NCAB Group AB (publ) (NCAB) Earnings Call Transcript

Welcome to the NCAB Q2 Presentation for 2024. [Operator Instructions] Now I will hand the conference over to the CEO, Peter Kruk; CFO, Anders Forsen; and Head of Investor Relations, Gunilla Ohman. Please go ahead.

Good morning. Thank you. So speaking today will be myself and Anders Forsen, accompanied by Gunilla Ohman. If we start by summing up our second quarter, we can see that the market recovery has been slower than we have anticipated. I think notably, we have seen a weak demand in Europe and especially Germany, as I think we've all seen from macro numbers on [ Ifo ] Index, et cetera, that the German manufacturing industry has done worse than expected, and that has also impacted our business. Nordics has performed with mixed performance with some parts have been benefiting from defense growth, but we've also seen lower activity in areas of construction or energy sectors. In North America and East, however, we start -- we continue to show progress with order intake growing and we have also landed some nice larger projects, notably in North America, which further helps the growth trend in orders there. Overall, despite demand being lower than anticipated, especially in Europe, we still continue to see a very healthy growth in our new part numbers as well as in new customers won. Looking at the financials, we can see that we are maintaining gross profit at very good levels. Factory prices remained low, and we can also see that the signs we start to see about potential price increase in the market have been somewhat more muted as demand in Europe is lower. EBITA and EBITA margin are, of course, impacted by the lower top line, but we have also taken some nonrecurring costs in the second quarter, which has another impact on the quarter EBITA numbers. On the M&A side, however, there's been a lot of activity in the last couple of months, and we have landed 4 new acquisitions as well as still having a very active pipeline of continuing ongoing discussions, and we've also added an extra credit facility to support further M&A possibilities of SEK 500 million. If we then look at a little bit closer to some of the acquisitions. We started in April with an smaller acquisition here in Belgium, 2 employees only, but it gives us a nice direct foothold in the Belgium market, and we'll work closely together with our business in the existing in Benelux. Then here in July -- early July, we announced 2 other acquisitions. We have ICOM Industrial Components in Switzerland, adding SEK 40 million of annualized revenue and 6 employees split in Switzerland and in Serbia. And this, again, we already have a business activity in Switzerland based on our acquisition of db in 2023, but this gives us a stronger foothold and will enable us to grow the business in Switzerland. And similarly, we also announced an acquisition in Austria, EPI Components Trade, a company with 4 employees and SEK 35 million. Again, a market which we are currently serving out of our German organization, but this gives us a local presence and it enables us to continue to grow in that market. Then, as we may have seen yesterday, we announced a larger acquisition. We are announcing that we are acquiring the company, DVS Global, with main business in Italy, serving industrial customers and also partly in automotive. It's a very quality focused company that has a long history, almost 20 years of business in the industry, revenue of SEK 230 million in '23 and with a very good profitability as well. We will be taking over some 31 employees in Italy, Switzerland, Hong Kong and China. Very sort of similar culture and values with what we have in NCAB, and we expect a very smooth integration. This is a signing that happened here yesterday, and we expect to close the transaction in September or latest in October. And if we then look back at the quarter in some numbers, we can see that net sales are down 12% versus the prior year to SEK 935 million. That's an organic decline of 15% in both Swedish krona and U.S. dollars. And even if it's lower than last year, it is somewhat in line with the order intake that we've seen in the past quarters, where we have been [ handling ] between around SEK 900 million to SEK 970 million. If we look upon the order intake, we're up slightly versus last year, and the book-to-bill is flat on the number 1. If we then look at EBITA, we are at SEK 120 million. So a healthy EBITA margin of 12.9%. Of course, impacted by the lower sales, but gross margin helped to maintain a good profit level, gross margin remaining at 38.5% versus 36.4% of last year. And then also, as I mentioned, we took some onetime costs. We have taken costs. We are in the process of implementing our new IT or business systems. And those activities have been more intense in Q2 than in Q1. And we have also been having our biyearly all-employee development conference, where we work on strategy and business development with all of our employees, and that was taken now here in quarter 2 this year. Working capital still remains good at 6.2%, and that also then helps to generate a continued strong operating cash flow of SEK 101 million versus SEK 152 million last year and a good ratio versus our EBITA of [ SEK 120 million ]. Anders?

