Welcome to the NCAB Q2 presentation for 2023. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. I will hand the conference over to the CEO, Peter Kruk, CFO, Anders Forsén, and Head of Investor Relations, Gunilla Öhman. Please go ahead.
Good morning, everyone. My name is Peter Kruk, and my colleague, Anders Forsén, and Gunilla Öhman, will do today's presentation. Starting by looking at some key takeaways for the Q2 . We have seen generally weaker markets in all of our regions. Net sales and order intake are decreasing, mainly because of lower pricing, but also inventory normalization with our customers. We can see Nordic and European regions performing slightly stronger, you also have pockets, markets like EV charging markets and aerospace and defense that continue to perform well. Despite the lower top line, we have developed and improved results with higher margins and good profitability. We've been able to offset lower pricing with record gross margins, and with that, we have a strong EBITDA, which improves year-over-year despite the lower top line.
We have also, in the Q2 , concluded two acquisitions of Phase 3 Technologies in the US and DB electronic in Germany here in early May. Here the integration process has been initiated. As continuing from previous quarters, we've continued to improve our cash flow. Our working capital has continued to decrease, which builds a very strong, healthy cash flow. Beside the two acquisitions we concluded, we have a very promising pipeline of M&A targets and continued discussions ongoing. Looking at some key figures, net sales decreased by 6% to SEK 1 , 057 billion . The order book in from 2022 has continued to support net sales in the quarter. Our organic growth for comparable units is down 14% in Swedish krona.
Looking at the order intake, we also see a decrease by 11% to SEK 924 million. That corresponds to an organic decline of 19% in SEK. Again, as we mentioned, largely tied to pricing changes and inventory adjustments. EBITDA still reached SEK 168.2 million, which is an increase by 5% over last year. That generates an EBITDA margin of 15.9%. One should also bear in mind that in the quarter, we have taken additional transaction costs related to acquisitions of SEK 8.4 million. Factoring that out, our EBITDA margin would have been at 16.7%. Gross margin, as reported, was very strong.
It was a new record level of 36.4% versus 31.3% in prior year. A very strong cash flow of SEK 153 million in the quarter as well. As we mentioned, we have two new acquisitions. We have DB electronic, which is based in DACH region, so Germany, Austria, Switzerland, and we have also Phase 3, which is based in Silicon Valley, which both represent two key markets for NCAB. Both these companies complete complements our existing business quite well. Their focus is very much on quick turns, so shorter series, prototyping work, development work, and quite often this can also be a important first step for new customers. With these customers, we see opportunities to also grow sales of volume production for these customers.
Combined, they will add some 350 million SEK in a yearly basis. Brief background around NCAB. We are a company focused solely on printed circuit boards. We are serving demanding customers, supplying them on-time deliveries with zero defects, produced sustainably at the lowest total cost. We believe in serving our customers locally. We are operating with local companies, serving their customers in their markets, but we also have a strong factory base. We are using only with factories, outsourced productions. We have no in-house manufacturing, but we have a strong manufacturing team supporting the production in those factories.
We describe ourselves while we don't have in-house production as an integrated PCB producer, where we have a very strong presence with the customers, providing them with technical support, but we also have a very strong factory presence through our factory management team, which represent more than 120 people in our total organization. From that perspective, when a customer deals with us, they are dealing with us as we would be in full control of the full supply chain. Our focus is on demanding customers, and we are also focusing on what we define as high-mix, low-volume segments. These are typically customers whose product value is quite high, where the printed circuit board is a smaller item of the bill of materials.
They still have very high demands on quality in their products, and given their volume, even though they might be globally leading companies in their specific fields, in terms of printed circuit board needs, they have struggling to get access to the leading factories due to their small volume consumption. By using us, we can consume, combine many customers' needs and get access to the leading factories. This, being in this segment, also gives a lower price pressure for us to operate in. Anders, will you please take over?
Yes, absolutely. This is, take a look on the growth journey that NCAB has done. I mean, the company started in 1993, started mainly in Nordic, and then grew more and more into Europe, and then with some acquisitions in U.S., 2012. We have been growing all years except 2009, when the financial crisis was. We made the IPO in 2018. Looking at the growth, we have about 21% annual growth since the last 10 years, and about 25% since the IPO.
