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

Ladies and gentlemen, welcome to the NCAB Group Q4 Report for 2019. Today, I'm pleased to present CEO, Hans Ståhl; and the CFO, Anders Forsén. [Operator Instructions] Speakers, please begin.

Good morning, everybody. So I feel very proud here today to present our Q4 2019 results, and we have prepared an agenda here, where we're going to start off with talking about NCAB; Q4 in short; and then we have this coronavirus, so we're going to talk about the actions and effects; and then further with the Q4, more detail; and summary; and then we have the question-and-answer as we finish up with. So if we start with the first page where we present NCAB, and we have 17 companies around the world, and we're selling our products to 45 markets, and we are almost 400 employees or specialists as we like to call ourselves. We are working with 23 factories. And it's worthwhile mentioning, it's not -- we don't own the factories, we only own the relationship. And at the next page, we can see what we are producing. So we are producing printed circuit boards, and the product we have is the bare board, and it's all custom made. It's always a drawing before we can produce them, and we work in a niche, high mix, low volume. So we don't like the high-volume type of boards. And our customers is putting on the key component. So that's when it becomes a PCB-A and then it's being mounted into a finished product. So we look at the next page, our journey. If we start from the top, we have made some acquisitions. In 2019, we've made 2 acquisitions, one in Denmark and one in the U.S.A. And the company, NCAB, it was founded back in 1993 in Sweden. And from there, we have entered a lot of markets along the road. And the latest one was in Benelux. Revenue-wise, also we have been growing every year except 2009. But 2009, we still -- despite the lower revenue, we still made a healthy profit, which a little bit explains our kind of resilience to low -- poor business cycles. Even if we have a bad business cycle, we are still making money because we don't own any factories. So going to the quarter, we have it on next page. So we had a net sales of SEK 422 million, and that's a growth compared with 2018 with 4%, and measured in U.S. dollar is what exactly in the same level. But then we have the result, bottom line, it was actually plus 14%, and we are extremely proud of that, that we have raised the profit and measuring in percentages plus 80 basis points. If we look at the whole year last year, we have grown 10%, measured in Swedish crowns and 7% excluding the acquisitions, and also -- measured in U.S. dollars is 2%. And again, the EBITA, it was plus 15%. So a summary of the Q4. We made an acquisition, as we said, Altus-PCB in the U.S.A. with good contribution. And the integration process has gone very well. So we're very happy to have them on board. And we are in the recruitment process of a new CEO is ongoing. It's an interesting project. And also, we have came out in second place in the competition, Employer of the Year, which we are very proud of because that's important for us because our biggest asset is our employees or ourselves. And the coronavirus will, of course, kind of have an impact on our business, especially for Q1 this year. And we have suggested a dividend of SEK 4.75. So going to the coronavirus. I think we all have heard about it. And first of all, I'm happy that we don't have any employees that has been infected. And as we are -- everybody right now are working from their home. But thanks to the very good Wi-Fi connections in China. It's kind of they can do their working -- tasks very well. They will work from home, little bit of difference, but it's to the 29th of February. And as of today, we have about 40%, 50% of the staff is back into the factories. And the forecast would be like in 1 or 2 more weeks, we have 80% to 90% of the people back. But of course, I mean, our factories also have a supply chain. So we don't know 100% how that has impacted the factories. But for us, it's extremely important that we have a dialogue with our customers and have a dialogue with our factories so we prioritize the right way. Because simulate that our customer will run out of boards and then it's important that we start to produce the boards that is the most urgent -- the most urgent boards. So that's basically what we are doing every day here. And we also have a daily update. We have people in China checking the factories, so we're getting exactly the status every day. And again, this is the -- the important thing is to have dialogue with factories and with the customers. And of course, the impact. It will have an impact in the first quarter 2020 as we can see today. But it's -- we have the order intake. It's very good. So we don't see -- we haven't seen any cancellations. And still, the underlying needs is still there. So all customers, they're going to have their product. So Anders, I'll leave it to you now.