Okay. Just to sum it up what you said, Peter, that we can see that we are down 12% in SEK and [ 13% ] U.S. dollar. The exchange rate SEK/U.S. dollar has been rather stable within last year. So it's no big difference there. Of course, we can see that we have a bigger drop in EBITA connected also to the revenue that is [ down ], supplying is down and also some nonrecurring costs, as we mentioned. And EBITA for the quarter ended up in 12.9%. I think we continue to have a healthy progress in our gross margin. Of course, we still had a rather good gross margin last year as well. So we can't compensate the drop in revenue as we did in the same way as we did last year. But still, I think we are continuing to run with a very healthy and good gross margin. This is also a sign of that, the prices that we expected to increase a little bit from the factories in Asia has been stable on the same level as before. So we don't really see any signs right now for increasing prices, and that might also be the consequence of the weaker demand from mainly from Europe. So just to look in, in the growth for the total company then, as we said, down -- revenue is down, order [ intake ] is down. But I think we are on a very stable level quarter-by-quarter. As we said before, we think it has bottomed out. And we can also say that we see a little bit of fragmented deep market between different segments, where we can see that Europe is going down while other segments going up. So there are different signs in the different markets. But overall, this gives us a rather flat development quarter-by-quarter. And I think what we have said before as well, we are really back to a situation where we can more or less measure 1 quarter's order intake into 1 quarter's revenue. As I said before, we see some really good signs in East. We also see some positive development in North America, where we have gained a number of new interesting projects. And in total, book-to-bill was 1.0. And as Peter also mentioned, that we still see a good positive trend in taking new part numbers and new customers won. So some of the areas, I think we can see that we are keeping good control of our market position, and we're taking new orders, but still the customers are very hesitant to place the volume orders. And there are very much cautiousness in the market, which says that the new part numbers doesn't translate into orders and revenue as it normally have done. So we see many, many smaller orders than we used to see before. Going into the EBITA. So of course, it is a drop versus second quarter 2023, which was a rather strong quarter on the other hand. And also, of course, when we have a high gross margin, a drop in top line will have a higher impact on the EBITA. During the quarter, we also continue to take the cost for the new IT platform, and it was a little bit higher than the first quarter, maybe it was about SEK 8 million in first quarter and SEK 13 million this one. We also have this biyearly employee conference, which really creates value for all the employees and really boost the company values in a good way. And of course, all that cost is taken 1 quarter, so that will be a hit in the specific quarter. So therefore, we can see a lower EBITA margin down to 12.9% or almost 13%. Still good to see that we can match that with our gross margin, and that gross profit is not going down as much as the top line. Back to you, Peter.

Thank you, Anders. So looking at Nordics, where as we've mentioned before that Poland is part of Nordics due to the strong connection of the business that we have. So we are now reporting Poland under Nordics. Also here, we can see order intake decreasing by 2% versus last year to SEK 226 million. We can see Aerospace & Defense are sectors that are performing well in the Nordics. But we then have some other business where, say, you can see that Denmark as a country has been exposed to some construction activities and also some energy sector business. And we have also seen slightly weaker activity in EV charging in the second quarter. Net sales amounted to SEK 207 million, decreased by 9% from prior year, and we have seen a slight mix shift or mix in the quarter. This can always vary a bit, and we've had a little bit more negative mix in terms of customer country mix in the quarter, which has impacted our gross margin slightly negative in the region. EBITA amounted to SEK 29.6 million, and the margin is at 14% versus 22% of last year. If we then look at Europe, here, we can see that the net sales is decreasing by 20% versus prior year. And combining comparable units, it's a decrease of 22% in SEK and 23% in U.S. dollars. We can also see that our order intake is SEK 423 million. So also a negative book-to-bill compared to sales. And this again is very much related to German market, which is weak. And that also actually has an impact on neighboring markets as well as like Netherlands and also, to some extent, Italy. But we do see some positive development in automotive and also aerospace is an area where there is positive signs within the sector. So what we can see is that the anticipated trend of inventory reductions reducing to then be translated into a growth in the future. I think we can see that probably we have lost at least 1 quarter, and we'll see when that pickup will happen. EBITA decreased down to 56.7% -- SEK 56.7 million, and it corresponds to an EBITA margin of 12% in the quarter. North America, here, we have a more positive trend or continued positive trend. Order intake up to SEK 229 million and a healthy book-to-bill versus the net sales of SEK 200 million. So order intake for comparable units are up 29%, both in Swedish krona and U.S. dollars. There is an underlying overall growth, but there are also some interesting new projects that have been won in the quarter, both in aerospace and also in research laboratories. Net sales, as we said, also increased by 9% to SEK 200 million. However, for comparable units, it's a decrease of 2%. EBITA decreased by -- to SEK 28 million versus prior year, and the EBITA margin is down to 14% versus last year, but slightly up versus the prior quarters. And if we look at East, the market conditions in China overall still remain challenging. And I think as we've all seen market macroeconomic numbers for China also being continued difficult. However, we've been able to win new interesting business as well in the high tech demand in customers. So we were having the quarter a positive book-to-bill of 1.07. Our order intake was up to SEK 60 million versus SEK 43 million last year, which was quite weak, and net sales flat versus last year at SEK 56 million. And we also have an EBITA of SEK 11 million and an EBITA margin of a very good 20% in the quarter. Anders, over to you again.

