Cicor Technologies Ltd.

Welcome to the annual media and analytics conference call and live webcast. I am George, the chorus call operator. I would like to remind you that all participants will be listened only mode and the conference is being recorded. The presentation will be followed by Q&A session. You can register for questions at any time by pressing star and one. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcasting. At this time, it's my pleasure to hand over to Alexander Hegman, CEO. Please go ahead.

Good afternoon. Thank you very much, George. Yes, good afternoon, ladies and gentlemen. I'm very happy that you are here in large numbers. So that is very pleasing and shows a certain interest in the company that all of you have. So it's a big pleasure for us, that's Peter Neumann, our CFO, and myself, to present the highlights of 2023 to you. First of all, for those who are new to us, like usual, I spent just a couple of minutes on introducing the SECOR group. And the most important thing is that what you find from SECOR is high-end electronics developed, manufactured by SECOR, and with a total focus on three markets. These three markets are the medical, industrial, aerospace, and defense markets. The fastest growth, and we'll come to that later, we had this year in the medical sector. It's now 29% of our sales. We have very strong business in areas like surgical robots, smart drug delivery systems. We have also very high growth and expect further very high growth in the aerospace and defense sector where we support safety, reliability, communication on many different platforms for our customers. These are the two areas that are specific focus because here we cannot only differentiate ourselves because of strong regulation, very high-quality requirements. This is also where we have this very close synergy with our AS division, where we are manufacturing high-end substrates. Still the largest area, growing a little bit slower than the others, and especially at the moment, is the industrial sector. Still 39% of business, where we are driving electronification, miniaturization, and automation. Seco as a company, we are growing for quite a few years now, quite strong. You will see the numbers a little bit later. We are on a growth trajectory, very important for us. It's a combination of external and internal growth. But even more important than top-line growth is margin expansion. And what you will see, and Peter will explain more in detail, is that we have achieved the highest EBITDA margin ever, the highest core EBIT margin ever for many, many years. What we are doing is that we are very close with our customers and we are very close with our customers for a very, very long time. It's all around the customer and it's all around the products that they want to have developed where we support them. that they need to be brought into manufacturing, this is what we do for them, manufactured, and really we are with the products until the end of their life cycle. So being a strategic partner to our customers over the life cycle of a product, this is what we do. And we are doing that with an expanding footprint, and I mean expanding because we have the ambition to be market leader in our target markets in Europe. And here we are very strong, Switzerland, Germany, and the UK, where we have just adjusted the process of acquiring two new sites. So now let me switch over to the highlights of 2023. Yes, the financial numbers were extremely pleasing for us. And you will see definitely then the details from Peter. Also, in the present environment, a positive book-to-bill rate, so book-to-bill ratio over one, is critically important to us. It has come down in the second half from 1.1 to 1.03. However, we still see a positive book-to-bill ratio, which is exceptional because of the very high bookings in previous years during the times of the material supply crisis. Now most industries are working down their order books, we don't. We have still an order book of about one year. Our market focus extremely important and you will hear that again and again during these presentations. You will also hear more about what we are doing in M&A. What is important to us is that we are acquiring the businesses, and then we help them to outperform. And that's what happened also in the past year, that the acquired businesses have not only achieved our expectations, they have overachieved and outpaced our most optimistic expectation, I have to say, as far as top-line growth and margin expansion goes. We have done other important things during the year, like the strategic partnership with Cleance. I'll say a few words about that later. And at the beginning of the year, the expansion of our factory in Vietnam. We will continue to grow in 2024. That's our clear expectation, and we'll come to that later. Now, I've mentioned already our target markets, industrial, medical, aerospace, and defense. And if you look at the growth rate of SECOR overall, which is 24 and a half percent, then our strategic markets, there we have grown 28% with the highest contribution from the medical market. With the growth of 43%, and that is in Swiss Franc, 43% top line growth in the medical market. Very, very important for us. Again, the other two markets have also seen very good growth, albeit at a lower rate. The non-strategic markets have also grown, but at a much smaller rate, at a rate of 9%. Now, if we go by region, Switzerland still is and remains a very important market for us. We have seen growth in Switzerland, but slower growth than the rest, and that is fueled by M&A, mostly by the