Earnings Call: Q3 2022

Nov 8, 2022

Ladies and gentlemen, good morning and welcome to the NCIB Group Third Quarter Conference Call. All participants will be in the listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Anders Forsen, CFO. Please go ahead. Yes. Hello. Good morning, everyone. I'm happy to present the 3rd quarter results for NCIB Group. I'm not joined by Peter So if you go to Page number 3, a rough summary, we see a rather solid and good demand continuing from our customers. We also can see that the component situation is improving for our customers, which is feels good, of course. We're also very happy to present a record EBITDA result and the highest margin ever for NCIB. All segments is Doing very well, except East that's still struggling after the disclosure of Russia and from the lockdown in China. In connection to our profit, we're also very happy to present a strong cash flow. Since we see lead times decreasing, we also see that our working capital is Going down step by step, which is very good. And we still believe that we have a positive acquisition climate going forward. So overall, a very positive report from our side. If you go to Page number 4, you can dig in some deeper in the numbers. We reported a net sales of SEK 1,168,000,000, Which was a growth of 35% or 10% in U. S. Dollar. Organic growth, taking away the The acquisition impact, it was flat in U. S. Dollar but increased from 23% in SEK. We see still order intake at a Good level. I mean, we still have a situation where we had very high order intake during 2021. And we also had a situation right now where The lead time is going down, meaning that customer doesn't need to order as much as before, so we can deliver on the previously made orders. So we are very happy with the situation even if you can see a decline in U. S. Dollar. Also very happy I see that the integration of our acquired companies is doing very well. We see the synergies we have expected, and that also adds on to the improved EBITA margin. And EBITDA reached SEK 184,000,000, an increase of almost 50% compared to Q3 last year. And we also are very happy to report the high EBITA margin, 15.7%. To some extent, it is connected to the stronger U. S. Dollar since we are buying and selling U. S. Dollar and have a lot of operating costs And finally, of course, the very strong cash flow. I mean, we have so that the SEK 212,000,000 is a strong number and connected to reduced working capital and a strong profit. So next slide then, a short recap of NCIB. I mean, what we are producing is the bare board that you see And of course, what is important to note that we don't own any factories. We only have relationship with the factories and with the customers. And also at all PCBs or printer circuit boards are customer unique or product unique. So it's not the shelf goods that we are selling. And then next page, we work in our niche, which we call high mix, low volume. And that's the area where we can add much more value. I mean, that's a higher product value. It's much higher demand on quality, less price pressure, and it's more difficult to buy directly. So that is the area where we can So to really give our customers a good added value. And I mean, TCB market global is about USD 80,000,000,000 And we say that the high mix low volume is something between 25% 30%, meaning that we still have less than 2% market So there's a lot of opportunities to continue to grow in the PCB market. And it's important to be in the right area where we see we can make profits. Going into the next slide, talking about more about sustainability. This is, of course, getting more and more important. I think we have to note that NCIB has been working tends to be with sustainability since 2014. We do a lot of work together with our customers. We're having a lot of seminars. We are Discussing with customers how to design and how to produce the printed circuit boards in a more sustainable way and so on. And the important part is that we can actually Prove that what we are saying is true with the factories because we have more than 3 people in China working only with Sustainability Audit. Are visiting our factories on a daily basis. We are doing audits. We can control that everything we say is actually true and not just a Note on the paper. And of course, choosing the right factory from a sustainability point of view has been more and more important. And as you said, being on-site is crucial. So I think we can take this many, many steps further. And we also started to mention now the energy consumption, the water waste from the factories, so we can, together with customers, Really make sure that we might make the right show choices to have a better sustainable production. Going forward to the next page, a little bit of our industrial segments. As you see, we're not working with consumer products. We're much focused on industrial, medical, telecom and power. And what we say in Power is a lot of EV charging. That is an area that is improving a lot. Also on the customer mix, It's very, very healthy. I mean our top fifty customer represents only 44% of our revenue and the 2 biggest customer, about 7%. We have a very good mix. And also the bigger customers have several sites we are working with and often in different countries. Next page, a little bit about the story of NCIB that started in 1993. And then we set up a number of greenfield companies around the Europe and then USA from 2012. And we have, since 2000 8 had an average growth of 20%. And after the IPO in 2018, we have intensified the work with more acquisitions I've seen the synergies from that kind of growth and also have a CAGR of 29% since the IPO. And the last acquisition, 2022, has been Mirtha in January and