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

Ladies and gentlemen, welcome to the NCAB Group audiocast for teleconference Q4 2021. Today, I'm pleased to present CEO, Peter Kruk; CFO, Anders Forsén; and Head of IR, Gunilla Ohman. [Operator Instructions] Speakers, please begin your meeting.

Thank you. So today, I will start up. Peter Kruk here and joined -- followed then by my colleague, Anders Forsén. If we move to Page 3, we can start by summarizing quarter 4. We're ending the year on a very strong note with a good fourth quarter. We amounted to net sales of SEK 977 million, which corresponds to strong organic growth as well of 55% in U.S. dollar. And U.S. dollar is the trading currency we have, which better represents the true development of the market. If we then add the effects of acquisitions, our growth is 87% in U.S. dollars. Also positive is that the order intake continues on a high note. Total orders amounted to 10,067 -- sorry, SEK 1,067 million, up 55% in U.S. dollars. And if we look upon comparable units in U.S. dollars, the increase was 27%. And also very positive is to note that our strong performance is across all regions and sectors, and we're seeing growth with both old and new customers. We've also seen in the quarter that lead times have stabilized, and our order book is normalized so that there's a good correlation between order intake and net sales. Also very positive is that our acquired companies are doing very well. And all in all, this has resulted in an improving EBITA to SEK 121 million, up from SEK 52 million the previous year, which is an increase of 132%. And this has, of course, been a good development here, leveraging our increased sales. And our margin for the quarter amounted to 11.6% compared to 10.1% in the prior year. If we move to Page 4, then summarizing the full year. Also here, a very positive overall view with growth in net sales amounting to SEK 3.2 billion, up from around SEK 2.1 billion in prior year. So an organic growth of 39% in U.S. dollars and with the acquisitions, a growth of 63%. And I think we can also see, and we will show later in the chart, how our organic growth is actually significantly outperforming the market development, which further cements the fact that we're gaining market shares. Also good is that our order intake has been very strong, clearly higher than our sales number, amounting to SEK 4.039 billion. It's up 93% in U.S. dollars. And for comparable units, the increase was 63%. We've also been able to announce 5 acquisitions during '21. And in February, we acquired -- announced the acquisition of PreventPCB in Italy. In June, we announced sas-electronics in Germany. In September, we had RedBoard Circuits in the U.S.; and in October, Elmatica in Norway; and finally, in December, META Leiterplatten in Germany. EBITA for the full year increased by 111%, up to SEK 406 million. And our EBITA margin rose to 12.6%, up from 9% in prior year. Anders, and to you.

So next page then, some important events during the last quarter. We have got a new finance situation in place with a new borrower agreement with our Bank Nordea, meaning that we have replaced old loans. And we do have a new credit facility for further acquisitions, which give us more opportunities in the future. We also held an extra general meeting in December that decided to make an extra dividend of SEK 10 per share before the split. That also was announced on that meeting. So then the split was made in end of December. And as Peter said, we announced the 2 acquisitions in fourth quarter. And we also have a proposal for dividend that will be decided on the meeting in May. And The dividend proposal is SEK 0.60 per share. And that will be paid out in 2 installments just to better match our cash flow. And coming back to the acquisitions in the next page. In October, we acquired Elmatica, which has been one of our sort of main competitors in the Nordic and Northern European market. It's very strong quality-focused PCB trader, actually, been in the market for over 50 years. They have a very similar structure and culture as NCAB, very quality focused. So they have their head office and employees in Oslo, Norway, but also subsidiaries in Sweden, Denmark, Germany and Hong Kong. Big part of the sales is actually happening in Germany, in France, in Italy and so on. Elmatica have about 45 employees and net sales around SEK 370 million. So this is the biggest acquisition we've done so far. They also have a very good profit level, which add on to NCAB profits going forward. And we have paid an enterprise value of SEK 350 million, and that will be an additional earn-out based on the development of gross profit until end of 2021. So that will be settled here in the first quarter. We can see a number of synergies. We can see synergies on the purchasing side. Elmatica has not a strong order sales in China, so we think that we will benefit from our purchase organization in China and support pricing and so on. We also know that they have a lot of high-quality people or well-experienced people from Elmatica that will join us. One of those has actually been appointed as Technical Director for NCAB Group, which is good. And we also see that they have much more experience in the defense and aerospace industry, which will be an add-on for NCAB. So we see a lot of positive synergies on that front. Also in end of December, we announced an acquisition of META Leiterplatten in Germany, and the acquisition was closed here in the beginning of January. It was a privately owned company, started from 2020. They had net sales of about SEK 85 million and 17 employees. High-quality company and also focusing on the customer segment that we are focusing on in Germany. There will be some synergies, especially from the supplier side where we think even here, we can add on with new factories and better pricing and better payment terms. Also, META had an own logistics setup with a known warehousing that will support our existing business in Germany in a good way. So we see a number of good potential here as well.