Also after the IPO, we have done a number of acquisitions or increased the speed of acquisitions, which is a good way for us to grow the market, take on good customers, and be able to grow them organically, and also to get hold a lot of good people. Coming back to the numbers for the Q2 , as Peter said, we saw a small decline in revenue, about 6% measured in SEK and 12% in US dollar. Despite that, we are very happy to see that we can continue to improve our EBITDA. We reached 5% higher, up to SEK 168 million, which represents 15.9% EBITDA margin.
In this number, we also have SEK 8.4 million in transaction costs for the two acquisitions. The underlying EBITDA margin was actually 16.7%. Looking also in the revenue side, we see a price decrease in the market, so at least 50% of the drop is connected to prices. Take a look on this picture, then we see that we saw a little bit drop in revenues, as I said, but we managed to offset very well with improved gross margin. During the quarter, we reached over 36% gross margin.
That means that even if we see a lower revenue, we actually improved our gross profit by 10%, meaning that is a strong way for us to continue showing good profit and healthy results for the market. A little bit the reason is that we see that the factories in China have very low utilization. I mean, they have built a lot of new capacity after the pandemic, and also there are a softer market, especially on the consumer side, which means that a lot of factories are really chasing for volume, and that means also lower prices. I think we have been able to, as in the same situation as previous years, when we have this situation, we've been able to really use that and improve our gross margin to compensate for lower prices.
We can see that even if you see a lower top line, we see gross margin going up. Yeah, I think we mentioned most of these areas. The net sales was down in US dollar for comparables, 12%, and order intake decreased by 11%. Book-to-bill, 87%. As I said, it is little bit volume from inventory adjustments, but it is big part of prices. We are also very back to the lead times that are very normal now, and lead times are maybe shorter than normal due to the situation at the factories. And as we have mentioned, I mean, we have been able to keep up the result and even increase the result.
As I said before, we have added about SEK 8.4 million in transaction costs for two acquisitions, and we are also investing in new IT platforms that is planned to be launched here during Q4. That has also added some extra costs, about SEK 10 million for this quarter, which was not there last year. If you take that into consideration, the result might look even better. Importantly, to see that even if we have lower revenue, we have improved or increased our gross profit. We continue to see some advantages from scale in the European segment and also US, where we managed to improve our profitability. We continue to work hard with the working capital.
As the logistic is working much better, we don't need to have the buffer stock, we don't need to have so much goods in transit, we're able to constantly improve our gross, our working capital. Earnings per share was down compared to last year. Last year, we had a very strong positive currency gain in the result. That amounted to the strong result last year. Peter, back to you.
If you start looking at our individual segments, looking at Nordics, here you have first an explanation. We have some business that in 2022 was all booked as Nordics, which from 2023, split within Nordics and Europe. If you look upon adjusted order intake, we are also here seeing a decrease by 15% to SEK 242 million. Net sales decreased to SEK 207 million, which is a decrease by 10% for comparable units in Swedish krona. Within the Nordic countries, you can see Norway performing slightly better than the other countries at the moment. EBITDA is down compared to last year to SEK 45 million versus SEK 59.7 million. If we were to, again, factor out the adjustment of business being moved out, we would also show an increase here.
in the Nordics year-over-year, our EBITDA margin improved from 19.9% to 22% in the quarter. Europe then, who then receives some business from previously Nordic, shows an adjusted net sales for comparable units, which decreased by 11% and 70% in USD. Order intake, at 513 million SEK, adjusted, it was again, also showing a decrease by 16% and 20% in USD. EBITDA, however, increased to 94 million SEK, corresponding to a margin of 15.4% over 12.4% in last year. Moving over to Americas, you could say Americas and East are our countries or regions, which are seeing the biggest sort of challenges right now.
In the US market, we see we have a higher share of contract manufacturers, and their sort of adaptation to shorter lead times and reducing inventories is creating kind of bullwhip effect, which has a bigger impact on our order intake and net sales in that region. Our order intake decreased by 40% and adjusted, if we're factoring out the additional Phase 3, it decreased by 30% to SEK 242 million. Net sales decreased by 11% and adjusted, excluding Phase 3 comparable units, it decreased by 24% to, in Swedish kronor. EBITDA still increased to SEK 31.6 million over SEK 30.3 million, and our EBITDA margin increased to 17.3% over 14.8% in the quarter. East, clearly, this is the region where anticipations were higher.
