Earnings Call: Q3 2020

Nov 10, 2020

Thank you and very welcome all. And we are very happy here in Brahma's MCEB headquarters to introduce our new CEO, Peter Kruk and also, of course, Anders Buschia, CFO. So please, Peter, would you start? Thank you, Benio. I'm very happy to be joining today for my first time with NCIB and to present a good quarter together with Anders. If we move to a brief summary of the quarter for NCIB, I think in the quarter, we have seen a recovery in Europe and also in the transportation industry, which was quite badly impacted in quarter 2. And we're now starting to come back to a normalized order book. In quarter 1, we received excessive orders due to fears of deliveries in Asia. And this, of course, combined with the pandemic spreading to Europe and Americas led to low order influx in Q2 and Q3. But during Q3, we have seen orders grow month by month. The integration of our acquisitions announced earlier this year in the Netherlands and the U. S. Are progressing well, and they are driving growth in the quarter for us. We've also seen good growth and improving margins in the U. S. And our cost savings are continuing to contribute positively to our margins. Moving to the next page, Page 4. So in Page 4 overall, just to give an overview of who we are at NCIB, we have globally more than 4.50 specialists. We are serving customers in Europe, Americas and Asia, and we have some 23 partner factories supplying us with products. Our mission is to supply PCBs for demanding customers, delivered on time with 0 defects produced sustainably at the lowest total cost. And our vision is to be the number 1 PCB producer wherever we are. If we move to Page 5, just to give further insight into our product and technologies. What we do are we do the printed circuit boards, the PCBs, that our customers in turn mount electronic components on to create PCBAs. And PCBAs are key modules in almost any product today. Moving to Page 6. In NCIB, we are servicing many different applications and industries ranging from high speed trains to heat cameras or mirror replacement displays in automotive. The fact that we are in many different industries makes us very resilient to fluctuations in individual markets. On Page 7, the niche we are focusing on within NCIB is to serve demanding customers in what we describe as high mix, low volume segment. In this segment, we can see that the price of the component, such as the PCB, is low in relation to the final product cost, but where there are very high demands on quality and demands on delivery performance. And in this segment, NCIB provides high value to our customers. Talking about our history on Page 8. Our journey has been one of continued strong growth, both organic and through acquisitions. The company has its roots and started in Sweden and in Nordics and then expanding in Europe and China and in recent years been followed also expansion in the U. S. And throughout the years, we have since 2008 only seen 1 year with negative growth, which was 2,009, and this was again followed by a year of record growth. I have now been with the company since little more than 1 month. I had several reasons for sort of why I chose to join the company. I'm happy to say that the reasons which I saw from the outside have been confirmed when joining. I can see that there is a very strong value driven company culture and a decentralized empowered organization. I think this has served the company very well in the turbulent times of 2020. It's also a company with lean structures and a very straightforward atmosphere and a strong focus on delivering value to customers. And thirdly, I think we are even though NCAV is in a leading position, we are still operating in a very fragmented market and there's extreme good opportunities for us to grow as a company. Now on Page 10, looking on in China came back in production end of February, and we've actually been able to handle customer deliveries well despite the situation. We saw, as I mentioned earlier, a surge in orders in the Q1, which was then followed by lower influx of orders in the second and third quarters. But we're now seeing signs of recovery in Europe and the order book is coming back to a normalized situation. On terms of activities, we have bridged the restrictions in travel and activities to interact with our customers through other means. We have had quite a lot of success with webinars and others with good attendances from customers. We've also been able to secure deliveries, working closely with our customers, but notably with our factory management organization who are on-site with our factories, securing deliveries and quality. We've also received some limited state support from a few European countries. In the quarter 3, it totaled SEK 1,000,000. And overall, our cost reduction activities has been efficient and quite successful. On Page 11, we're summarizing the financial numbers for the quarter, which we're quite happy with. We've seen good growth of 22%, reaching SEK 5 1,000,000. When looking actually at sales translate in U. S. Dollars, which is our predominant currency of sales, You can actually see that the sales is even better, growing by 34%. Our EBITA amounted to SEK 50,100,000, an improvement by 8%. And our margin EBITA is 9.3%, which is slightly down versus prior year as a result of some regional sales mix and margin impact of the new acquisitions. With that, I give the word to Anders to continue. Thank you, Anders. So we are focused on the year to date numbers, January, September 2020, where we can see that we have had a growth of 18%, both in SEK and in U. S. Dollar. We had, of course, a positive effect from U. S. Dollar in the spring and the negative impact from U. S. Dollar the last couple of months. But anyway, we're showing a good growth. Excluding acquisitions, we are down 3% in revenue, and