Castral in the UK in Going forward to next page, we can see the numbers for the quarter. As we said before, we're very happy of this number and see the So as we said, we reached SEK 1,168,000,000 in net sales, an increase with 35%. If we measure U. S. Dollar, it was an increase of 10%. EBITA was close to 50% improved from last year, up to and we have improved our EBITA margin at 1.4% units. If you look at the next slide, we see the numbers, January, September, which are almost the same. I see the growth is about 53% in SEK and 31% in U. S. Dollar. Also here, we see that EBITA has increased a lot, 72% compared to 1st 3 months 2021. And that is, of course, connected to a strong growth and improved EBITA margin. And the EBITA margin comes very much from the scale impacts from the bigger revenue and the acquisitions. And on next page, we go into the different segments. Except for East, we see very positive development in all segments. Nordic is improving revenue with 49% and almost flat in Airbus and Air Kilsen acquisition. Of course, it is still Marthika acquisition that drives the growth here. EBITA margin continued to be in a very high level, so 18 0.1% in Q3. Europe, also good growth, 14% income acquisitions and almost flat without. Also here, we have seen the improvement in the EBITA margin continues. So we are proud of the 13.2% in Europe. North America also growth both with or without acquisitions and a healthy margin. Eastern, of course, we have some issues. We know that we closed down Russia in April, but we also see declining revenue and order intake for our Chinese Malaysian operation, mainly due to the lockdowns in China. On the other hand, the business we are doing in China is very profitable, And we keep up a very high EBITA margin. Going into next page, you can see that the revenue continues Increased year by year, and we are in a position where we can continue to also improve gross margins. So we see that we have an improvement compared to 2021. A little bit lower numbers for 2020 2021 is mainly driven by acquisitions We did during those years with lower gross margin, and we can see a positive trend in almost all those companies where gross margin is improving. Going back next page, number 14. We see growth in net sales, 10%, NSEX 35%, as I said. Comparable companies almost flat in U. S. Dollar. We see the order intake, as I said before, is Decreasing in U. S. Dollar, but we see a growth in NPS. And the main reason is, of course, that we had all this order Low that during last year and now we see lead times going back to more or less normal. So we expect that from Q4, we are in a normal position Orders in Q3, about SEK 75,000,000 2021. And if we count on that, we see an increase in SEK 16%. On the profit side for the group, EBIT, as we said, increased 49% to SEK 184,000,000 And EBITA margin increased to a new record high for us of 15.7%. We also have been working a lot with reducing working capital. We see that inventory is going down due to shorter lead times, which has resulted in a very strong cash flow of over SEK 200,000,000 for the quarter. And also earnings per share was up from NOK 0.49 to NOK 0.74 in the quarter. Let's continue then into the segments on the next page, starting with Nordic. As we said, we continue to see a good growth in order intake. Of course, this is driven by the acquisition of Elnautica, which was made in beginning of October last year. But we also see a strong development in Denmark and Norway. We also here can see that it is a lot of EV charging applications that's driving the growth for those countries. Net sales were up 49% in U. S. Dollar and 84% in SEK. And EBITDA increased from €32,000,000 to €56,000,000 And also here, we saw a stable EBITDA margin Between the quarters. But anyway, we are very happy of the performance of the Nordic countries, and we are very confident that this will continue on this high profitability level. It's also good to see that we have been able to integrate the master care in a good way and see some cost synergies going forward. Going into Europe. We see a net sales increase of 14% in U. S. Dollar And with about 40%, if we measure in SEK. We see also here strong growth in our bigger customers like Germany, Netherlands Order intake was here as well down in U. S. Dollar but flat in SEK. But also here, we had a very high extra order intake during 2021 and in the Q3. NPEA continued to increase. We are up to 13.2% for the last quarter. And here, we see some good synergies From the scale impact and also from the acquired company. And we are happy to see that we have been able to onboard The Kestrel acquisition made in June in a very good way. And we have seen that we have got new prices from our common factories from already from August. We have got new payment terms extending out from some 45 to 90 days, also valid from all orders placed in August going forward. So we see a very strong synergies in that part. Going in for North America, We see here as well an increase a decrease in the U. S. Dollar in order intake, but in SEK, it was a small increase in orders. Net sales, on the other hand, grew 7% in dollar and 32% in SEK. And if we exclude acquisitions, it was more or less flat Also here, we see a strong development of our EBITDA margin and EBITDA. And the main reason is that we are have been working hardly with the gross margin from the BBG acquisition made in 2020. So I think in average margin, gross margin had gone from some 20%, 21% to well about 30% now for all customers. So been a hard work with that one, but that has really paid off in the higher profitability in the U. S. Market. We are very so proud of the team in U. S. As well doing good there. Okay. Going into next slide and looking into East, sort of