consolidation of our division and the businesses that we had acquired at the beginning of the year from Phoenix Meccano. So that has led to an increase of the European share. The Asian share has gone down from 14% to 11%, which means the total number has been pretty much stable. Why didn't we see growth? The reason is that there is an important customer who did destocking already in 2023. So that's a customer who's coming back to normal in 24. So destocking after the component crisis has been resolved is something that is not starting this year. You see here one example, it started last year already. If we look at the two divisions, of course you will see the detailed results later when Peter presents them. EMS division, 90% of sales and growing has made very, very important steps forward, both operationally and strategically. Operationally, what is most important for us right now, winning new customers. We are in a situation where many customers are seeing a slowdown in demand, and we are compensating that by winning new customers. I've said it a few times, we are winning new customers at a rate that is about five times more than some customers or some business that are lost. Also, our progress in operational excellence and working capital efficiency is very important, has made a big contribution to the numbers that you will see later in detail, especially the EBTA margin of the EMS division, but also the very pleasing free cash flow that we are able to report. We have just closed in January on STS Defense. I will go into detail a little bit about that company, and I mentioned the partnership with Cléon. Cleons is one of the world's leading manufacturers of engineered polymer components. And together, between Seeker and Cleons, we are able to be a true one-stop shop, for example, for smart drug delivery devices. One of the largest, as we believe, in the next year's fastest growing segments of the medical industry. The Advanced Substrate Division, although it's only 10% of sales, still plays a very important role. And I mentioned that in the beginning when I was telling you about our ambitions and our success in aerospace, defense, and medical, because specifically for these applications, the AS Division manufactures substrates that are highly differentiating. That division is a true technology powerhouse. and it supports the growth of the company overall. Going into the operational detail, you have seen little change to the previous year in the division. That is the result of an excellent progress in not only operations, also on the margin side of our PCB production. Whereas the thin-film substrate sites were suffering, especially from shortage of personnel, so they couldn't deliver all the orders, and some is shifted into 2024. Now, as I've said, I'd like to give some update on M&A, what we are doing here. And some of you know this picture already. M&A is one of the three pillars of our strategy. The first one is the focus on our three core markets, and we repeat it again and again. We are really extremely disciplined here. Then it is the building of strategic customer relationships. I have mentioned how we are partnering with our customers throughout the lifecycle of the product. And the third is M&A. And let me go in detail why M&A is such an important pillar and why we can show to you that value can be created through M&A. We are seeing a market that is large, that is extremely fragmented, that does not have a clear market leader. So you see the top 10 companies represent only 40% of the total market. These are 2023 numbers that we are having from the industry. So a very fragmented market where, however, there is a very clear rationale for consolidation for many good reasons. We are in a very large market. Last year, the European EMS market was 57 billion euros. It's a forecasted growth rate of 6.8% annually. We saw last year somewhat bigger growth. This year, we have to expect somewhat lower growth and a normalization than Worldwide, the core segments that we are serving, so medical, aerospace, defense, and high industrial, so that is the high mix, low volume segment of the market that we like most because it's the most sticky customer relationships and most profitable. They represent in Europe a relatively high portion of the market, 40%. So it is really a large growing market that is fitting exactly to what we can do. As I mentioned, this is a market with really high customer loyalty. Customers just don't want to switch suppliers. There are high entry barriers, especially in mission-critical applications. And that is also one of the reasons for consolidation. There are very clear economies of scale. We are showing also in our numbers that better utilization of factories, of equipment, drives productivity in a very clear way. So we have a long-term positive market development and we expect that years from now we'll see a more and more consolidated market. We have announced two and a half years ago that we would complement our organic growth strategy with acquisitions, and we have delivered. We have started to deliver end of November 21 with our first acquisition, as most of you know. Six months later, we have acquired our first German target. Then half a year later, it was our second German business. Two months later, carve out of comparatively small but strategically important business thin-film business of AFT Microwave. Nine months later, we have closed on the acquisition of SCS Defense. And one month later, we have signed and closed the acquisition of Evolution MedTech. Now, TT Electronics is the latest news. We signed that transaction