AQ Group AB (publ) (AQ) Earnings Call Transcript & Summary

So time is 14:00 Central European Summer Time. And welcome, everybody, to the information call about AQ Group after the second quarter 2020. We are a crowd of around 10 people. It seems like you're quite international crowd, from different parts of the world, and we will do this call in English. And please mute while you're listening. And then we will take us through this as good as possible. So I move on. We will have a Q&A at the end if there are any questions. So my name is Anders Carlsson, I am the CEO of AQ Group since 2018. So this is now soon 2 years in this position, before that in ABB Group. And I'm structuring this presentation. We have not run these calls after the quarterly reports for a while. We've been available on the telephone for questions. But now as we have the Annual General Meeting this year, we had a physical AGM, June 25, but it was very small one with very few attendees because of the corona pandemic. So we thought now that after the second quarter, for those that could not attend the AGM, we take the opportunity to invite for a call like this and present the group and the report. I'm structuring the presentation like this. I will start with a general introduction, thank you. After that, we'll come into the details in the report that we published this morning. And then at the end, we talk more about the market and the business segments and what we do. And then we take Q&A at the end. So I move on then to make a general update about AQ. I mean we are a contract manufacturing group, and we are active in 7 different business areas in 2 segments. And our business concept or business idea, as we say in Swedish, is to develop, manufacture and assemble components and systems for demanding industrial customers. And the key words here are really demanding. We want to be with a really tough and really demanding industrial customers that are in very, very highly demanding segments. Another keyword is develop. We want to be close to the R&D teams of our customers. And finally then, with our commitment to total quality, our customers become long-term partners. We have -- with OEM customers, you have like a sticky business model that you get in, you supply, you have a really high performance when it comes to quality and when it comes to delivery and also when it comes to attitude and commitments. So if you do that well, you stay for a long time with your customers. We're also a company that really are living in line with our core values. And this is actually -- this is always the last page of the quarterly report but we turn it around there and we start with this one and really just want to start with. I mean every company in the world say they are customer focused, but you only prove it day-by-day in the daily interaction with the customers. So we really want to work with the customer, understanding the customer, providing a little extra mile to do things for the customer. So -- and that is proven in the everyday work we do. The other thing is that we really try to work according to the core value simplicity. We don't try to complicate things. And we only do the things that adds customer value and the customer wants to pay for. We avoid complexity and bureaucracy. And most of our competitors, supply end market is very fragmented. So we don't have a big market share and neither have our competitors, so we compete a lot with small companies around the world. So we have to be very lean and simple in what we do. Entrepreneurial business is key. We have 42 sites, around 30 companies, and we have very strong MDs who act as entrepreneurs, grab the opportunities that come, work very hard, take action fast. As an example, now in the corona pandemic and the last year of the tougher markets, our MDs have taken action really fast in reducing the cost. So that's a really important core value. We also live with courage and respect. For us, courage and respect means that you say things like they are. You give feedback. You try to do things the way you believe in. We try to be very open and direct and clear in our quarterly report. We are -- as an example, we have on-time delivery in the report and not so many other companies have that. And in the end, cost efficiency. You need to be competitive to be a supplier to industrial demanding OEMs, so you need to always work on the cost in all possible ways. We do collection, we don't have a lot of IP and technology to hide behind. We need to have a really, really good service and really, really good performance in what we do and also be competitive here. And when we look for acquisitions, we look very much for companies that share our core values. And very often, if you are a successful company supplying to industrial OEMs, you are very close to these core values that we have. Then we move on. We are international company. We will come back to Europe more in detail. You can see we are in China, India. In China, we are in -- we have 3 sites in Suzhou, close to Shanghai, where we do basically all the BAs in AQ Group. In India, we have a site in Pune with 2 companies, very much focused on the rail sector of India. And then in North America, we are so far mainly a wiring business. So we have wiring companies in Canada, U.S. and Mexico. And then in Brazil, we got a foothold into Brazil with the acquisition of Trafotek last year, where we have a small start-up factory that we hope can give good benefits for us in the future. And now, if you move on now to Europe. You can see we are in the middle of Europe, from north to south. And of course, we have the Swedish historical birth. 