I think we started to see off in during Q1, as the pandemic restrictions had been lifted, we saw a lot of customer activities picking up. As we can see, and we can also see in global PMI indexes, the manufacturing industry in China is still not picking up. It's primarily service industry that's picked up in China, and that has had ripple effects also to the other regions who are trading with China. We can see order intake has decreased to SEK 43 million, over SEK 60 million previous year. Net sales decreased by SEK 28 million to SEK 56 million, and EBITDA decreased to SEK 10.8 million versus SEK 12.6 million. We were able to preserve or actually improve our EBITDA margin to 19.2% over 18.9% in 2022. Anders?
Thank you. I mean, this market situation gives us even more opportunities to be in good discussion with further acquisitions. Of course, we are very happy that we managed to close Phase 3 and DB in the Q2, and we are in a number of really good discussions for further acquisition, especially in the European market. I think many other smaller competitors face the same market conditions, and of course, they don't have the same ability to negotiate on prices and so on as we have, so they are struggling much more. This opens up for possibilities on the acquisition side, where which will boost growth further on. We have right now about 44 companies that we have shortlisted, and as I said, we are in a number of discussions.
Of course, it's difficult to know where they will close or when they will close, and if and so on. I think we are in a good position. We also have a very strong financial, strong balance sheet, which means that we are well geared to continue to invest in further growth for both organically and through acquisitions. Just some other key figures, I think we managed a good return on equity, almost 40%, and a little bit down compared to last year, but it's mainly due to much higher equity. We still have a very healthy net debt versus EBITDA of 1.2. We have said not to have more than 2, so we have still more headroom to grow there. Strong solvency of almost 38%.
As we said before, we have been able to reduce our net working capital, so we are now down to SEK 419 million versus over SEK 500 million last year. That means also that net working capital relationship to last 12 months revenue is down to below 8. I think this also shows that we have a very, very strong flexibility, and we can manage all different kind of market situations. Still, we have over SEK 700 million in firepower for further potential acquisitions. I think we are in a very good shape. Okay, Peter?
Yeah. Oh, sorry. Bringing back our financial targets that we launched in 2022, we are aiming to get to 8 billion SEK in turnover in 2026, with an EBITDA of at least 1 billion SEK. We also aim to keep our net debt over EBITDA less than 2 times, and we expect that to be in the order of around 50% of net profit.
Whilst 2023 is the market conditions are proving to be more challenging, we have a strong belief in the long-term growth opportunity for the company and for us to reach our financial targets. Overall, our strategy, we have a strong position, and we are continuing to focus on growing our market shares in the markets where we already have a presence. We are with our customer, then developing our relationships. It generally means that we will increase share of wallet with customers, but also move up in terms of the services and technologies we work with our customers, and with that, also grow our margins with them and the value we provide them. We see a lot of opportunities still to continue to expand geographically.
The acquisition of Phase 3 greatly is an excellent example of this, which strengthens our position in the American West Coast. We also see a lot of opportunities to consolidate the market. It is an extremely fragmented market still, with a lot of opportunities for consolidation, which we will be exploring. With that, we open up for questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. It is also possible to post written questions via the webcast.
Hello, it's Johan from DNB here. Happy to see EBITDA improving given the environment.
The next question comes frm Johan Skoglund from DNB Markets. Please go ahead.
Hello, it's Johan from DNB here. Happy to see that EBITDA is improving given the environment you're in. My first question is about some more color on current order and price trends. I mean, in what magnitude are prices down, and are they down across all segments?
Yeah, you can say that, yes, there is a predominantly, it's Asian manufacturers are clearly down. You can see that there is still cost inflation upwards in some of the European factories. But in Asia, the drop in, I think, the larger, the weakness in the Chinese economy locally, as well as some of slower world economy, has had an impact on the factory loading. The reaction generally from factories will be to try to keep their production running and maximize that. Producing printed circuit boards is a capital-intensive industry, and there are also certain processes which you will not want to sort of shut down or run intermittently.
With that has led then to a price decrease in the market. We believe at least maybe half of the decline we are seeing in our top-line numbers is related to pricing overall.
Okay, very good. Even though you have lower volumes in the quarter, have you added any new customers in the quarter?
Yes. I'd say actually, the progression of winning new customers, as well as winning new part numbers is very positive. That, of course, bodes very well for our future long-term growth. As always, with us, winning new customers, it's a slow business growing with new customers. Winning new customers does not really impact very much the sales within the given quarter, even maybe sometimes the given year. Actually, you will see the volumes one or two years later in the numbers. What we're winning now in terms of taking market share, winning new customers and projects, is very positive for the long-term growth, but has little impact on the next one or two quarters.