The segment where we see some issues are not growing. Of course, first of all, it was that we stopped all our sales to Russian customers in February, And then we decided to divest the business in Russia in the beginning of April. It was sold off to our local management in Russia. Of course, that has an impact on the development in the segment, but we also see a slower activity in China. A lot of customers are in lockdown, and then there are some issues to be meeting customers and so on. So we have seen a decline in order intake for the comparability of Nisbett, 34% in dollar. And revenue is also down compared to last year. On the other hand, we have been going to take good business, And we are taking the right kind of business with high margin and high profitability. So we're still aiming to report a good EBITDA margin and EBITDA in East. And as you said, a lot of factory a lot of the customers are in lockdown, but we have not seen Same kind of problems in the factories. There have been a few factories which have been in lockdown, but more or less the production works well. So we don't see any issues or hiccups on the production side. Continuing with next page then, Possible acquisitions going forward. We're still working and building up our pipeline with companies where we are focused on mainly in U. S, Europe, but also starting to look into Southeast Asia, we see a number of companies. We have found a number of interesting Potential acquisition targets also in that region, and we also see that as a big growth area. So that could be interesting going forward. Next page, a little bit of how we work with the integration of our acquired companies. It's, of course, important to make sure that we Take care of the marketing, the branding, used the NCIB brand rather quickly. We focus a lot on these customers and on the sales, make Sure that the customers understand and see the value of being part of NCA or customer to NCAB Group and of course, work with employees to make sure We can keep and attract the good people. Then we look into the operations like IT and Finance and find some scale advantages. And very much, we see also a huge advantage with our big team we have in China and Taiwan. And with the support from that team, we can often Find better factories or have my more high-tech factories or better position at the factories, which will be And the improvement for the customers of the acquired companies. And we say that within 12 to 18 months, all acquired companies should be fully NCAB office. Next slide, some other financial KPIs. Once again, strong return on equity, Up to 42%. Net debt over EBITDA, 1.0%, little bit higher than last year, but still down compared to last quarter. Solvency, over 35 percent net working capital, we see a positive trend where we reduced working capital, Which also means that we have working capital relationships for the last 12 months sales is down from 11% last year to 10% right now, and we expect that To continue, the strong cash flow has also mean that we have seen have a good firepower for further So we have available cash of NOK 950,000,000 together with the new bank loan from Nordea that we also have So we are in a good and strong financial position. As presented 2 quarters ago about our new financial targets, we said that In 'twenty six, our target is to reach SEK 8,000,000,000 in revenue and SEK 1,000,000,000 in EBITDA And that we should not have more than 2x net debt versus EBITDA. And also that we should try to have a really good dividend policy We'll try to distribute available cash. And we believe that we are in a good path to reach these targets. And how to grow them on the next page. We still believe in our 4 cornerstones to grow the business. Of course, increased market share with the customers we have in Europe, USA and East. I mean, in many markets, we still have a low market share. A deeper collaboration with existing customers is sort of an easier way to grow with the customers we have. Expand geographically, it can be into new markets, new areas, new states in U. S, for example, and of course, acquisitions due to Consolidation of the market. So we are working on all these four pillars to continue to grow the business, and we see still good opportunities. So a quick summary of the quarter. Now we go back to some Q and A or questions. So should we start the floor for questions and answer? This should be move on to the Q and A. Mr. Forsen? Yes. So should we start the questions and answer? Yes, yes please. Sorry, I misunderstand that. Yes please do. Thank you very much. We will now begin the question and answer session. The first question comes from Paul DeChery from Arc Advisors. Please go ahead. Yes. Good morning. Thank you for taking my question. And Please pass on my best wishes to your CEO for a speedy recovery. I've got 2 questions, and I'll take them in order. You mentioned in your report that you're taking market share from competitors. Could you give some more details? You mentioned in your investment materials, your main competitors are FineLine in Germany, Itik France, PowerPilot in USA. Are these the competitors you're taking market share from? Can you give any more detail on the exact competitors and also which regions? And how you see this, Valentin in the future and why? Yes. Of course, it's difficult to say exactly from who we're taking market But we can see that we, in all markets, in general, are growing faster than the market in general. So that means that we believe that we're taking market And of course, it's difficult to say if it is from the other big players. I guess that it is locked from smaller players or Partly direct purchase in China and so on. It's a bit tricky to know if it is from finance or from someone