NCAB Group AB (publ)

Good morning. Thank you. So speaking today will be myself and Anders Forsén, accompanied by Gunilla Öhman. If we start by summing up our second quarter, we can see that the market recovery has been slower than we have anticipated. I think notably we have seen a weak demand in Europe and especially Germany, as I think we've all seen from macro numbers on IFO index, et cetera, that the German manufacturing industry has done worse than expected. And that has also impacted our business. Nordics has performed with mixed performance. Some parts have been benefiting from defense growth, but we've also seen lower activity in areas of construction or energy sectors. In North America and East, however, we continue to show progress with order intake growing. And we have also landed some nice larger projects, notably in North America, which further helps the growth trend in orders there. Overall, despite demand being lower than anticipated, especially in Europe, we still continue to see a very healthy growth in our new partner numbers as well as in new customers' one. Looking at the financials, we can see that we are maintaining gross profit at very good levels. Factory prices remain low, and we can also see that the signs we start to see about potential price increase in the market have become somewhat more muted as demand in Europe is lower. EBITDA and EBITDA margin are, of course, impacted by the lower top line, but we have also taken some non-recurring costs in the second quarter, which has another impact on the quarter EBITDA numbers. On the M&A side, however, there's been a lot of activity in the last couple of months, and we have landed four new acquisitions, as well as still having a very active pipeline of continuing ongoing discussions, and we've also added an extra credit facility to support further M&A possibilities of 500 million SEK. If we then look a little bit closer at some of the acquisitions, we started in April with a smaller acquisition here in Belgium, two employees only, but it gives us a nice direct foothold in the Belgian market, and we'll work closely together with our business in the existing Benelux. Then here in July, early July, we announced two other acquisitions. We have ICOM Industrial Components in Switzerland, adding 40 million SEK of annualized revenue and six employees split in Switzerland and in Serbia. This again, we already have a business activity in Switzerland based on our acquisition of DB in 2023, but this gives us a stronger foothold and will enable us to grow the business in Switzerland. And similarly, we also announced an acquisition in Austria, EPI Components Trade, a company with four employees and 35 million SEK Again, a market which we are currently serving out of our German organization, but this gives us a local presence and enables us to continue to grow in that market. Then, as we may have seen yesterday, we announced a larger acquisition. We are announcing that we are acquiring the company DVS Global with main business in Italy, serving industrial customers and also partly in automotive. It's a very quality-focused company that has a long history, almost 20 years of business in the industry, revenue of 230 million Swedish kronor in 23, and with a very good profitability as well. We will be taking over some 31 employees in Italy, Switzerland, Hong Kong, and China. Very similar culture and values with what we have in the NCAB, and we expect a very smooth integration. This is a signing that happened here yesterday, and we expect to close the transaction in September or latest in October. And if we look back at the quarter in some numbers, we can see that net sales are down 12% per year to 935 million SEK. That's an organic decline of 15% in both Swedish kronor and US dollars. And even if it's lower than last year, it is somewhat in line with the order intake that we've seen in the past quarters, where we've been pendling between around 900 to 970. If we look upon the order intake, we're up slightly versus last year, and the book-to-bill is flat on a number of one. If we then look at EBITDA, we are at 120 million SEC, so a healthy EBITDA margin of 12.9%. Of course, impacted by the lower sales, But gross margin helped to maintain a good profit level. Gross margin remaining at 38.5% versus 36.4% of last year. And then also, as I mentioned, we took some one-time costs. We have taken costs. We are in the process of implementing our new IT or business systems. And those activities have been more intense in Q2 than in Q1. And we have also been having our bi-yearly all-employee development conference where we work on strategy and the business development with all of our employees. that was taken now here in 42 this year uh working capital uh or still remains good at 6.2 and that also then helps to generate a continuous strong operating cash flow of 101 million sec versus 152 last year and a good ratio versus rb 220. anders okay yes to summer up what what you said peter that we