Okay, good. Are you still seeing decrease in prices now in July? I'm realizing it's only been a month in Q3, but are you seeing any signs of stabilization?
I think we're coming to a situation where prices will not move down very much unless there is something happening in the currencies which would sustain that. I think the factory situation is not sustainable for the factories to be running at the current pricing they have. I think this has been more of a short-term bridge for them. We don't see really indications of further movements on the pricing, but prices still remain low. We don't see a rebound yet, but long term, it will not be sustainable for the factories to remain here. Over time, we do expect pricing, as well as then probably our gross margins to normalize.
That sounds surprisingly positive. Just for my last question, are you able to say anything about customers' inventory adjustments? Are they still ongoing? How much would you say is left, if you can comment on that'll be helpful.
I would say it's still ongoing. It's difficult to say exactly where they are. I think we did a lot of improvement of our own working capital throughout 2022. I think a number of our customers are on that same journey, but maybe a few quarters behind us. It's a mixture. I think we start to see some effects of that, maybe already partly in Q4 from customers. I expect that we will see effects from inventory adjustments in the next one or two quarters as well, but hopefully, we should expect that to start to be declining.
Okay, very good. That's all from me. Good luck with Q3, and I'll speak to you soon.
Thank you.
Thank you. The next question comes from Klas Danielsson from Nordea. Please go ahead.
Yes, good morning. Thank you for taking my questions. Just starting out with a follow-up here on the pricing side. I, you know, I appreciate markups are increasing by quite a bit, which is impressive. I was just wondering, are you, are you seeing any sort of pushback from customers on the pricing side currently?
I think we have to be fair. I mean, prices are going down, so we are giving price downs also to our customers. Of course, we are taking care that we are protecting the gross profit to have a cost coverage for what the services we provide. In that perspective, we are in dialogue with our customers, and we are being able to generate savings for our customers. In that process, we are still being able to preserve a healthy gross profit for ourselves.
Yeah, they, I mean, correct me if I'm wrong, they do have quite decent visibility on your purchase prices, right? In the order phase.
No, not really.
Okay.
I would say not. Of course, the customers also know about the market situation, and they know about the pricing changes that happens in Asia, but they do not have really any transparency to our purchase prices. Of course, they do know the market situation in general and understand that the pricing is going down.
Yeah, cool. Just wondering on the gross margin and sort of the improvements that you're seeing. I mean, you mentioned part of it is that you're renegotiating and improving your pricing structure as well, due to the situation being what it is. Just trying to understand here, what is sort of sticky in these gross margin increases when those purchasing prices start to normalize?
That is, of course, somewhat difficult to exactly judge. I mean, if you look back on our history, we are continuously working on, sort of adding value to our customers and improving our margin over time, and I think we've done that successfully, as we can prove through our history. Right now, we are seeing sort of specific effects where purchase prices are dropping fast, and say part of that is being sort of transferred immediately to the market, but some of it is being pocketed. As I guess, if we would have had a normal situation, we would not have seen this kind of margin increase. We may have seen sort of more the traditional move up that we've seen historically. It's a bit hard to understand exactly how much of this may go back.
We expect a big part of it to go back, if we would have been in a normal market.
Okay. Okay, that's fair. Just, you know, backing out a bit and then, you know, looking at net sales growth over the last, I think, five quarters here, we've seen negative growth, and I appreciate you have really tough comparables in 2021, and then you're seeing some of these inventory pricing issues and so forth. Could you maybe help us understand, sort of barring a significant macro drop, which is an outlier here, I guess, when do you actually expect to be back to sort of growing net sales?
This is, of course, is the $10,000 question, I believe. I think right now we expect 2023 to be quite turbulent. I know there are projections from industry organs like Prismark, following the market, that are expecting a pickup here in the second half of this year. I think for us, our key ambition is to be flexible and to handle whatever the market will bring us. Let's say, if we have a weaker market, we can still protect our profitability development, and if there is a pickup in the market, we'll be able to leverage that. I think we've proven historically that, say, we are quite resilient to downturns in the market, and when there is a pickup, we are the one of those players in the industry who can really benefit from that pickup and then grow rapidly.
Whilst we are anticipating a pickup in the market, some time in the future, which would hopefully then benefit us in a good way, we are also prepared to handle a couple of quarters more of turbulent times.
It sounds like you're basically quite confident in growing gross profit, at least, this year, continuing on that standard.