Moving then to Slide 8, some overview around NCAB. So our focus is to supply printed circuit boards for demanding customers, and we're also specifically focusing on what is the high-mix, low-volume market in printed circuit boards. And our aim is to supply on time with zero defects, produced sustainably at the lowest total cost. We are really the lowest in piece price, but we provide a superior value for our customers. Our vision is to be the #1 PCB producer wherever we are. We are already, by some distance, the leading supplier in the world, but our aim is to be #1 in each and every market. And there are also some markets which we can add to our current markets being served. We pride ourselves on being local, both close to the customers, and we are serving the market through 16 companies, but we also have a strong presence globally with the factories. We have some main 29 factories. We don't have any factories in-house. We are all working with partner factories. But out of our 562 employees, we have roughly 100 employees working only with factory management and continuous improvement in this area. If we move to Page 9, printed circuit boards. What we do are the printed circuit boards you see to the far left, so the board upon which then the semiconductors and integrated circuits are mounted to create a printed circuit board assembly. And that then founds -- creates the fundamentals in any electronic product. Moving to Page 10, about our history. We started out as a company in 1993 by 3 gentlemen. Started out as a private company in Sweden, stepping out from PCB manufacturing to actually start in trading with products from Asia. They were able to grow the company, expanding into Scandinavia and some countries in Europe. And in 2007, R12 Kapital came in as a new owner and bought the company. And from there on, we have expanded the internationalization of the company. And in 2018, we took the company public. And from there on, we have continued both with the strong organic growth and also further acquisitions. All in all, we have seen -- you can see in the chart below that from 2008, we've had a continuous growth of annually, roughly, 18%. And we can see that, that growth has been accelerating in later years, notably from the effects of further acquisitions.

Going into acquisitions, then we see a huge opportunity going forward for further acquisitions to go to market [indiscernible]. The market is very fragmented with many, many smaller companies. I mean, typically, as I said before, there might have been a factory closed down, and management team or sales team started some trading business. And they have done that maybe for 10, 15, 20 years. Typically, the owners are now in the age of 60 something. So there will be a succession plan, and that is a perfect match for them to sell. We can also see that the pandemic has created more reasons for the smaller ones to sell because they have difficulties to give the customers good value since they are not present in China as we are, for example. So we still have a long list of potential targets. And we are trying to contact them one by one and see what we can do. I mean, so far, we have been successful in concluding 5 acquisitions this year. So there are still opportunities in the market. Just a few words on the next page regarding our integration process. We really tried to make all the acquired companies as an NCAB company. We think that's important. So we -- typically, we start on the marketing branding side to make sure that we have the same brand everywhere. And then we focus very much on the employees and on the customers because what we are acquiring is actually customer relationship and good employees with this competence. So a lot of focus is made on putting in our values, our way of working, making sure that the customers continue to buy from us. And often, we can give the customers more benefit because we can have a broader factory base in China, we can support them with broader technology than the smaller ones before. Then we have secured all that, then we focus on the operation, looking into pricing, payment terms, looking into IT systems and finance and so on. And after 12 to 18 months, the target is to have all acquired companies as a fully NCAB company, working in our system and as much as possible, in the same way of working.

