars.Order intake was stable, showing a growth of 5% and reached SEK 4,227 million for comparable units in U.S. dollars, however, showed a decrease of 20%. But as we have communicated in earlier quarters, lead times were extending during '21, which caused an extreme order intake situation in '21 and in '22, lead times have been improving. And thus, we see a reduction in order flow as they can now be goods or delivered with a shorter lead time.Positive for the year is that our acquired companies in the last 2 years are all doing very well, and we generated an EBITDA of SEK 631 million, which is an increase of 55% over 2021. And also looking at our EBITDA margin, we reached a record level of 14.2%, which was above last year's 12.6%. And again, for the full year, a strong operating cash flow of SEK 568 million compared to SEK 48 million in 2021. And 2021, of course, was impacted by the extending lead time and the increase in working capital.And for 2022 or in the spring of this year, the Board has suggested a dividend of SEK 1.1 per share. Some background what NCAB does is printed circuit boards, where that goes into becoming printed circuit board assemblies. So we do the Board showed on the left here, which then when one mounts, the semiconductors and micro processes becomes a printed circuit board assembly, and that basically forms the brain in any modern electronic product.NCAB has no in-house manufacturing. In fact, we're working only with outside partner factories. And however, we take a big responsibility in developing the factories, and we also -- that also includes our focus on sustainability. So it starts already why when we are choosing the factories that we check, of course, their performance in terms of technical capabilities, quality performance, cost competitiveness, but equally important is our focus on sustainability, looking at social conditions as well as checking or following up on environmental aspects and this has continued through sustainability audits as well as being on-site more or less every day.In this year, we can now see that we continue to have a very diversified industry segment exposure, very little exposure to consumer industries, predominantly different industrial applications, and we also have a very low dependency on large customers. Our top 50 customers represent only 44% of our total revenue in 2022. Anders?

[Anders Forsén, executive]

Thank you, Peter. We have to give a background about NCAB Group and the company started 1993. So we are turning 30 years this year and we have been showing growth almost all years since the start. And since the last 10 years, we've seen an average growth of 23%. And after the IPO made in 2018, we have focused on adding on more acquisitions together with organic growth and are presenting a 38% annual growth year-by-year.And going into next slide, we see a summary of the quarter. We see that our revenue increased 5% to just above SEK 1 billion. In the U.S. dollar, however, it was a little bit lower revenue due to the increased excess rate for U.S. dollar. EBITDA ended up SEK 141 million, up 17%, and we improved the EBITDA margin compared to fourth quarter 2021 and also, for the full year, as Peter mentioned, we ended up with SEK 4,458 million in revenue, up 38%. We also showed a very positive growth in U.S. dollar. And we are very happy to present the improvement in the EBITDA, where we can see effects from our larger scale and synergies and so on.So EBITDA is up 55% and EBITDA margin at 14.2%, which is a new record for us, which we're very proud of. And of course, one reason behind the improved profitability is that we continue to develop our gross margin. And as you know, we are selling most of the printed circuit board in U.S. dollar, and we are buying almost everything in U.S. dollar. So there are no really currency impact in the improved gross margin. So it is sort of a pure currency-neutral gross margin, which has improved.The decline we could see in 2020 and '21 was due to acquired companies, which lower margin and where we have been able to sort of adjust them into the NCAB model and where you're working and so on. So it is good to see that the margin continues to improve. It also proves that the customers are prepared to pay for the quality and the product we are delivering.And if you then look on the quarter, we discussed about the growth, about 5%. It was a little bit lower in U.S. dollar. We also can see that the order intake decreased in the quarter. If you go back to the revenue side, I think we saw a stable trend in October, November, but we saw a weaker December. And especially last 2 weeks, we could see a lot of our customers who are closed during Christmas and after Christmas, and that also had an impact on the revenue.We also had some extra COVID outbreaks in December, which probably have caused some delivery issues and also postponed some invoices from December. So there are some seasonality reasons also why the lower revenue. And on the order side, it's important to remember, I mean, this high order intake we had during '21, I think we try to calculate this extra orders to about SEK 500 million. That was due to the longer lead times. And of course, the lead time is now going back to normal, and we see that we have good capacity in the factories order will shrink with the lead times is going back to normal.Profitability, we are proud to present another increased profitability in the fourth quarter. EBITDA is 17% and the EBITDA margin up to 13.7%, which is the best EBITDA margin for the fourth quarter. Fourth quarter is normally a little bit lower for us since we have the seasonality effects on the revenue side. And we continue to work with our inventory and our working capital. So we had another strong cash flow for the quarter.And as Peter mentioned before, the board has suggested a dividend of SEK 1.10 per share, which is about 49% of earnings per share. So Peter?