Yeah, we believe we can handle sort of the gross profit side and our cost structures quite well in a down market as well, which gives us resilience, and it also means that we have a very strong financial situation, which gives us opportunity to be very active on the M&A side in during these times as well.
Okay. Then just last question from my side. I mean, you mentioned, and I think you've talked quite a bit about the sort of acquisitions and the quick turnarounds here. I'm just trying to get some color on what the sort of upselling opportunity actually is here. Could you maybe give some color? I mean, how many customers do they have typically? As well, how big is sort of the business with these customers, in the sort of part of the value chain that they do not address today and that you do? Basically, I guess, what would the maximum upselling opportunity be here?
I think if you go to the db electronic acquisition we made in Germany, Switzerland, I mean, they had the philosophy that no customer should have more than EUR 300,000 in revenue because they would like to really have a huge number of customers and not be dependent on the customers. A lot of these customers are sort of on our target list in Germany. For sure, there will be many customers with opportunities to also say, sort of the NCAB, be normal volume deliveries to. I think that that is a good opportunity. A few customers were, of course, we already had, but I think we got the connection to many new customers with possibilities to sell much more than just a quick turns.
Could you maybe, kind of... Is there any rule of thumb or how much bigger the sort of normal sales post-prototyping is in relation to the prototyping phase, which I guess these guys are more inclined to?
It's a tricky one. It depends on the type of the customer, of course, but it could typically be, I just, I guess, in total, maybe 10 times or more. Of course, it will always be competition and everything, so you cannot expect to get everything.
Okay, okay. That's a, it's a good help. Thank you very much for taking my questions.
Thank you.
The next question comes from Anders Rudolfsson from DNB. Please go ahead.
Good morning, all, thank you for taking my questions. Perhaps you already kind of discussed both of them, actually. I've been listening to a number of calls during these quarter two presentations. Some companies actually mentioning that April was very weak, May a little bit better, and June being the best month in the quarter. Is that something that you have seen as well, or where do you think it is a rather stable all way or rather weak? How do you see it?
I would say it's been rather stable. You could say that during our Q1 , then we actually saw a positive trend. I think China slowed down, and we did not really see that trend continue into Q2 , so we had a bit of a setback. Within the quarter, of Q2 , I would say it's fairly stable, if anything, slightly positive in the quarter. After our Q1 , I would be cautious to read too much into that.
Okay. There is, as you mentioned, China is weaker than expected. There's a number of companies talking about that as well. Do you have an explanation for that?
It's difficult to say. It seems like the, as the economy has opened up in China, consumers are eager to spend money, but they're spending money on services. They're, and they're going out to restaurants, dinners, cinemas, whatever, but consumption of product is lower, and that has had then ripple effects to industrial production. Then, of course, you have parts of economies in Europe, like Germany, has a lot of their trade versus China, which is then also partly suffering. I think the whole world was partly anticipating that China would, say, storm out of the blocks after the pandemic, and that that would start help pulling parts of western industry also, but I think clearly we're not seeing that happening right now.
All right. The final one, you touched a little bit on that before perhaps, but book-to-bill is 87% now. This is a tricky question for you, perhaps, but when could we see book-to-bill being back at 1 or above?
I think we're starting to approach that point.
... quite soon, because overall, we, I mean, one thing is that right now with the, say, good availability of capacity in the factories, lead times are extremely good. That means, of course, that customers can now delay their ordering patterns at the same time as they're working with their inventory management. I think that still has an impact on the relationship between sort of books and billing. We will expect that to normalize within the not too distant future.
Okay, very good. Well, that's all from me, and I wish you a very good summer. Thank you.
Thank you very much.
As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any written questions or closing comments.
This is Gunilla Öhman, and I found one question from Hampus Engdhal on the web. That regards if we can comment more on the prices that we're getting from the factories, also in comparison with the years 19, 20, 21, and not just 22, which he imagined was impacted by supply chain issues. Would you like to start, Peter?
Yeah, I think we saw in during the spring of 2021, we saw price increases, which we, summing everything up, I think we believe were in the kind of double-digit order, so around 10%. I think we're basically seeing those price increases reversed, or at least in that order, would be my guess.
Okay, good. There are no more questions from the web. I just want to remind you that we have our Capital Markets Day on 4th September 2023 , and we will send out an invitation where you can register later on today. Then our Q3 report is November seventh. Very welcome, and thank you very much for today.