else, but We can measure and see that we are, in most markets, growing quicker than the market in general, and that's the sort of the proof that we believe is taking market share. And we believe as well that using the best factories that we can do to our size, it will continue. And we also see that Many smaller players are struggling. They are not able to visit the factories in China as we can do. I mean, we have so many people Based in China and Taiwan, meeting the practice all the time, which always in prioritize us in some ways. So that makes It's easier for us to do good business and deliver on time to the customers. Okay. Yes, that makes sense. Thank you. And my second question, and forgive me if I've misunderstood this, but you said in the presentation today that your customers in China Are not affected sorry, your customers in China are affected by lockdowns, but not your production or suppliers. Can you tell me why that would be the case that you've got no problem sourcing the product, but your customers are having problems ordering? Yes. I think I mean, the most PCB factories they're using are in the southern part of China, and I think they have been less impacted than, for example, the Huang Hai, Suzhou area. And also, I mean, if there are some outbreaks of COVID in some of the cities, Many of the workers in the PCB factories are living in dormitories and in the factory, which means that they can continue production. So even if the city area located have been in lockdown, the production has not been harmed because We have so far not had any outbreak of COVID at our factories. So that is one reason. And I think the customers Main customers here in China are located in the Shanghai Suzhou area where there was much more lockdowns. So we think that is one of the reasons. Okay. Many thanks for answering my questions at all. Okay. Thank you. Thank you. The next question comes from Klas Danielson from Nordea. Please proceed. Yes. Thank you very much. Thank you for taking my questions. Please tell Peter a And so starting with the question on the order side. I think the effect from lead times It's quite clear and you explained it quite well. But I guess it's also been burdened a bit by over ordering in earlier quarters. And I was just wondering, Could you maybe detail where you think you would be adjusted for this as well? And maybe when do you expect it to return to organic year on year growth In the order side as well. I think I mean, as we said before, we are sort of hit from 2 directions. 1 is, of course, that we had some Extra orders last year, which we calculated was roughly SEK 75,000,000. And then we also see now that Customers are not ordering due to that we are delivering out to the existing order book. I mean, we have a number for example, we have a number of forecast orders where we they placed sort of yearly forecast for us and then we accept the orders. And we did that for 44 weeks Before delivery time, a couple of months ago, when the lead has a long, now we're down to 22 weeks. That means that the number of customers with that kind of We have more or less sealed the order intake this quarter. So there is also an impact on that side. But we believe that, that will ease up right now, And we think also that we are back to a normal position from this quarter for Q4. So we see that with this Most of the orders taken last year are now delivered, and we believe that we are back in a more normally type situation where we can See this quarter by quarter development. Okay. So looking at Q4, should we expect a more or less flat organic growth In comparable numbers or is it still burdened, I guess, a bit by the lead times in Q4 2021 being a bit higher? Maybe slightly, But I think, I mean, that might be fair to guess close to fast development. That's good. That's good. And then secondly, I guess the only weakness on the net sales level apart from It's quite obvious, I guess. That's in the Nordics. Could you maybe detail a little bit what's behind the decline? Give us some color on the outlook there? Is it just tricky comparables? Or is there anything certain in the Nordics? It's mainly strictly comparable. We maybe have seen some kind of slowdown in the Swedish market. I would say the other markets is going rather well. You also note that some of the business from El Malteker that we acquired 1 year ago, they have a lot of business Hi, the Nordics. And we are step by step now trying to move around a little bit to make the business land in the right segment. So It's not very much impacted this quarter, but might be some minor impact that we have moved business from Nordic to Europe. But that's a minor impact. Okay, okay. That's interesting. And then maybe as well because you talk a bit about it During this presentation on the different growth rates and so forth in each customer segment, so for instance, looking at Power and so forth. Could you maybe detail or give us some extra color on what is the type of growth in the Power segment? Do you expect that to be A bit more cyclically sustainable, for instance, or if you could maybe give us some idea there? It's of course tricky. What we can see is that we get more and more customer and more and more projects in the EV charging area. I mean, we started maybe 2 years ago with the ISE and SUBTEK in Norway, and they were the main drivers. And then now we can see that we have More customers in Sweden coming in. We have more customers in Germany. We have in U. S. A few. We have in Netherlands and in Italy. So we see more and more projects coming in for you, Sharjah. It's difficult to predict exactly how much it is in this. We don't measure it That's well, I would say. But what we see the trend is radically as we see the growth in