We can see that we are down 12% in SEC and 30% US dollar. The exchange rate SEC US dollar has been rather stable within last year. So it's no big difference there. Of course, we can see that we have a bigger drop in EBITDA connected also to the revenue that the supply is down and also some non-recurring costs as we mentioned. EBITDA for the quarter ended up in 12.9%. I think if we continue to have a healthy progress in our gross margin, of course, we still had a good gross margin last year as well. So we can't compensate the drop in revenue as we did in the same way as we did last year. But still, I think we are continuing to run with a very healthy and good gross margin. This is also a sign of that the prices that we expected to increase a little bit from the factories in Asia has been stable on the same level as before. So we don't really see any signs right now for increasing prices. And that might also be the consequence of the weaker demand from mainly from Europe. So just to look in the Graph for the total company then, as we said, the revenue is down. But I think we are on a very stable level quarter by quarter. As I said before, we think it has bottomed out. And we can also say that we see a little bit of fragmented markets between different segments where we can see that Europe is going down while other segments going up. So there are different signs in the different markets. But overall, this gives us a rather flat development quarter by quarter. And I think what we have said before as well, we are really back to a situation where we can more or less measure one quarter's order intake into one quarter's revenue. As we said before, we see some really good signs in East. We also see some positive development in North America where we have gained a number of new interesting projects. And in total book to bill was 1.0. And as Peter also mentioned that we still see a good positive trend in taking new part numbers and a new customer's one. So somewhere there is, I think we can see that we are keeping good control of our market position and we take new orders, but still the customers are very hesitant to place the volume orders. And there are very much cautiousness in the market, which is, says that the new part number doesn't translate into orders and revenue as it normally have done. So we see many, many smaller orders than we used to see before. Going into the EBITDA. So of course, it is a drop versus second quarter 2023, which was a strong quarter on the other hand. And also, of course, when we have a high gross margin, a drop in top line will have a higher impact on the EBITDA. During the quarter, we also continue to take the cost for the new IT platform. And it was a little bit higher than the first quarter. Maybe it was about 8 million in the first quarter and 13 in this one. We also have this bi-yearly employee conference, which really creates value for all the employees and really boost the company values in a good way. And of course, all that cost is taken one quarter. So that will be a hit in the specific quarter. So therefore, we can see a lower EBITDA margin down to 12.9, almost 13%. Still good to see that we can match that with our gross margin and that the gross profit is not going down as much as the top line. Back to you, Peter.

Thank you, Anders. So looking at Nordics, where, as we've mentioned before, that Poland is part of Nordics due to the strong connection of the business that we have. So we're now reporting Poland on the Nordics. Also here we can see ordering intake decreasing, but by 2% versus last year to 226 million SEC. We can see aerospace and defense are sectors that are performing well in the Nordics. But we then have some other business where, say, you can see that Denmark as a country has been exposed to some construction activities and also some energy sector business. And we have also seen slightly weaker activity in EV charging in the second quarter. Net sales amounted to 207 million SEK, decreased by 9% from prior year. And we have seen a slight mix shift or a mix in the quarter. This can always vary a bit. And we've had a little bit more negative mix in terms of customer country mix in the quarter, which has impacted our gross margin slightly negative in the region. EBITDA amounted to 29.6 million SEK and the margin is at 14% versus 22% of last year. If we then look at Europe here, we can see that the net sales is decreasing by 20% versus prior year. And combining comparable units, it's a decrease of 22% in SEC and 23 in US dollars. We can also see that our ordering take is 423. So also a negative book to bill competitor sales. And this again is very much related to German market, which is weak. And that also actually has an impact on neighboring markets as well as like Netherlands and also to some extent, Italy. But we do see some positive development in automotive and also aerospace is an area where there is positive signs within the sector. So what we can see is that the anticipated trend of inventory reductions reducing to then be translated into a growth in the future. I think we can see that probably we have lost at least one quarter and we'll see when that pickup will happen. EBITDA decreased down to 56.7% million SEC. and it corresponds to a beta margin of 12% in the quarter. North America, here we have a more positive trend or continued positive trend. Order intake up to 229 million SEK and a healthy book to bill versus the net sales of 200 million SEK. So order intake for comparable units are up 29% both in Swedish kronor and US dollars. underlying overall growth, but there are also some interesting new projects that have been won in the quarter, both in aerospace and also in research laboratories. Net sales, as we said, also increased by 9% to 200 million SEK. However, for comparable units, it's a decrease of 2%. EBITDA decreased to 28 million SEK versus prior year, and the EBITDA margin is down to 14% versus last year. but slightly up versus the prior quarters. And if we look at East, the market conditions in China overall still remain challenging. And what I think is we've all seen macroeconomic numbers for China also being continually difficult. However, we've been able to win new interesting business as well in the high tech demanding customers. So we have in the quarter a positive book to build of 107. Our order intake was up to 60 million sec. versus 43 last year, which was quite weak, and net sales flat versus last year, 56. We also have an EBITDA on 11 million SEC and an EBITDA margin of a very good 20% in the quarter. Anders, over to you again.