last week and expect to close by the end of the month. Let me go into these three transactions and why they are so important for us. I mentioned already that out of our three target segments, especially aerospace defense and medical, hold the biggest promise for differentiation of SECOR throughout the whole supply chain, where we have very strong contributions. And thus, it is also the opportunity to expand profit margins further. STS Defense Limited is a very high-tech test engineering manufacturing provider for mostly the UK aerospace defense industry. It is a company that realized 27.5 million pounds of sales in the fiscal year that ended in the middle of 2023, and they have strong operating margins ahead of the average of SECOR. And as we mentioned at the time, the integration of STS Defense leads to an expansion of the overall SECOR operating margins. Now, STS Defense Limited is extremely focused on engineering. So the offering that we can now make to our customers is the development of complete systems and the manufacturing, something which is very unique in the UK. And the UK is the third largest manufacturing base worldwide for defense products. So it is the number one market in Europe to serve. So then we finalized the acquisition of Evolution MedTech. This is 25 people. But these 25 people in Bucharest do amazing things. They develop wearable devices, class three, so highest security medical devices, implants. They are having an enormous ability, and that's why we We're extremely glad when we were approached by the owner of the company who we know for a very, very long time. And he offered his business to us. These end-to-end engineering services, together with the engineering power of STS, double our R&D capacity. So now through these two transactions, we have doubled our R&D capacity. with a strong focus on medical, in the case of Evolution MedTech, and aerospace defense, in the case of SCS defense, aerospace defense. So we are building extremely strong platforms that start with product development and lead over to manufacturing products. Now, why is also the carve-out of the three manufacturing sites from TT Electronics so relevant for us? The first, it's 500 persons, it's 21 million pounds of business, sorry, that's the price we paid, it's 70 million pounds, British pounds of business, and growing. And why does that fit so perfectly well into SECOR? It fits because we really need capacity for our existing aerospace defense customers in the UK. And the sites that we acquire from TT Electronics, they are profitable, not as profitable as C-Corp, but they are profitable and they offer enormous, enormous potential for growth. That is true for all three sites, the two UK sites and the China sites that we are acquiring. And that is the reason why we can now announce that the manufacturing capacity that we offer at SECOR is growing from 500 million to 700 million Swiss francs. So that transaction also makes us the market leader in EMS service in the UK and the aerospace defense market leader in Europe. So what you see here, I won't go into the details is We are focused and we are disciplined in our M&A approach. Our M&A approach is all about driving synergies, managing risks, and creating value. And so far, so good. It has worked very well, as you will see in the financial results that, Peter, you will present now.

Thanks a lot. Let me lead you now through some financial results. Overall, the results speak for themselves. If we start with the long-term view, you can see that the growth strategy that we announced in 2021 is coming alive, and you start to see this in the numbers going up. You can see nicely visually here on the long-term chart that SECO is breaking the revenue and profitability records. And also, I think especially, we are consistently building margin in terms of EBITDA progression. One point also, as we have seen a lot of post, well, closing events, STS, Evolution MapTec, and the TTA Electronics IoT Carbot have no impact on our 2023 results, so none of those you will see in our financials. Let's dive into the 2023 details. First, Very solid order intake, book to bill of 1.03. And we have close to one year of orders on hand. Overall order book is at record levels. Revenue, we have grown on a reported basis 24.5%. At constant FX, 27.5%. So the Swiss franc has gotten stronger over the year against most currencies. Hence, you see a negative impact there of 3%. What I like especially on the top line is the balance contribution of an organic growth of above 11% and the M&A contribution. So this balance is very important and we want to continue going forward. On the profitability, sorry, go back. On the profitability, strong progression as we have been delivering economies of scale and the focus in our core segment is paying out. We are looking into our business from two divisions. The EMS division is by far the largest division with now close to 90%. It has broken a new record with close to 350 million revenue and EBITDA margin of 12.5%. The AS division is a critical key competitive differentiator contributing in terms of technology to our core segments. What is really pleasing on the AS segment is how it has been coming back to growth in the second half and delivered a very, very strong margin progression in the second half. For perspective, second half AS was plus 400 basis points versus a year ago. So really back on track with this business. If we dive into the detailed P&L, you can see the material margin that we have a small improvement as we are executing our focus on the core segments and our pricing activities. Now, the