that area. And there are also much more interest now in energy control For a lot of heating system, solar panels and so on. So there are many projects, you see, still in a very low level, but we are in discussions with many Pleasure to that, Paj. So of course, there will be a big interest in the Energy Control sector and Green Tech area going forward. Okay. That's perfect. And then looking at China, I think it's a rather interesting topic at the moment, so with regulation and so forth. So Starting on the side of the U. S. Restrictions on ship sales and so forth, I know that you supply, I don't know, not the most intelligent equipment, so to speak, but could you maybe detail if you're expecting any kind of spillover effects or so forth or what you're seeing from this? We haven't seen any kind of that. I mean, we have not seen any PCB factories in It was growing or expanding. Of course, we see that the existing PCB factories are already fully loaded in U. S, But we have not seen anything that someone would invest in new production capacity. So from that range, we Still believe that the Chinese production will be very valid. I mean, there are a lot of talks of building production capacity The semiconductors and understaffed in Europe and USA, but so far, we haven't seen anything spillover for the PCB. And what could happen in some way is that the PCB assembly will be done more and more in Europe and U. S. A. And then they need the PCBs. And it might be easier for us to sell to those customers in Europe and USA, that is China. So yes, It could be a small positive impact, but we haven't seen any negative impact so far at least. And just kind of follow-up on that. I guess, it's do you think your kind of competitive advantage and the Reason for NCIB Existing is less on the production of these were to move more To Europe from China and to, I guess, other Asian parts or whatever? Or do you think the kind of more tricky Industrial picture makes for still some quite good opportunities for you to keep your advantage or If you understand what I mean. I think, I mean, the more high-tech and the more a lot of there will still be a lot of high mix low volume assembly work in Europe, And of course, then they need good support from supplying the PCBs. So we still believe that, that will be good opportunities for us to support that. If we see more assembly, and I think you're going to see in the menu, the EMS companies are also growing rather well. That means also that our customers are growing, Which means that there are a need for companies like us. So we foresee positive markets going forward there as well. Okay. Fantastic, Anders. Thank you very much for taking my questions. That was all for me. Yes. Okay. Thank you. Thank you. The next question comes from Robert Reddin from Carnegie. Please go ahead. Hi Anders. Just maybe I missed what you said, but on North America and the margin share of 17% in the quarter. Was there something sort of temporary positive there? Or what were the drivers to the strong margin development in the North America segment? I would say the main driver is that we have been constantly working with the gross margin from the Baobol Group acquisition in 2020, and we see a positive drive quarter by quarter, and It was extremely good here in the 3rd quarter. So it's no really onetime impact. Then I know that we have had Some really high margin business on the West Coast for some customers that could have, Of course, push this to this top level. But in general, we have been working very much together with our See even improving in gross margin for the customers, so that is the main reason. So if 'seventeen is sustainable, I won't promise that, but we will be on a Higher level than before. Sounds very good. And I saw you had similar Comments about El Martica. So it seems like those larger acquisitions, they worked out really well in terms of the Modern Development post acquisition. Yes, they have excellent. Yes. And in the in Moscow case, we also have reduced some head We have seen some work there. So we have been much more efficient on the cost side and when we are operating. I mean, they were sort of a mainly group. And now we have some headcount left, which were rather expensive on the payout side. So that also gives some profit improvements going forward. And on acquisitions, you wrote that your pipeline is strong and that you have a lot of Discussion is ongoing and so on. Are you seeing any acceleration in that At the moment, I'm thinking about maybe other buyers being less interested in buying companies now if they have Rickey balance sheets and so on. Are you seeing any changes there in the trend? No, no, not really. I think maybe We see the same kind of interest in the ones we have been meeting and talking to. We still try to approach a number of companies, and It's not easy to get a good dialogue. And of course, it sometimes takes some time before decision is made by the seller. But Still see it's very positive. And I think that many of the companies we are talking to, they see a lot of hassle by not being able You've traveled to China last couple of years. So so they see huge advantage and possibilities to joining our group in that way. There are some more reasons for them to sell back now than maybe 2 years ago. All right. Sounds good. That was all from me. Thank you. Thank you. Thank you. This concludes our Q and A session. I would like to turn the conference back over to Ms. Ganila Uman closing remarks. Thank you. And thank you all for listening in. I just wanted to kindly remind you that Our Q4 report is on February 17, next year, 2023. So Have a good thank you. Thank you. Thank you for listening. Thank you. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your