[Peter Kruk, executive]

Then looking into the different segments, we can see that Nordic order intake was flat in the quarter but decreased in U.S. dollars. Net sales, however, increased by 10% in SEK to SEK 296 million over SEK 269 million, but also showed a decline in U.S. dollars.Positive development in a number of markets, Denmark and Norway, particularly doing very well, and EBITDA improved to SEK 45.2 million or SEK 41 million and we continue to show a very healthy EBITDA margin in the Nordic segment of 15.3% over 15.2% last year. And for the full year, the growth was 71%. And I can also see that on full year EBITDA, we reached 16.8% over 16.1% last year overall in the year, also an improvement.Looking at Europe, strong net sales in all markets. We can see especially countries like Germany, Netherlands and U.K., U.K. have done quite well. So a growth by 19% to SEK 484 million over SEK 407 million, which and still showing a growth of 6% in U.S. dollars. However, in comparable units, we saw a decrease of 15%. Order intake showed an increase by 5% in Swedish kroner to SEK 536 million, over SEK510 million, but there was again showing a decline in U.S. dollars by 13% and in comparable units by 23%.Book-to-bill is still showing a good number of 111%. And we can see that '21 Q4 had a significant boost in the orders for comparison. We can see that EBITDA showed a good improvement now. EBITDA reaching SEK 53.2 million over SEK 39.2 million, also showing a good margin improvement from 9.6% to 11% and a good full year growth of revenue by 49%. And also here on full year EBITDA, EBITDA margin increased from 10.6% in '21 to 12.4% in '22.Looking at North America, we've seen a decline in the order intake by 13% and in 30% in U.S. dollars. Net sales increased by 2% in the quarter to SEK 191 million over SEK 187 million, but surely decrease by 17% in U.S. dollars. EBITDA showed a good -- again, a good growth by 55% to SEK 33.9 million, over SEK 21.9 million and our EBITDA margin increased through a very strong record number of 17.7% in North America, over 11.7% in last year.And also, for the full year, a good growth of 31%. And also, for the EBITDA side, on the full year side, North America improved from 12.1% to 15.1%. And finally, East, the segment that has seen the biggest changes throughout the year, of course, through the exit from Russia, where we stopped sales by end of February last year, and we sold the company on April 8. For comparable units, we can still see that there is a decrease in sales by 13% to SEK 51 million and by 29% in U.S. dollars.I think clearly here, the business in Asia, especially in China has been very much impacted by the COVID restrictions that were still in force during the fourth quarter. So comparable unit sales decreased by 22% to SEK 55 million and with USD 37 million EBITDA decreased to SEK 11.6 million or SEK 15.4 million. However, the margin improved to 21% compared to 13.6%.And the customers in China, as we said, had a lot of problems with lockdowns. And full year EBITDA also improved for the segment despite the exit from Russia from 14.7% to 17.5%. Would you again, Anders?

[Anders Forsén, executive]

Thank you. So I think we still have a very positive climate for further acquisitions, and we are in a number of discussions. And I mean, we have announced 7 acquisitions the last 2 years, and we are looking into companies that are very similar trends here, be working with the high mixed low volume, having a high-tech profile and working with the right customers in the -- mainly in the industrial segments.And I also have a long list, we have about 40 companies that we are step-by-step tied into approach. And as I said, we are in a number of discussions already. And then we can see that way of working with acquisitions is that we really try to focus on one brand, making sure that we use the strength of NCAB in that way. So after a takeover, we go into the marketing side, we work with the sales and the customer side and then, of course, work a lot with the employees because I mean that is people's business and it's very much a relationship that we are acquiring.And then we see the synergies coming mainly from better purchase conditions, better purchase prices, payment terms and so on and also that we can use our huge factory management team that we have in Asia to support the newly acquired companies and their customers. And that is normally very, very positive for those employees and the customers. And our target is that after 12 to 18 months all acquired companies should be a fully integrated NCAB office.And going back to our financial KPIs and balance sheet. We still have a very, very strong balance sheet. So we are -- have no problem to continue this journey. I think you should be very proud of our return on equity over 40% for the last quarter year. And we also have a net debt of 0.8x versus EBITDA. We have a financial target of not exceeding 2x, so we still have a lot of headroom to continue to invest.Solvency is good 39% and we have been very successful this year to work with the working capital. I mean, that increased when the lead times increased 21%, but we have seen now that when lead times getting shorter, we don't need to have the same kind of buffer stock. We don't need to have as much buffer in the logistics, et cetera. So we are now back to a normal level. And we are a very asset-light business which have net working capital less than 10% of our last 12 month sales. And also, we have over SEK 1 billion in available cash. So we are in a strong position to continue with our growth activities.