biggest improvement was coming from operation expenses, 100 basis points. Clearly there you can see our excellence program as well as the economies of scale as we're growing our business. If you go further down, depreciation, amortization, clearly we use our assets more efficiently. The next slide, you will see what we strip out in our core results, so the amortization of M&A goodwill intangibles, where we're really amortizing well in line with the plan, and it's mainly the access acquisition. Couple of words on the financial results, and the financial results, the key change from 2022 to 2023, is driven by the negative FX. So we see a 3 million higher negative FX effect in 2023 because of the strong Swiss franc. And taxes went up for two reasons. Obviously, our absolute profitability is much higher. Our absolute profit is significantly higher. And secondly, there have been some external changes, external tax effects, mainly in the UK, but also in Romania. Good, if you go to some details, here you see on the sales side the breakdown. The first number is acquisition, so this is the acquisition of the EMS business of Phoenix Meccano that we started concentrating as of January 2023, and also four months of SMT, giving us 51 million more. You see the negative FX impact of 3% as mentioned. and you see organic growth drivers, mainly from EMS, but as mentioned, while AS is negative overall for the year, it had a very low first half, but the second half is already back into the growth mode. Balance sheet. Balance sheet is really important because we are well financed, we have a very strong balance sheet, and we have very moderate leverage If you look into details, you see that we have optimized operating net working capital and we have been driving efficiency in our treasury activities. What you can see is despite a business of 24.5 million, 24.5% larger in terms of revenue, we have managed to slightly reduce the total size of our balance sheet. And you can also see that we are very lowly leveraged, we have leveraged below one. and have only 43 and a half million of net debt. Clearly, we are ready for the next round of acquisitions and the announcement over the last couple of months shows that we're executing along our ambitious growth plan. Cash flow, cash is king, we all know. What you see here is that because of the efficiencies we've been driving, we have been returning and really delivering strong free cash flow. The core number is the free cash flow excluding acquisitions. We have been delivering $26.3 million of free cash flow. The other impressive number is the free cash flow in absolute is $4 million. So with our operational cash generation, we have more than paid even for Phoenix Meccano, VMS business, and AFT, and delivered a positive free cash flow including these assets. So really strong performance and that we continue to drive going forward. Operating networks and capital. We talked within a lot of previous discussions. We have invested in 2022 to protect our customer base and increase our inventories as the supply chain normalizes. As we are driving operational excellence, we have been able to reduce it as percentage of revenue from 35% to 30%. You can see that if you take out the acquisitions of Phoenix Meccano and the AFT business, we have even reduced the absolute operating network and capital. So really, really strong results, and we're getting much closer to a 25 to 30% that we see as our goal going forward. CapEx, in line with the midterm guidance, we have delivered 3%. We had no major capacity increase. And we will continue working along this line as a of around 3% as we announced in our midterm goals. Return on invested capital, this is an important measure. We use it a lot as internal during KPI. It really rallies the teams around growth, profitability, and capital efficiencies, and the mix was coming nicely together in 2023. We have been growing revenue by 24.5%. We have been driving profitability 130 basis points, and we have basically grown our invested capital significantly below the core EBIT number, driving in the end that we're close to our 15% guidance as per the midterm guidance. For everyone here, the key figures per share, this is important because, as you'll recall, we have issued a mandatory convertible bond. Hence, we look at earnings per share and all numbers, core earnings per share, and including fully diluted of the mandatory convertible bond. To note, as of January this year, all holders of the bond can optionally convert. And we have seen, obviously, first shareholders converting into shares. But here on the fully diluted basis, core earnings per share, we have shown for this year again that we can show a growth of 14%. Award and acquisitions. The acquisitions we closed in 2023. They're the Phoenix Meccano EMS business that we bought and the AFT microwave car bought. You see here the details, two points that I think are important to mention. One is these acquisitions came with a fairly low goodwill. You see it here of 1.1 million. Basically, we have bought them for close to asset value. That's one. The second one is you see here the direct cost related to acquisitions. We have, because of our pipeline of acquisitions, really developed a playbook to execute acquisitions with moderate costs. So for these two acquisitions, we have paid less than $600,000 of transaction costs. So to wrap up, 2023 was an excellent year. We continued growth, balance, organic, inorganic. We expanded EBITDA margins, and we have shown that we can deliver sustainable free cash flow, all that is important as we go forward into this year now.