Okay, from the corona back to the Q4. And I think where we are -- as we said, we are rather proud of the results. We still see a good growth in Nordic, and we grew 21%. Of course, part of that is due to the Multiprint acquisition, and it was about 5%, if we exclude that one. The margin is good, but a little bit lower than we have been used to. But I think also that we saw that the calendar effect in December made our revenue lower-than-expected in December, which also put some pressure on the EBITA margin. Europe, we had a small decline in revenue. We saw a growth in the first 2 quarters, but Q3 and Q4 have decreased, mainly in U.K. and Germany. And I think in the beginning, we saw effect on the automotive, but that has also spread for the Industrial segment, where we are mainly present. North America's on the other way, more positive. We have had more sort of sound business in the beginning of the year. And I think the market is more set for the new tariffs. We still see a decline in revenue, but we see a more -- much more activity among the customers. And we also can see that the profit is increasing due to better gross margin and that we have a more stable organization, and we have done a lot of cost-efficient activities in U.S. So even if not growing in fourth quarter, we see good growth in the results, which I'm proud of. And East. China, Russia continues to deliver in a good way. And we also had a very healthy profit in East. Going back to next page. We see that we are still growing. We are not growing in the same speed the last 2 quarters, but still, we are 10% up for the full year, with 7% growth, excluding acquisitions. But anyway, we are focused on the gross margin, and we continue to slowly increase the gross margin, which, of course, is important for the future as well. And it's also one of the main points behind the improved profitability. And then next page, we can see, as I said, about the growth, it's a bit slower. Still strong growth in Nordic, as I said. And we also see that North America is starting to recover, which is very positive. Net sales increased 5% in SEK and was in the same level in U.S. dollar. We also have a little bit positive growth in order intake in the SEK, but negative in U.S. dollar. But anyway, the good part is that order intake was much higher than revenue. So we are building order book, which is, of course, positive for the future. And also here, I think we can see we had some calendar impact on December because it was a very short month, and that, of course, impacted the revenue and also had some impact on the profitability for the last quarter. Going back to the EBITA. As I said, we have seen improved profitability in those segments. We increased EBITA with 14% compared to last year, and we reached an EBITA margin, 9.7% in the fourth quarter, which we are extremely good despite that we had a weaker revenue in December. And on top of that, we also take extra costs for the Altus acquisition of about SEK 2.2 million. So excluding that one, EBITA margin was about 10.3%. And of course, another reason is improved gross margin. As we said, we also have some downtime cost efficiency programs. We have not recruited in the same speed due to the weaker growth. Earnings per share, a little bit lower for the quarter to last year. But last year, we had some positive effect on taxes since we activated some previous losses. We also had some negative currency exchange rate and financial net in the fourth quarter. But year-to-date, earnings per share increased from SEK 6.37 to SEK 7.61, it's really a good job. Next page turn, going back to the segments again. I think we discussed Nordic. We have not seen any -- really no slowdown in the economy in Nordic. Our customers still continue to order in a good way. We saw a little bit of a drop in the EBITA margin in the fourth quarter, mainly due to that it is higher revenue from the countries producing a little bit lower margin. But as we think the year-to-date number of 15% is short term -- the long-term goal for Nordic, and this should be good. Going back to Europe, where we are of course, a bit disappointed in the revenue development. We had a rough start, but then we saw especially Q3, Q4 going down. And it, of course, has been the main countries, U.K. and Germany. And of course, Germany, I mean, we started with the weaker automotive industry. And we, of course, happy not being so much into automotive. But the second half of the year, we saw that it was spread also for the Industrial segment because I think that has an impact on whole Germany. So that is the main reason for the slowdown. We also opened up in Benelux, which, of course, had some extra cost for us to certain quarters. But we see good progress with many customers and activities in the Benelux area. So that looks very promising. And we are in a stable profit level of about 6%. And still, we continue to recruit, maybe in a slower pace, but we recruit in Europe to work for a future growth, 2020. Next page then, going to North America. Yes, we are still decreasing the revenue but in a slower speed, and we see a clear sign of recovery in many areas, which is very positive. We're also very proud of the Altus acquisition. It has a small impact for the fourth quarter. And Altus also has been very profitable company or will be a profitable company. So that's also part of the increased profit level in U.S.A. But as we said before, I think we have a very stable organization, we have been able to work much more efficient now than before and also improving the gross margin. So that is what's behind the improved profitability in U.S. And then finally, the segment in East. We saw a growth of 2% compared to last year, but the full year growth is about 11%. And we are growing both in Russia and in China. We could see some slower growth in China due to a lot of our local Chinese customers actually are exporting to U.S., and they were a little bit hit by the tariffs. But I think most of that starts to stabilize. And we also could see an improved profitability in our East segment. And then finally, going back to the balance sheet on the next page. Return on equity, almost 40%. And as you know, we do have a very strong cash flow. That means that we have a net debt of close to 0, again despite that we have done 2 acquisitions during 2019. We have a solvency of about 40%. And also net working capital is below 8% of the last 12-month revenue. So I mean we don't need very much in inventory, we don't need so much in trade receivables, et cetera. So it is easy for us to grow without any need of cash. So that means that we have a very strong balance sheet and opportunities for future expansion. So to summarize the numbers for fourth quarter. As we said, it's a bit continued weaker top line growth, but we have improved gross margin. We also saw an improved EBIT and EBITA margin due to cost savings, et cetera, which is good. Nordic continues to grow, very much thanks to Norway and the acquisition in Denmark. And we see, finally, some positive signs for North America, and we also have seen a lot of positive synergies from our acquisitions we done during 2019, which is also promising for the future.