[Peter Kruk, executive]

And we have continued -- have higher aims for our continued development as a company. We launched the financial targets during last year. And in these targets, we are targeting to reach a net sales of SEK 8 billion by 2026 and at the same time also deliver an EBITDA result of at least SEK 1 billion in 2026. And as Anders mentioned, we aim to have a net debt over EBITDA less than twice 2x. And we will continue to make dividends of available cash that we don't have so that we have available beyond what we need for our acquisition and investment activities.And we expect that to be around 50%, which is in line with what we're proposing for this year also. Our strategy is the same basically since 2018, where we continue to deliver on this plan, and it's about continuing to increase our market shares in -- in all of our markets, but primarily in Europe, U.S.A. and East. We continue to deepen our collaboration with existing customers, both growing our sales with them but also developing our relationships and working with more advanced technology. We continue to look at how we expand geographically into new regions and new markets.And finally, we also see opportunities of consolidating what is a very fragmented market. We still only have -- even though we're a globally leading player, we only have around 2% of our target market in the high mix low-volume segment.

[Gunilla Öhman, executive]

And we are also proud to have a very stable and solid shareholder list with a lot of good names. What has happened during the year is that our R12 Kapital has decreased 2% and the rest is quite stable in the list. And Lannebo Fonder has increased somewhat during the year. And the ownership of Group Management is 2%.

[Peter Kruk, executive]

Well, I think with that, we end our presentation, and we'll open up for questions.

[Operator]

[Operator Instructions] The next question comes from Klas Danielsson from Nordea.

[Klas Danielsson, analyst]

So I just wanted to just kind of start off with the order side. So last quarter, you said that you were back in a pattern where orders and sales would be roughly equal, right? And this quarter, it seems like you're in a pattern where rather lead times are small, and so you should probably see a bit more orders being taken in the quarter and then delivered on in the same quarter. Could you maybe try to help us understand the kind of relationship between orders and sales and how that's going to develop over the coming quarters from here?

[Peter Kruk, executive]

Yes, sure, Peter here. And I think, yes, I think what we're saying is that lead times have been improving. I think what we have seen in the last quarter is that things have become even better in terms of lead times than maybe what we were expecting, which has had maybe a slightly negative effect on the order side. So we actually see the same strong customer commitment in terms of their activity levels.I think what we're also seeing, which I think has also potentially played into the order intake in this quarter is -- I mean, you followed the work we have done in 2022 in sort of addressing the working capital throughout the year. And I think what we are seeing is that I think many of our customers are now -- have been doing a little bit of the same journey, but maybe starting a bit later than we did. And I think that is also impacting the order intake in the short term or in the temporary term.

[Klas Danielsson, analyst]

All right. And so just a follow-up on that. Could you kind of help us understand, how much within those SEK 1 billion in orders on average, I guess, is deliverable upon in January and February? And I mean, how much of a difference year-on-year, is that basically [indiscernible]?

[Peter Kruk, executive]

I mean it's a bit hard to judge. I think we said in the third quarter, we believe that we had roughly like SEK 75 million with us in the order book, and we expect it to maybe have around 25% in the fourth quarter. Maybe that has moved a little bit. But I think also at the same time, on the revenue side in the quarter, we can see that we had in Q2 and Q3, we had order intake of 1,036 and 1,011 in those quarters. So I think our revenue is coming in largely in line with those numbers. So maybe we have seen that lead times improve a little bit better. So the impact we saw in orders would have been a little bit more than those SEK 25 million we estimated it to be in fourth quarter. And at the same time, I think we might be seeing some element of -- some of our customers, typically contract manufacturers, EMS companies, we can see from their reporting also that their inventory levels have been quite high and have maybe not been as successful during '22 to reduce their inventory. And I think that is maybe a little bit what we're seeing now that they are coming back in -- as lead times are improving, supply chains are more stable. That helps them also now to sort of come back into a more normal inventory planning in their side.

[Klas Danielsson, analyst]

Okay. I don't fully understand personally, but just take another stab at it, but on average, how long is the lead times on the orders within that SEK 1 billion?