On Page 13, we have a slide which gives you a background to where the market is going. And we can see this is the data from Prismark, which is the authority on -- following the printed circuit board market. And we can see that 2021 was a strong growth market for printed circuit boards worldwide with the market growing from USD 65 billion to around USD 80 billion. So -- however, we can also see that whilst the market was growing by some 23%, our organic growth has, in this year, been 39%. So it's a clear testament to the fact that we are growing within the market and gaining further market share. Moving to Page 14. We come back to the fourth quarter numbers. So we can see again here in the summary, the sales, up 90% to SEK 977 million. And if we look at -- in U.S. dollars, which is our trading currency, we are up 87% to USD 111 million. Our profit is up -- or EBITA, up to SEK 121 million from SEK 52 million, so up 132%. And our EBITA margin of 12.4%, an improvement of 2.3 percentage points from 10.1% in prior year. Also then looking at the same summary for the full year. You can see our sales amounted to SEK 3.220 billion, an increase by 52%. And if we look in U.S. dollars, it's USD 376 million, an increase of 63%. Our EBITA at SEK 406 million, an improvement of 113%. And a full year EBITA margin of 12.6%, which is an improvement by 9.6% from prior year. Also then if we move to Page 16, we mentioned in the introduction that we see good growth in all regions, which is very positive. So Nordics growing by some 125%, 44% excluding acquisitions; Europe, up 97% or 57% excluding acquisitions; North America, 64%, up 51% excluding acquisitions; and in East, 40% up. So strong growth in all 3 regions. And we can also see that on the order side, similar growth numbers or growing numbers in all regions equally, with the strongest growth coming from Europe and North America on the order side. And also good and healthy margin development in all of our regions at the same time. Moving to Page 17, we can also see here the top line number and also our gross margin development. So we've been able to grow with high growth and also stable margins. The fact that our gross margin has declined slightly from 2019 is, in fact, only related to the fact that we have acquired companies that have had at the starting point a lower gross margin than the legacy NCAB business. So our aim is to be able to continue to continuously make improvements on our gross margin. Over to you Anders on Page 18.