we think we are already proud of that due to the specific year of the corona pandemic, etcetera. So I think it has been doing well. Our profit has also increased. Year to date, we're up SEK 139,000,000 and that includes SEK 15,000,000 of transaction costs with the acquisitions. So excluding that, it should have been SEK 153,000,000 and the EBITA margin of 9.6 percent, which is much better than last year. So that's good. Next slide. As you know, we operate a bit different in different regions. We had a little bit weaker region in Nordic due to the lower order intake in the summer. Europe growing due to the acquisition of Flatfield in Netherlands. Otherwise, comparable units are a little bit below. North America also very positively impacted from the growth or the acquisition of Baerboel Group in Florida and also from Altus that we did in November 2019. Our old business, Ultrasen U. S, did a flat growth, which is rather good anyway. Margin wise, as you know, we always have a strong margin in Nordic, a little bit weaker in Europe. And North America is rather good as well. The BBG acquisition still have a lower EBITDA margin than our old operation. Then East, which is our operations in Russia and China, had a small decrease in revenue this quarter, mainly in the Chinese operation, where we see some effects from the trade war between China and USA. Next slide, if you see that we continue to grow, as we have done almost all years, as Peter said. Also mentioned the gross margin, it reported 30.4%, but that is due to lower gross margins in the acquired companies, especially in the one in USA, where they are much lower than we are. And we, of course, working on to increase that step by step. Also, flatfield had a lower gross margin. So if we compare companies by company comparable units, we were up 31.8%. So actually, we had done a small improvement in the comparable units. Next page then. As we said, for the quarter, growth is driven, of course, very much through 2 acquisitions. So we presented 22% growth and 34% growth in U. S. Dollar. And net sales compared to the spread in U. S. Dollars. So I think that's also a good sign that we have sort of recovered a little bit from the corona situation. Order intake is still a bit lower, 15% increase and 24% in U. S. Dollar. Still, we do have some impact from the very strong order intake we had in Q1. But I would say that, that has leveled out now. So now we can see a more normal trend again. And the normal trend is that we typically have orders 1 quarter and that will be delivered or invoiced the next quarter. Next page about the result and EBITDA. We saw an increased EBITDA compared to last year, up to SEK 50,100,000, slightly lower EBITDA margin, but we had an extremely strong margin in 2019. Earnings per share is down a little bit due to some negative exchange rate effects in the finance net. As Peter said, we have got some state support to about SEK 1,000,000 in the quarter, and that is mainly in France, Italy and Spain. Otherwise, of course, our operating cost is rather low due to limited travel activities, etcetera. So we're yes, even if we don't grow, we show a healthy EBITDA result in margin. Some more in regarding the segments. Nordic, as you know, the main focus is not to grow very much. We try to have a good profitability. We saw revenue down 14% in the quarter. And I think this is effect of that the summer continued longer than normal in many Nordic countries. Normally, we see an upturn in August, but that took place for us in end of September this year. So in some way, I think the corona has made that we have seen a slower start to the summer. The trend is, however, rather positive in order intake month by month, but we saw some drop in the beginning of the quarter. Anyway, our profit margin ends up 14%, 18.1% last year was very strong, But normally, we are around 14%, 15%. So I would say that we still have a stable gross margin EBIT margin. Order intake also was down in the quarter, but we saw a positive change the last 2 months, and we saw a sort of month by month order going up again. So it's also a sign that the sort of the summer made was a little bit slower than normal and then it starts going back to normal business. Europe, on the next page, revenue increased 32%, of course, due to flatfield acquisition. We also see mainly on the order intake that the Southern Europe is getting back on track better and better. We had a weak start of the quarter, but then we saw a very strong ending with the quarter. We have also seen that the transporting sector in UK mainly have gone back to normal levels. So a lot of happens on the activities and order intake from customers. We also have working with the integration of the Plattsville in Netherlands. So far, very positive customer reactions. So we think this is a good step forward, and we see potential in the future, of course. Europe sorry, North America, U. S. A, we see an increase in revenue of 131%, driven, of course, by the acquisition of Werribul Group, which we did in April. So that's more than double our revenue in U. S. EBITA margin is down a little bit compared to last month, but that is due to a little bit lower profitability in Babol Group. But as we said before, we are working on the gross margin and we think there are potential to do something positive there. Also here, integration goes according to plan. It's, of course, a bit difficult. We can't travel. We can't meet. So we do a lot of integration work over different webinars, etcetera. It takes longer time, but it's working. As you know, we also got some new factories in Taiwan from this acquisition, which is especially for U. S. Is very good. And we're opening up those factories for more NCIB countries and NCIB customers right now. So it's good to have something to share in China with companies. Finally, segment East, a few percent