[Anders Forsén, executive]

I think we still -- the old pattern, let's say, orders in 1 quarter translate into revenue the following quarter, is still largely sort of true. And you will always have some movements up and down around this regarding you have some seasonality effects, and you can have as we have right now customer situation, where customers have a lot of inventory, and that will lead to a correction during a quarter or 2, we don't know, so.

[Klas Danielsson, analyst]

Okay. Okay. And then I was wondering if you maybe could elaborate a bit on the OpEx side as well. It seems to me like OpEx is up a bit more than usual in Q4 versus Q3. So the seasonality seems to be a little bit more pronounced. Is there anything happening especially in there or is it just a continued execution of --

[Anders Forsén, executive]

No, not really. I think what we can say that we are -- since we are working on with growth over time, we add on more employees. We add on more cost during quarter-by-quarter. And since we had a little bit lower revenue than average for the year in the fourth quarter, of course, a little bit lower revenue and the costs slightly increasing quarter-by-quarter, that might be the effect for.And I think typically, if you look on the history, our fourth quarter is normally the weakest from a profitability point of view. So I think we have a situation where we still are in a growth mode and expect to grow, meaning that we add on with resources and then the cost will increase. And then if a quarter is a little bit lower revenue, that will have an impact on the profitability level. So I would say that is the main reason. There are no really significant other changes in the quarter and no specific things.

[Klas Danielsson, analyst]

Yes. And then how is the planning and how are you considering that? Because clearly, this quarter, I mean, on a comparable units level, I mean sales was actually down 16%. It sounds like it's going to be down a bit in Q1 as well, right? And so how are you planning for that because of obviously --

[Anders Forsén, executive]

Of course, we'll be following the order intake very carefully. And as it has been a little bit softer the last time, of course, we tried to postpone new recruitments and work with the cost side in a smart way, but we are not aiming to do any big things that will impact the further growth capabilities. But of course, we will try to adjust what we can do. And I mean, also, we have 75% of our revenue is -- our cost is variable. So big parties or the variable directly. But I think of course we monitor this carefully, and we do what we can to keep up the good profitability, but we will not do anything that will harm the future growth.

[Peter Kruk, executive]

No, I think we can say that from our customer interactions and we see what's happening in their pipelines and what's happening on new customer acquisition activities. Things there are still looking very positive. We know that there could be some corrections in inventory and other things here in the near term, but that has not really changed our outlook for growth nor our confidence in our long-term targets. So right now, it might mean that we are sort of -- we're not putting on them in brakes, but you can say maybe we're not sort of we are lifting the foot a bit from the gas pedal. But I think we are in a healthy state going into '23 and have confidence around that.

[Operator]

The next question comes from Robert Redin from Carnegie.

[Robert Redin, analyst]

Can I ask – also on those -- the order intake and sales. I mean, if you combine 2021, 2022 order intake and compared with sales, order intake is sort of SEK 600 million higher than sales. So have there been sort of any cancellations or do you still have that order backlog, call it, the SEK 600 million left in 2023? Can you sell for more than your order intake, say, in Q1 or Q2 or is it more this 1:1 now?

[Peter Kruk, executive]

No, we have no order cancellations. So I think that is still a healthy order book. And I mean it's always a bit tricky exactly which quarters to capture exactly see if the number is exactly the EUR 600 million you mentioned or not. But I think we still have, overall, if you look back, say, 1, 2, 3 years, we still have an order intake which is slightly higher than our revenue side. So we are in a good position for '23 in terms of order book.

[Robert Redin, analyst]

Okay. Good. And this inventory reduction at customers, I mean maybe you've now completed your inventory sort of resetting customers done that, too or is it continuing as customers?

[Anders Forsén, executive]

No, I think that is probably what we've been seeing now in the latter part of the year, let's say, some of the order softness that we may have seen has been partly due to the fact that lead times have been improving but we can also see also from the communication from a number of, say, listed companies that we sell to that their inventory side has been high and they are working on getting that addressed, and that somehow trickles down also to our products, even if our product typically are not products that are, you tend to keep in large inventory but due to say, the shelf life or when you need to run them into production with good quality. But it will still have some impact. So we can see a number of our customers are in a mode where they are high on historical inventory levels, and that is playing a part in this, we believe.