Page 18. Thank you. So of course, we were really happy to see that we could end a fantastic year with a strong fourth quarter as well and orders continue to grow. I mean we have been sort of thinking that maybe the order will slow down a little bit since we had a lot of extra orders for this longer lead time during the first half of the year. But we see that it continues to grow and we see it continue to have a higher order intake than revenue, which means that we are on a stable market position in that way. So orders increased 55% in U.S. dollar, fourth quarter. For comparable companies, 27%. We have to remember that fourth quarter was a rather good quarter from an order point of view in 2020 because then we saw that the market took off a little bit. Revenue-wise, we saw 87% growth in U.S. dollar. And for comparable companies, 55%, which is really strong development, of course. We can also see stabilized lead time, which means that the orders we take now will be delivered with shorter lead time than before. So that's also a good sign. And that's very positive then that the orders continue on a good level since it's not boosted by any longer lead times anymore. On next page then, we go into the result and EBITA. And the quarter ended up with a very strong EBITA result. Normally, fourth quarter is a little bit weaker because we have a little bit lower revenue in December since many customers would like to have shipments in January, not before year-end. But still I'm very happy to present that we made the 12.4% EBITA margin. I think this is also proof that we have managed the price increases from the factories in Asia in a good way. We see a lot of benefits of scale from the acquisitions and from the higher revenue. And also the acquired companies have actually performed very, very well, and we see good synergies from the integration so far. This means, of course, that the earnings per share will more than double. The only negative part maybe is that we see a little bit more higher working capital. Working capital relationships to the last 12-month revenue is 11% compared to just below 8% last year. But this is due to the freight situation. We need to have more goods in sea. We need to have some more buffer stock and so on. But hopefully, that will go down when everything is set on the freight market. Next page, we go into the different segments. Nordic is, of course, very much boosted by the acquisition of Elmatica, which we did in October. Elmatica will -- so far, they belong to the Nordic segment. There might be some change going forward because a lot of the business is actually done outside Nordic. So the order intake increased a lot due to Elmatica. For comparable companies, it was only 4% as we had a very, very strong order intake, fourth quarter 2020, especially from Norway and from the EV charging market. Net sales, on the other hand, grew very steadily, 127%, including Elmatica, and 46% for the comparable companies. We saw growth in all markets or companies. And we had a strong development of EBITA, which more than doubled. EBITA margin is a little bit below last year's fourth quarter. But if we exclude Elmatica, we end up in 16.9%. So we have actually developed EBITA margin for the comparable companies. Going into next page, Europe, which has been the market that has been growing most. And we see the strongest development both for the full year and also for last quarter. We see a very strong growth in all markets and also very good performance from the acquisitions we have made. Order intake for the quarter increased by 80% to SEK 510 million. And for comparable units, it was 46% in U.S. dollar. And net sales almost doubled in SEK and just below in U.S. dollar. We also see a very good increase in EBITA. So we went from SEK 12 million to SEK 39 million for the quarter. And it's a good margin of 9.6%. So very happy development of the European segment. Going into North America on the next page. Yes, we can see -- I mean, North America has been growing for us. They were maybe a little bit slower in the beginning of 2021. And we see that the growth, both in orders and in revenue, have accelerated during the year. So we end up with 42% growth in orders for the quarter, and the net sales increased by 64%, still a very high number again. And also here, we can see a good development in profitability. So we go from close to SEK 7 million to SEK 22 million. And the main reason is here that we have sort of changed a little bit of the business model of Bare Board Group that was acquired 2020. We have mainly phased out some smaller customers and focused more on the bigger customers. We have also worked a lot with pricing and value add. So the gross margin has increased the number of percentages for Bare Board Group, which is the main reason for the improved profitability. We also have this PPP loan, which was given in 2020. They were sort of forgiven in second quarter to give us an extra boost for the year of SEK 11 million, but the quarter is, of course, not boosted by that. And then we see some growth synergies from the RedBoard Circuits that was acquired in September. East, the market we have for Russia and China. Also here, we can see some good growth numbers. Order intake maybe not as high as the other segments, but here, I think also we saw the big development in fourth quarter 2020. Revenue, on the other hand, is growing by 40% for the quarter. And we still have a very strong profitability despite that we have all the factories sort of close to us in China. But we focus very much on more high-tech and very good service delivery to the customers, which really creates a relationship with the customers and also creates good margin. So finally, then going through some KPIs. Return on equity has been improved a lot. Of course, this is also in connection to the extra dividend we did in December. We do have some net debt now. I mean, we had some positive cash before, but we have done a number of acquisitions, and it's good to see that we are in some debt position that we would like to be. Still have a solvency of 29%. Net working capital, as I said before, maybe it's the only one that goes a little bit in the wrong direction, but we see a certain need now for the freight situation where we need to have more goods in transit and more goods in buffer stock. Still, net working capital sales of 11% is rather efficient, but we would like to be even better than that. And we still have a lot of cash for further acquisitions.