down very close to last year. We have seen Russia has been going down rather well. We have those sales seen in China some problems with the trade war, both from our local Chinese customers exporting to U. S. Has gone down and also that there is some component shortage from Chinese EMS factories buying important components from U. S. A. So that has affected the business a little bit. We see a lot of customers redesigning the products right now, and hopefully, that will take off again. Profit wise, we are on a rather stable level, around 11%, 12%. We have, though, during this year, have much up and downs, very much connected to the fluctuations of the ruble versus U. S. Dollar, which impacted the result for our Russian operation. Next page, a little bit of our KPIs. Return on equity is down compared to last year, but of course, that is connected to the share issue we made in April. Otherwise, we have a positive cash position. We have a strong solvency and net working capital is still on a low level. I mean, if you compare the SEK 167,000,000 to our last 12 months revenue, it's 8.3%. And we have been able also to reduce the working capital in the acquired company in Netherlands, which is also good for us. And if we take together available cash, including what we can take on our bank overdraft, we have over SEK640,000,000. So we have a very, very strong balance sheet. And of course, we are looking into opportunities to use that balance sheet for further growth. Back to you, Peter. So if we look then on Page 22, our financial targets and policy for the midterm, we have a growth target organic growth target of 8%. We have a target of EBITA margin of 8% and a net debt less than 2% and a dividend of 50%. If you look upon our how we're performing today, we can see that growth wise, 2020 is a challenging year. So we have no growth or we are below the growth target on organic growth. We are, however, performing better on the EBITA percentage. But again, these 2 are partly related. We are forced to be spending less money on growth activities right now. And that is, of course, right now giving us a higher EBITDA percentage as well. Net debt wise, we are, as Andres mentioned, we have a good balance sheet situation with 0 debt. So we're well positioned to take advantage of any restructuring in the market. And our dividend policy, our Board decided to cancel the dividend for this year in the annual assembly earlier this year. Looking at our strategy, we have a strategy based on 4 main pillars, where number 1 is increasing our market share in established markets. There's still a lot of opportunities for us to go after in most of Europe, USA and the East. We are working on deepening our collaborations with the customers to enhance the value. We are looking to expand geographically. This may mean both new markets or as well regions within markets. And of course, to be active in consolidation of the market and here our strong balance sheet is a good position for us to do this going forward. Okay. Thank you. So thank you. Now we're open to take questions. Thank you. We have a question from Robert Wedin from Carnegie. Three questions, if I may. So first on that recovery in demand in Europe during Q3. I guess the positive order intake trend is likely to be mirrored in sales in Q4. But could you say something about the order intake trend in October? Did it continue with the same trends you saw in August, September or has this COVID-nineteen development impacted that project recovery you saw during Q3 that was in the first question? Yes. We can see the same trend continues. So if that's simple answer on the question, that trend continues from the last quarters in the summer and in the October as well. Okay, great. Maybe this is a detail, Bertol, you had working capital release of SEK 22,000,000 in the quarter. You said something there about the majority of that thing related to the Flatfield acquisition. Was that the sort of first such results, call it? Or do you expect any further working capital reduction in there? I think that there will be some. What we have seen is that we have better payment terms with many of the factories, which we have tried to implement step by step. We also would they Flatfield also had much more inventory in their business model than NCIB has at an average. So of course, we will always have more inventory in that kind of business, but we are trying to work to reduce that one. So I guess there will be some positive effects going forward as well. Okay. That's great because it was a majority of that quarterly reduction in working capital. It's a digitized part of the easy pay for the acquisition, 10% or something. Yes, that's perfect. And then leading over to M and A, you have a very strong balance sheet with this net cash position and now COVID-nineteen is sort of back. But does that slow down M and A discussions? Or do you think there will be increases sellers' willingness to sell? What would you say with regards to the M and A pipeline and the potential to grow through M and A going forward? I think for sure during this year, there's been some difficulty to continue M and A discussions. But I think now the market has stabilized and we have been continuing our discussions with potential sort of companies. And I think these things will continue and progress in the coming months. So overall, I think the market expectations are stabilizing. And if maybe there was, let's say, hard to do achieve any results during quarter 2, maybe now the discussions can become more productive. There are no further audio questions registered, so I hand back to the speakers. Okay. Thank you very much. Then I'd just like to remind you that our Q4 is to be published on February 23 next year. So looking forward to hear from you all then. Thank you very much, Peter Nanders. Thank you. Thank you for listening.