Okay. Thank you. And then coming back to some financial KPIs. I think still we have a good return on equity, down a little bit versus last year. Mainly, it's 2 components. Of course, we did have a higher equity per end of Q2 and a little bit lower result. Still, we have a very good match of net debt. Our net debt-to-EBITDA ratio is 1.1, and a strong solvency of over 40%. We have been, during '23, been working a lot with reducing our net working capital, and I think we are now down to a rather stable level around 6%, 6.5% of last 12 months revenue. So we still continue to have a good cash flow. Of course, during '23, when we reduced the working capital that gave us even stronger cash flow, but still we're in a good position. We also see that we have a lot of interesting M&A activities in -- in the pipeline. And we signed here in June a new loan agreement where we added on another SEK 500 million, which means that we have a lot of good firepower for continued further acquisitions. So still a very healthy balance sheet and good financial KPIs, I think. And then looking in a little bit into the acquisition pipeline. We have been -- we are focusing on Europe, U.S. and East. We are looking a little bit more into the Southeast Asia and Japan market to see if we can find some activities there. As usual before we have -- we will always look for the High-Mix-Low-Volume segment. We will look for the companies that have the right customer mix and of course, without any production. And we're also looking for profitable companies. And still, we have around 50 target companies. It's good to see that we've been able to close 4 of them this year, but we are still in discussions with a number of other potential targets. So the market is still good for M&A activities. Peter?

Yes. So rounding up and looking at overall, we continue with our strategy. We are, as we've said before, active in a very large market. The High-Mix-Low-Volume market for printed circuit boards is around USD 25 billion, which means that we currently, while still being a leader, we only have around 2% of the world market share. So we have -- we'll continue to remain 100% focused on printed circuit boards and to continue with an asset-light model not having any factories of our own. Instead, we'll continue to invest in becoming ever better at serving our customers, being a leader in technology and sustainability to further grow our market shares. We are looking to continually expand geographically. We see M&A as the main driver to take the steps into new markets as it helps us accelerate the process to grow into new markets. And finally, it is, as we've also said before, a very fragmented market with a lot of smaller local regional trading companies. And therefore, we can see there is a good opportunity for us to add value by integrating these through acquisition to give them access to our factory management setup and a much better -- give their customers a much better service. And before opening up for questions, I'm also realizing that this will be Anders' last quarterly call for NCAB as Timothy Benjamin will start in September. I want to say that I have greatly enjoyed our cooperation over the past 4 years. I wish to extend my personal thanks as well as thanking you on behalf of the management team and the Board of Directors. So thank you, Anders. Besides being a great colleague, you've had a fantastic share in developing the company's success over the past 15-plus years. Thank you very much.

Thanks a lot, Peter.

And with that, we open up for questions.

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

I will start with one on Europe as it sticks out as a bit weak. A book-to-bill of 0.89 if I calculate it correctly. I just want to get some more thoughts on maybe the sequential trends here. We've known for a couple of quarters that Germany has been lagging behind some other European markets. How much of the sequential delta is Germany continuing or getting worse, I would say or how much should we read into that? You also talk about some other South European countries also underperforming. And maybe lastly there, which sectors may be stuck out as being the weakest end customer segments?

I think we can say that there is some sequential deterioration from Q1 to Q2 because you could say, overall, our order intake is slightly lower in Q2 than Q1, whilst North America, as an example, is growing, we are falling behind more in Europe. And I think Germany, notably Germany or German customers are the main driver. And I would say it's a general industry that's most severely hit. So it's, say, quite broad. So it's not a specific sector, but the general industry in Germany is quite soft. Then we have, of course, other markets which are doing slightly better as well. So it's not all black gloom in Europe, but it's like it's -- yes. Sorry, Anders, go ahead.

But the clear majority of the drop in order intake is coming from German customers. That's very, very clear.

Yes.

Very clear. And then maybe just talking generally then on destocking. I feel in Q1, you talked about that you saw that destocking among customers began to weigh in, so to speak. But here in Q2, it feels like you're talking more about the destocking impacted you more severely. Can you maybe just elaborate a bit more, so I just get that right?