Okay, thank you. And then coming back to some financial KPIs. I think still we have a good return on equity, down a little bit versus last year, mainly two components. Of course, we did have a higher equity per end of Q2 and a little bit lower result. Still, we have a very good match of net debt. Our net debt, the beta rate is 1.1.1 and a strong solvency of over 40%. We have been, during 23, been working a lot with reducing our net working capital, and I think we are now down to a rather stable level, around 6, 6.5% of last 12 months revenue. So we still continue to have a good cash flow. Of course, during 23, when we reduced the working capital, that gave us even stronger cash flow, but still we're in a good position. We also see that we have a lot of interesting M&A activities in the pipeline. And we signed here in June a new loan agreement where we added on another 500 million SEC, which means that we have a lot of good firepower for continued further acquisitions. So still a very healthy balance sheet and good financial KPIs, I think. and then looking in a little bit into the acquisition pipeline we have been we are focusing on europe us and east we are looking a little bit more into the southeast asia and japan market to see if we can find some activities there as usual before we have all we will always look for the high mix low volume segment we will look for the companies that have the right customer mix and and of course without any production. And we're also looking for profitable companies. And still we have around 50 target companies. It's good to see that we've been able to close four of them this year, but we are still in discussions with a number of other potential targets. So the market is still good for M&A activities. Peter?

Yeah, so rounding up and looking at overall, we continue with our strategy. We are, as we've said before, active in a very large market. The high mix, low volume market for printed circuit boards is around 25 billion US dollars, which means that we currently, while still being a leader, we only have around 2% of the world market share. So we will continue to remain 100% focused on printed circuit boards and to continue with an asset-like model, not having any factories of our own. Instead, we'll continue to invest in becoming ever better at serving our customers, being a leader in technology and sustainability to further grow our market shares. We are looking to continually expand geographically. We see M&A as the main driver to take the steps into new markets as it helps us accelerate the process to grow into new markets. And finally, it is, as we've also said before, a very fragmented market with a lot of smaller local regional trading companies. And therefore we can see there is a good opportunity for us to add value by integrating these through acquisition to give them access to our factory management setup and a much better give their customers a much better service. And before opening up for questions, I'm also realizing that this will be Anders last quarterly call for NCAB. as Timothy Benjamin will start in September. So I want to say that I have greatly enjoyed our cooperation over the past four years. I wish to extend my personal thanks as well as thanking you on behalf of the management team and the board of directors. So thank you Anders, besides being a great colleague, you've had a fantastic share in developing the company's success over the past 15 plus years. Thank you very much. And with that, we open up for questions.

If you wish to ask a question, please dial £5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial £6 on your telephone keypad. The next question comes from Jacob Edler from Danske Bank. Please go ahead.

Hi Peter, I'm Shane Gunilla and thanks for taking my questions. I will start with one on Europe as it sticks out as a bit weak. A book to bill of 0.89 if I calculated correctly. I just want to get some more thought on maybe the sequential trends here. We've known for a couple of quarters that Germany has been lagging behind some other European markets. How much of the sequential delta is Germany continuing or getting worse I would say Or how much should we read into that you also talk about some other South European countries also underperforming? And maybe lastly there, which sectors may be stuck out as being the weakest end customer segments? Thank you.