[Robert Redin, analyst]

Okay. And can you say something about the price component of the U.S. dollar-denominated growth in comparable units in sales and orders for Q4 was price negative or --

[Anders Forsén, executive]

I mean, you can say, yes, I think there are some tenders if we can see some softness in the pricing side. I think historically, in '21, we saw a very rapid increase in pricing for printed circuit boards. In the last year, with the dollar strengthening, I think that has created an opportunity for largely factories in Asia to be a little bit more aggressive. And I think also the fact that Chinese market was running at a much lower pace in the domestic market during '22 also meant that the loading rate or the -- how visit the factories were in '22 was decreasing. And that also showed that we can see that for newer projects, we have been able to see that there are new pricing opportunities. And I guess that also will -- has, of course, a little bit of an impact on the order number --

[Robert Redin, analyst]

Right. And the outlook for that now going forward are the factories better utilized now is the outlook positive with the Chinese economy?

[Anders Forsén, executive]

I think it was nothing we'll need to want to see how it develops. I think what we can see now is that there has been a very rapid change in the Chinese economy from sort of having been in lockdown. And then we could see that more or less COVID was done and dusted by mid of January. If we just look at our own activities, our teams are now fully mobile meeting with customers, interacting with customers. So we can -- I think we can expect the Chinese domestic market will ramp up and that, that will have an impact on the factory loading. How these things play out with currency and existing loading in the factories and pricing, I think we'll need to follow closely or how that develops.

[Robert Redin, analyst]

And finally, I think that this EUR 10 million positive from the Elmatica earnout, that's included in the Nordics EBITA, right?

[Anders Forsén, executive]

No, it's not. It's in the central part of the sensor costs – so not impacted by that one. So that is in the central overhead.

[Robert Redin, analyst]

Okay. So it's in central overhead, okay --

[Anders Forsén, executive]

Yes. Yes.

[Robert Redin, analyst]

And that number swings a little bit from quarter-to-quarter, but then that number was a fairly large negative in the --

[Anders Forsén, executive]

Yes, it is. I mean, we have a situation where we sort of take a percentage of the revenue from all the companies to cover for the central costs and the difference will be end up in that line. And since we now had a little bit lower revenue in the fourth quarter, that means it's sort of lower revenue for the group and covering the cost. So that is the main reason. So there are no really other things that increases the cost.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers.

[Gunilla Öhman, executive]

So there are a few questions on the web here. And 2 questions about the gross margin. The gross margin is up 4 percentage points year-on-year and almost 2 percentage points sequentially. What is the main driver of this improvement?

[Anders Forsén, executive]

I think, I mean, we have been constantly working on improving our gross margin. That has been sort of a way to increase the business and secure profitability. I think also we have seen from some of the acquisitions we made, we have been a big improvement. And there also are some, as Peter said, some lower occupancy or utilization in the factories, which have given us opportunities to get better pricing. And of course, we try to partly give that to customer but also work with our own gross margin. So there are a number of reasons. But of course, it's our aim for all of the salespeople is to try to sell on value and use the possibilities where we can increase the margin if possible. So that I would say is the main reason. But if you're looking long term, we have always been able to step by step in a slowly pace increase in gross margin.

[Anders Forsén, executive]

And then, of course, within the different quarters, you can have some currency revaluations on timing of orders and invoicing, et cetera.

[Gunilla Öhman, executive]

There's another question about the backlog and lead times, maybe we were into this before, but maybe we just repeat a little bit about the lead time in the backlog. Is it back to pre-Covid level?

[Peter Kruk, executive]

Yes, I'd say so. You say you said that they're back to good pre-COVIF levels. And I think we saw this, it was something where the lead times extended dramatically during '21 and also not just longer lead up but unstable lead times. And I think that caused a -- basically, our customers in order to secure their smooth production had to make longer forecast and place orders earlier ahead.

[Anders Forsén, executive]

And I think that really changed. If I just compare 2020, you had orders of SEK 2.2 billion and revenue of SEK 2.1 billion in 2021, then we had orders of more than SEK 4 billion in revenue of SEK 3.2 billion. And now in this year, we are now back to the numbers of SEK 4.4 million in revenue and 4.2%. So you had a tremendous increase in the orders in '21 over revenue. And I think that is now readjusting back, which is a major contribution to why we have been showing lower order numbers here in the second half of this year.

[Gunilla Öhman, executive]

Okay. Thank you. I think those were all the questions that we had. So I just want to kindly remind you of our next quarterly report, which is on the 26th of April and our AGM, which is on May 9.

[Peter Kruk, executive]

Thank you very much.

[Anders Forsén, executive]

Thank you for listening.