And then finally, summing up by reiterating our overall strategy. So we are focused on sort of continuing to grow and to increase our market shares primarily in Europe, U.S.A. and East. We also have growth opportunities in Nordics, but the main focus is on the areas where we have smaller market shares. We're also working on deepening our collaboration with existing customers. In that, we can provide more value to our customers, which help them be more successful and will also help us grow our margins and create stickiness with our customers. We're also looking for opportunities to expand geographically. That may be adding new markets to the markets we are serving but also strengthening our position in areas where maybe we could add more physical presence. And finally, we are -- as we have mentioned, even if we are in a leading position, it's a very large fragmented market. It gives us opportunities to consolidate the market, and we're actively pursuing acquisition as part of our agenda. And by that, we close our presentation and are open to questions.

[Operator Instructions] Our first question comes from the line of Robert Redin from Carnegie.

On this order intake, I mean, order backlog is increasing Q-over-Q, but could you say something about the average sort of delivery lead time? Is that also shorter now in Q4 versus Q3 so that this order backlog building is also -- there's a double effect in this being shorter than they were in Q3?

I would say that the effect on order lead time is marginally maybe moving. It's not a significant move in the order lead time at this time. Whilst we may see some improvements from factory side, logistics has not really moved that much. So there is no specific effect on shortening lead times on the order book at this time. But we do see some positive signs which may be positive for the future. But in the quarter numbers, there is no impact of lower lead times in the order numbers.

All right. Cool. And over hoarding, that was sort of a theme in Q1 and Q2, but I think already in Q3, you said it wasn't sort of a theme and I guess the same is true for Q4. But how about sort of inventory at your customers' sites? Did you -- do you feel they have high or low inventories compared to their sales levels?

I think it's something that has not changed overall from, say, quarter 3 to quarter 4. I'd say probably generally, many of our customers have slightly higher order inventory levels, simply from the fact that they have lacking components. So sometimes they are prevented from completing their builds and ship to their customers. But it's something that's been, say -- I'd say they're on a slightly higher level than maybe they were historically, but it's not something that has grown -- it maybe grew during quarter 2, and then it's been stable in quarter 3 and quarter 4. So we see more of a kind of normalized order pattern right now from our customers.

And I think also in general, you can see that the customers are really looking for the shipments. And if we have some issues with freight, they are sort of concerned about that. So it's not that they would like to push orders for the future. It's rather the opposite. So I think that the customers see that they have a need for the products.

Right. And orders were up quite a bit Q-over-Q compared to Q3. Is that sort of -- is there a seasonality there? Or was there stronger demand in Q4 than in Q3?

Well, normally, you see some effect of orders being placed in kind of November, December time frame for the Chinese New Year. So typically, there's a little bit of seasonality. But we don't really have huge seasonality in our business. But there could be some small effects there potentially, but we don't really have strong seasonality in our business.

And I think maybe when you compare with 2020, we saw that much stronger in 2020 because then we're expecting the price increases, meaning that we push customers, and customer placed order fourth quarter 2020 to the avoid new prices. We haven't seen that kind of effect this year. So I would say that it's lower seasonality impact this year than last year.

All right. Sounds good. Because the number -- it wasn't a factor, again, for Q4. Okay. So that was not an order effect. I had a question on Europe EBITA margins. If you look at it over a couple of years, moneys have come up quite a bit. And of course, you've got a lot of acquisitions. But what do you say has been driving this move from -- this move of margins moving up by several percentage points?

I'd say it's a combination of activities. Of course, it's about how we are -- we have the fact that we have existing customers where we're growing closely, so we're able to develop the business with existing customers. Then, of course, the significant organic growth is, of course, getting good leverage on that growth to our cost position. The fact -- one of the main reasons why European region has had lower EBITA margins has, of course, been that we've been investing a lot in growth. So we have had a higher SG&A cost compared to, for instance, Europe, where we're much more well established and well known to our customers, whereas in Germany, we are meeting a lot of new customers. And that, of course, is something that has an impact now that we see a lot quick organic growth in Europe throughout the year that, of course, gives a better leverage on our fixed costs.