So going over to the future, delivering on our strategic plan. So we have kind of 4 strategies here. And the first one is, of course, increase market share in Europe, U.S.A. and East. And -- because our market share is extremely small. We are like, in Europe, have 1% market share. So there is so much more to grab there. And of course, work even deeper, collaboration with existing customers because our customers we have today, they do use much more circuit boards that we -- than we supply, so there are many projects we can capture there. And of course, expand geographically, the world is big. But then maybe we have -- our biggest opportunity is the consolidation of the market, as we have seen the smaller -- our smaller competitors, they are struggling as the factors in China are consolidating. So it's becoming big and bigger. And therefore, they kind of throw out the smaller kind of customers traded. That's where we see an opportunity in the acquisitions. And then finally, our target is like annual average growth, 8% is our target, and we have done 7%, 2019, but that is excluding the acquisitions. The margin, EBITA margin, 8%, we did 9%. And of course, we have a very strong cash flow. And also the dividend, we have estimated to at least 50%, and we have suggested 62% this year. That was everything. So we are happy to receive some questions now.

[Operator Instructions] And we have a question from the line of Robert Redin of Carnegie.

A couple of questions, if I may? So maybe we could take them one by one. So first, on order intake. So it's, obviously, well above sales in the quarter. So -- but maybe that's also partly seasonal, right? Could you say something about sort of order trends throughout the quarter or trends in January, things picking up or slowing down? Or the data center...

Yes. I think -- I mean, normally, we do have a little bit higher order intake in the fourth quarter. This is sort of a preparation for the Chinese New Year, et cetera. And we saw that this year as well. And so -- and we were a little bit above last year. So that was good. And we were also -- we were building an order book since we have higher order intake than revenue in the fourth quarter. I think we can see the same trend that four; rather good in Nordic and East, recovery in U.S. and still weak in Europe. So still we are affected by the weaker market situation in Europe.

Okay. Perfect. And then looking into Q1, Anders, if you can say something about how the quarter has started? And/or how we should think about this coronavirus impact there? You've outlined the sort of areas, but is it fair to assume you lose a couple of days or a week of sales? Or how much of an impact?

If we start with January 1, as we said before, we thought or we saw that December was a little bit weaker due to the calendar impact and that means also that we had a very strong start to the year. So in that case, I think we have started well, and we have seen order intake in a good level. But then, of course, there will be some impacts of the -- on the corona.

So I'm the corona specialist here, but I'm not the doctor. But anyway, yes, it will have an impact. So it's a challenge we have. But we think with the dialogue we have with the factories and everything, it looks much better today than it did a week ago. And more and more people coming back to the factories. But we cannot see the whole supply chain yet. But yes, Q1 will, of course, be affected.

Okay. Right. And then do you expect any impact in Q2? Or do you think this will be just a Q1 effect?