I think we can say that there is some sequential deterioration from Q1 to Q2 because you could say overall our order intake is slightly lower in Q2 than Q1. While North America, as an example, is growing, we are falling behind more in Europe. And I think Germany or German customers are the main driver. And I would say it's the general industry that's most severely hit. So it's quite broad. So it's not a specific sector, but general industry in Germany is quite soft. Then we have, of course, other markets which are doing slightly better as well. So it's not all black gloom in Europe. But it's like... Yeah, sorry, Anders, go ahead.

But the clear majority of the drop in order intake is coming from German customers. That's very, very clear.

Very clear. Thank you. And then maybe just talking generally then on destocking. I feel in Q1 you talked about that you saw that destocking among customers began to wane, so to speak. But here in Q2, it feels like you're talking more about that destocking impacted you more severely. Can you maybe just elaborate a bit more so I just get that right?

I think our view, as it has been, is that destocking will gradually disappear and that, say, in the second half, we should see it sort of step up and we would see impact in Q2 as well. But And I think that that trend is happening. There are signs where we see some customers where destocking is coming to a better situation. But I think that has been sort of overshadowed by potentially the slightly sort of negative turn of the economy in Germany in quarter two, which has kind of overshadowed that. So we don't really, it's hard to distinguish exactly what. But I think the overall perspective that destocking is nearing an end, that still is valid. But I think the overall demand situation in Germany specifically has overshadowed that.

Okay, perfect. Just on pricing then, I remember in Q1, I think you said that the negative price effect was 10% in net sales. And now you're right, the effect was minor. Are you able to quantify that a bit more and also maybe talk about how the year-over-year effect was in order intake?

I think when you're looking at the order intake, Prices were falling during the first half of 2023. And during the second quarter, we were more or less stable. So I think the impact on order intake Q2 this year versus last year is limited on the pricing. But of course, still we had some revenue last year, which was done with higher pricing than now. So it is some impact on the revenue side, but very limited on the order intake side right now. So I think we can see that we have had more or less stable prices since one year ago.

Yeah, perfect. Maybe last question or maybe one more. We've seen rapid increases in freight costs here during Q2. Were you able to offset that fully, would you say, here in Q2? Or is there some catch-up to be seen in Q3?

There might be some catch-up maybe. Most of it I think we can manage to handle. to push the cost forward to the customers. Of course, when there are some quick changes, maybe we have the prices included in the offer down previously, so there might be some small lag, but I don't think that is the material in this report, so I think we're in good shape there.

Okay, perfect. Then I have a last housekeeping question. Would you say it's fair to to say that 17 million was one-offs, because you have the 10 million, or you had 8 million in Q1 of the IT migration. Maybe, you know, the delta is, let's say, 3 to 5 million. Is that fair? And can you specify where these were charged in the quarter on a regional level? And maybe, especially talking about the conference charge? Mm-hmm.

Yeah, I think you're rather right in that conclusion about the sort of one-off for the quarter. And I would say we had maybe a little bit higher impact on the IT cost for Nordic. The adequate for the conference is rather evenly spread because it will be taken by all the participant countries. So I think that is rather evenly spread. Yeah.

Perfect. Thank you so much for taking my questions. And good luck, Anders, and thanks for your contribution the last couple of years.

Thank you.

The next question comes from Gustav Bernablad from Nordea. Please go ahead.

Yes, good morning. Good morning, Anders and Peter. It's Gustav here at Nordea. Maybe just to build on the demand situation and the question around Europe here. I was just wondering if you can say anything because I think you were a bit more forward leaning towards the beginning of the quarter when you talked in Q1. I was just wondering, when did you see sort of the inflection point to the negative in the quarter? Could you say anything about that or when it started to really become weaker?

It's hard to say, it's not like there's been a clear trend shift during the quarter, but I think we, as you said, it is a bit of a disappointment. I think we had expected that we would see stable and maybe slightly improving as inventory reductions would benefit us or the reduced inventory reductions. So it's more that you could see that there's slightly weaker performance across the quarter. I wouldn't say there is a trend that things are diving at the end, but it's something that happened gradually over the quarter, I'd say.