I think the growth of the revenue is really important here because, I mean, before, we had many companies in Europe that were midsized to small. Now we see that the main companies in Netherlands, in Germany, U.K., Italy are getting rather big actually, and they still have the same kind of management cost and we see higher revenue out of that. So we can find a lot of benefits of scale. Maybe you also can see that new customers are actually quickly to ramp up the volume than before probably due to the pandemic. So I think we maybe have a sort of quicker ramp-up, which boosts the revenue and profitability as well. And maybe even if we have added the same number of new employees every year, of course, they will be a lower part of the total number of employees. So there are also some impact to that. So size is important here to get the leverage.

And we have just one more question from Klas Danielsson from Nordea.

Just a few questions from my side, starting with a follow-up on the lead times. I just want to be very clear. Lead times are still at around that 5-month level in this quarter, right?

Yes, in that 5-month...

Yes. Okay. Good. And then in Q4 2020, they were roughly the same, right?

I'd say lead times actually started growing up in Q1, Q2 last year. That's when we really started to see both -- I mean, in Q4 of 2020. Then we started to see issues from factories, and we started to see price increases being pushed. And then we saw with the rapid growth, both from us and from the whole market growing in 2021, that created strains on the lead times from factories. So we can see that the lead time issue was growing significantly in quarter 1 and quarter 2 last year, and then they kind of stabilized in the summertime, and quarter 3 then was more kind of stable. Lead times no longer extending, and it's been similar in quarter 4, maybe some slight improvements from the factory side, but logistics have been continuously difficult. So compared to Q4 2020, the lead times are still longer now than what they were at that time. But they are maybe not -- they're not longer than what they were in Q1, Q2 of 2021.

They are not increasing, at least. So that is important.

Because in quarter 1 and quarter 2, you can see a part of the order intake which we received was, of course, the fact that they were placing orders with even further out in time. And that pattern has been broken since quarter 3, you can say.

All right. Because if I remember correctly, you guys did have somewhat of a boost from kind of preordering on the price rises and so forth. Correct?

Yes. You can see in Q4 2020, we saw some effects from pricing and Q1, Q2 from longer order lead times. But since Q3, we've actually seen more of a normalized order book.

Okay. That's fantastic. And then moving on, on the new customer growth side, I mean, you've been highlighting that you've been winning for a long time off of the supply chain situation being quite strange. I mean, is the customer growth continuing sequentially here? And -- I mean, looking out once the kind of supply chain situation eases a bit, would you expect any kind of share levels to rise? Or what should we expect from that?

I think what we can see from historical pattern is that the churn is quite low when we win new customers. I think we are very good at retaining customers and business over time. You can lose individual projects, but over time, we normally keep our customers and continue to develop them positively. So we don't really see that risk. And right now, we can see that we have had a very strong continuous pace of winning both new customers and new part numbers throughout the quarter. So all signs in that direction are positive.

Fantastic. Fantastic. Okay. And then on margins and OpEx. I mean, I understand that it's a bit of a lower season and so forth. Margins were down a bit sequentially still. I mean you want to recruit some more to capture growth opportunities as well. Is this showing up in this quarter? Or when should we kind of expect you to have kind of normalize those OpEx investments?

You can partly see this in this quarter, but this, I think, more is related to that the fourth quarter is normally the weakest. I mean we are adding on resources all the time and revenue is normally in the most comparable companies weaker in fourth quarter due to what we said before. Shipments will be more in January. Then, of course, I think during '21, we have had a very strong growth, and we haven't been able to recruit in the same speed. So somewhat -- probably long term, we will like to need more resources to run the business. And of course, we always try to be more efficient in the same time as well. But in some respect, I think we have had a little bit too low cost during '21 to be sustainable in the future.

And as there are no further audio questions, I'll hand it back to the speakers.

Okay. Thank you so much. I just want to remind you that our Q1 report is on the 28th of April and our AGM, which would be only digital, is the 3rd of May. So welcome back, and thank you so much for today.

Thank you.

Thank you.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.