I think our view as it has been is that destocking will gradually disappear. And let's say, in the second half, we should see it sort of step up, and we would see impact in quarter 2 as well. But -- and I think that impact that also -- that trend is happening. There are signs where we see some customers where destocking is coming from a better situation. But I think that has been sort of overshadowed by potentially the slightly sort of negative turn of the economy in Germany in quarter 2, which has kind of overshadowed that. So we don't really -- it's hard to distinguish exactly what is what. But I think the overall perspective that destocking is nearing an end, that still is valid. But I think the overall demand situation in Germany specifically has overshadowed that.

Okay. Perfect. Just on pricing then, I remember in Q1, I think you said that the negative price effect was 10% in net sales, and now you're right, the effect was minor. Are you able to quantify that a bit more? And also maybe talk about how the year-over-year effect was in order intake?

I think when you're looking at the order intake, prices were falling during first half of '23. And during the second quarter, we were more or less stable. So I think the impact on order intake Q2 this year versus last year is limited on the pricing. But of course, still, we had some revenue last year, which was done with higher pricing than now. So it is some impact on the revenue side, but very limited on the order intake side right now. So I think we can see that we have had more or less stable prices since 1 year ago.

Yes. Perfect. Maybe just -- maybe last question or maybe one more. Just on -- we've seen the rapid increases in freight costs here during Q2. Were you able to offset that fully, would you say here in Q2 or is there some catch-up to be seen in Q3?

Actually, some catchup maybe. I think most of it, I think we can manage to handle to push cost forward to the customers. Of course, when there are some quick changes, maybe we have the prices included in the offer down previously. So there might be some small lag, but I don't think that is a material in this report. So I think we are in good shape there.

Okay. Perfect. Then I had a last housekeeping question. Would you say it's fair to say that SEK 17 million was one-offs because you have the SEK 10 million -- or you had SEK 8 million in Q1 of the IT migration, maybe the delta is, let's say, SEK 3 million to SEK 5 million. Is that fair? And can you specify where these were charged in the quarter on a regional level? And maybe especially talking about the conference charge.

Yes. I think you're rather right in that conclusion about the sort of one-off for the quarter. And I would say we had maybe a little bit higher impact on the IT cost for Nordic. The [ artic circumference ] is rather evenly spread because it will be taken by all the participant countries. So I think that is rather evenly spread, yes.

Perfect. And good luck, Anders, and thanks for your contribution in the last couple of years.

Thanks a lot, Jacob. Thank you.

The next question comes from Gustav Berneblad from Nordea.

Yes. Anders and Peter, it's Gustav here from Nordea. Maybe just to build on the demand situation and the question around Europe here. I was just wondering if you can say anything because I think you were a bit more forward leaning towards the beginning of the quarter when you talked in Q1. I was just wondering when did you see sort of the inflection point to the negative in the quarter? Could you say anything about that? Or when it started to really become weaker?

It's hard to say. It's not like there's been a clear trend shift during the quarter. But I think we -- as you said, it is a bit of a disappointment. I think we had expected that we would see stable and maybe slightly improving as inventory reductions would sort of -- would benefit us or the reduced inventory reductions. So I think it's -- so it's more that you could see that there is slightly weaker performance across the quarter. So it's -- I wouldn't say that is a trend that things are diving at the end, but it's something that happened gradually over the quarter, I'd say.

And is this sort of a tone that we can also think starting now beginning of July as well or...

It's hard to say. I think July and August are always very tricky months to get a feel for how the market is performing because you always have shifts in exactly when vacations are happening. So I think we'll need to see both July and August in unison before we can really have a clear view on how the market is performing during the summer here. But I think we can expect, say, the -- I mean, the gradual improvement that we were seeing or expecting, probably, at least in Europe, is probably at least 1 quarter then deferred into the future compared to what we thought earlier.

Okay. Perfect. And then maybe a bit similar to what we have talked about in sort of the recent quarters here, given that demand is not really picking up as we had expected and prices remained relatively stable. Are you continuing to see bankruptcies among your PCB manufacturers? And are there any of your suppliers that are affected?

I think, none of our -- go ahead, Anders.

Go on, Peter.

Yes. No, we have not seen any of our factories impacted by bankruptcies. And I think actually, the pace of bankruptcies, I think have decreased somewhat. So I think the weakest factories maybe have been weeded out, so the rate of bankruptcies, I think have declined. I'm not sure, Anders, if you have anything else to add?

No, I think that's very true picture. And an important part is that we have not seen any of our factories having those kind of problems. So -- and we try to monitor them as good as we can all the time.