And is this sort of a tone that we can also think starting now, beginning of July as well?

It's hard to say. I think July and August are always very tricky months to get a feel for how the market is performing because you always have shifts in exactly when vacations are happening. I think we'll need to see both July and August in unison before we can really have a clear view on how the market is performing during the summer here. But I think we can expect the gradual improvement that we were seeing or expecting probably at least in Europe is probably at least one quarter then deferred into the future compared to what we thought earlier.

Okay, perfect. And then maybe a bit similar to what we have talked about in sort of the recent quarters here, given that demand is not really picking up as we had expected and prices remain relatively stable, are you continuing to see bankruptcies among your PCB manufacturers and are there any of your suppliers that are affected?

We have had no... Go ahead, Anders. Go on, Peter.

No, we have not seen any of our factories impacted by bankruptcies. And I think actually the pace of bankruptcy, I think, have decreased somewhat. So I think the weakest factories maybe have been weeded out. So the rate of bankruptcies, I think, have declined. I'm not sure if you have anything else to add.

No, I think that's a very true picture. And an important part is that we have not seen any of our factories having those kind of problems. And we try to monitor them as good as we can all the time.

That's perfect. And then just the last one regarding the M&A activity. And obviously, as we talked about Europe, a bit disappointment. But would you say that there is a link between your pickup in M&A activity in Europe and the weekly demand that either companies are more willing to sell as they don't see that pickup or are there any other reasons for this pickup happening right now, would you say?

No, I think it's other reasons. I mean, some discussions are a lot of long-term discussions. And I think what we could see was when the trend shifted from this fast growth one or two years ago down to more stays, slowing down on a stable situation, that created a much easier discussion with a lot of companies because they couldn't really expect that the market can continue to grow as it did in 2021-2022. But I don't think that the present situation will make any difference. But I think we saw a change one, two years ago when it was more easy to get in contact with companies and it was easier to get an agreement on the valuation when this quick increase slowed down, so to say.

Okay, perfect. That was all for me. Thank you very much. Thank you.

Thank you.

The next question comes from Johan Skoglund from DNB Markets. Please go ahead.

Good morning Peter, good morning Anders. A few short questions from me as well. The closing of DVS Global, you expect that in September or October. Do you expect the acquisition to have an earnings impact in Q3 or only in Q4 and ahead?

It will not have any impact in Q3. because it will be closed in the end of the quarter. And then of course we will have maybe some transaction costing connection with Antoine. So Q4 hopefully it will be a positive earnings per share, but at least for 25.

Good, thank you. And on your capital markets day you highlighted the interest for acquisitions in Asia. How is that progressing?

It's rather okay. I mean, the market is different in Asia because you don't have this kind of history of trading companies as we have in Europe. But anyway, we are working on the list. We are getting more and more companies on that list. So slowly, I would say we are making some progress. But of course, it's one thing to find companies and getting some contacts to really get an agreement, but I think we see some positive signs at least.

Okay, very well understood. And then lastly, you highlight defense as an area for Europe in Q3. How big of a potential do you see in the segments and would you expect this to show in orders already in Q3?

I mean, we have already a presence in Scandinavia or Nordics where we have ongoing business. I think that is developing favorably. We are also opening up for serving the defense business also now in Europe, in some countries here during quarter three. This, of course, is a longer process. So we are not expecting that to maybe impact orders already, or at least not in any significance in quarter three. But it is, of course, a great opportunity, but it is also a It is an industry with, say, specific regulations for export control, et cetera. That is why also we need to do this step by step and set it up for the, say, system support to handle those processes. And I'm glad that we're now able to support that and we'll be doing that in more countries here as we enter the second half of this year. But as we said, we don't expect that to have a significant impact on orders in the short term. Most of our business takes some time to develop and we expect the same for also for the defense.

Okay, good. And just a quick follow-up question on that. Given that defense has been strong, how big percentage of sales is that segment currently?

We have not made an updated calculation for the year-to-date numbers. I think last year we were around 5%.

Okay, very good. Thank you so much for that, and good luck with Q3, and good luck, Anders, in your future endeavors.

Thank you.

Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Anders Rudolfsen from DNB Markets. Please go ahead.

Hi there, Peter and Anders. Anders here. A couple of years ago, there was actually North America that was the market that was the one that had the biggest problems on your subsidiaries. And nowadays, it seems to be the market and the company that goes absolutely best. Could you give us some more flavor on actually what has happened and what you see next in North America?

I think to some extent it's a little bit market development as well. I think when we start to see the decline in order development, say already say in 2022 from the peak, we saw the decline actually happening first in North America. So North America and East were the two regions where we saw the downturn first. And I think part of that was also that we had maybe we have a higher share of our business in North America going to contract manufacturers or EMS companies. than what we have in the group as a whole or in Europe. And I think that puts you one step further down in the supply chain and gives you even more of that kind of bullwhip effect with inventory adjustments. So I think that is why I think North America was, say, performing worse in the second half of 22 and during 23 than maybe Europe was at that time. Now, as inventory situations start to become more balanced, I think we start to see a little bit of a pickup from that first happening then in the US market. So that is part of it. Then I think we've also tried to sort of do some changes. We've made some changes to, we have a new leader in the North American business from Europe in there with Howard Goff. And I think that is progressing well. So we have a lot of good activities as well. And then I think we've also been successful in some more significant projects in aerospace and some research projects that we've been able to win, which further adds on to an underlying trend.

All right. And if you can try to, I mean, now they are in pretty much all over the world with different businesses. Looking into the US, let's see, two or three years ahead, will US be the biggest market, you think?

I think if we look upon If you look upon the US market versus European market, you could say that the potential market is roughly the same size. And of course, today, US is significantly smaller than our European business. So over time, US for us is a prioritized growth area, both for organic growth as well as for acquisitions. If they can overtake Europe, I think that remains to be seen. But I think we see US as one of the growth opportunities for the group overall.

Right, interesting to follow. And finally from me, Anders, good luck with everything you're going to do and have a good summer.

Thanks a lot. I have some questions from the web. The first one is from Carlos Moreno at Premier Mython. And he asked that management in NCAB is basically new. How burdened do you feel by the long-term targets set out at the capital markets today? targets which you probably had a very small input in formulating. What do you say, Peter?

I think all of our management, we've had a very strong influence on those financial targets as well. I think what we can see is that when we set the targets after post-2021, we were looking at setting targets which were ambitious but realistic based on an overall say, normalized market that we have seen historically with the market growth of, say, 3%, 4%, 5% or overall market development. You could say that in 2022, we had a better market development than that average history. Now we've seen 23 being quite weak, and at least the first half of 24 is also weak. So should 2024 turn out to be another very weak year, which would mean that the overall five-year period would be significantly lower than overall market growth than the 5%, then that might cause us to need to revisit the financial targets. But overall, our strategy with the growth as well as the profitability is something we are still very much behind. But we will be, of course, assessing the situation. And if we need to, we will be maybe coming up with an update about our financial targets.

Okay, good. There's a second question from Philbert. He says, You mentioned a cost of 13 million for your bi-yearly conference. What was the cost in Q2 2023? We didn't have any, did we?

No, we had a similar conference in 2022 since it's bi-yearly. At that time, we still had the impact from the COVID, so no participants from Asia. And a lot of Americans were at that time also a little bit hesitant to travel to Europe due to the situation. So we had roughly 200 people, so half the number of people, and less people from East and from North America, which also created much lower travel costs. So if I just guess, maybe the conference cost for 22 was maybe 5 million. A little bit of a guess, but it wasn't. significantly lower since it was much lower, less number of people participating.

Okay, good. And the third and last question comes from John Hiltner at Enterfonde. And he asks what specific industries in Germany were weak in the quarter?

I think we see more manufacturing automation is an area which clearly is impacted, but otherwise it's more of a general impact on the German economy. So no specific segment sticking out extremely strong for us.

Okay, good. So that was all the questions. So I just want to remind you of our third quarter report, which is due the 5th of November. So very welcome back. And thank you for today.

Thank you. Thank you.