25 years ago, we started in Sweden. And then we have expanded largely in Eastern Europe. So we are a very Eastern European company. Out of the 6,000 people, we have almost 4,000 people in Eastern Europe. So Sweden is a big site, still 800 people in Sweden. And then we have around 600 in Estonia, 700 in Lithuania, 800 -- 900 in Poland. In Hungary, we are about 400. And then Bulgaria, we are 3 sites with almost 1,000 people. So -- and then Italy and Germany are more customer markets. We have small teams in Germany, Italy, not so much manufacturing. And then we also got into Finland in 2018 and 2019 with the acquisitions of Mecanova and Trafotek. That's who we are. And we are a manufacturing group, and we have a very, very good customer base, and we have a very broad exposure to many, many different segments. And these are -- all these names here are a typical example of demanding industrial OEMs. And if you group them a little bit in segments like this, we have recently developed this new segment slide, try to picture what we do. And these are 15 segments where we operate, and none of these segments are dominating. I mean all of these segments are -- no one is the dominating segment for the group. We are very spread along these 15 segments. We are in automotive and trucks, but we are a lot more into buses and off-road equipment, like construction and mining, forestry, agriculture, material handling like transportation trucks that like in KION Group. We are automation and power company. ABB is a big customer, and we can also sell to Schneider and Siemens and the others and the industry in general. One thing that is a little bit special with AQ, we are actually quite big in buses and railway. So we are like a local transit company. So those 2 segments together are a relatively big part of the group. So we do a lot from Bombardier and for other rail OEMs like Alstom and Siemens, et cetera. And then we are with the buses, a lot with Volvo Buses, but also other companies like Scania, et cetera. General industry and engineering is a very, very broad group. We do a lot of stuff for frequency converters and drives, as an example. This is a gas turbine. So we do machining of components for gas turbines in Hungary. We do stuff from marine, both in the harbors and in the ships. We are more and more into renewables. Food and beverage, Tetra Pak, Sidel are examples of those and medical, GE Healthcare, Getinge. And then we have a little specialty, we are big in parking meters and vending machines, which is part of the system products BA we have. And we come from Cale, as an example, a Swedish company that was merged with Parkeon a couple of years ago and formed the FLOWBIRD Group. So we were supplying them with parking meters. That is a little bit about AQ as an introduction. Some of you in the team are -- I know some of you know AQ really well. So for this -- for you, this was a little bit of a repetition. But some of you are maybe new to AQ. And then I think it made sense to have a little bit of an introduction to AQ Group. So then let's move into numbers that we presented this morning. And here, you can see AQ have this track record of going from -- we've been growing over 25 years, and we were close to EUR 500 million company in 2019. We continue to grow in Q1, a little bit helped by the acquisitions. And then, of course, corona came here, the COVID-19 pandemic. And it's been a tough quarter. We have a 15% decline compared to last year, and we have Trafotek acquisition. Because we made Trafotek acquisition last year, it is almost 10% of the group. That was a relatively large acquisition for AQ, and we had it in June numbers last year. And this year, we have it in all 3 months, of course. So organically, we are declining 21% in the quarter. And if you take a look at that, we have some countries who closed completely. We were lucky, we were not in Western Europe, where this happened as well, but we had sites completely closed in Canada, U.S., Italy and India. And these sites are relatively small compared to AQ standards. But still, we have an impact of around SEK 42 million. And for those of you that don't know Swedish, we consolidated in Swedish because we are a Swedish company. But this, if you divide this by 10, you'd come closer to the euro's numbers. And then we have the European vehicle industry were heavily impacted by corona because their suppliers in France and Spain and Italy and U.K. closed and then they could not keep open, so they had to close. And here, we have some bigger sites supplying into these customers. We had an impact of SEK 187 million. And we told you these numbers in the report. And for those of you that know mathematics, you can calculate that the rest of the 28 sites that were relatively unscathed, relatively not so much impacted, some of them also grew nicely, was adding [ SEK 32 million ], if you look at the numbers. We move on to the margin. And these are the margins, if you go back on the quarters, we have a target of 8%. So we are working with the EBT target. So we don't do EBIT or EBITA or rather we go for the profit after the finance cost, because finance cost is also a cost. You can see, we managed to do 7% here in EBT, even though we dropped 21% organically, which I think is -- and we are pleased with that, of course. Organic growth is really, really a key priority for AQ. So it's been painful the last quarters where we have not been able to grow organically. So we work a lot with that internally. And we really try to be close to the customers and find a new business and also find more business with the customers we have. And if you look at -- yes, same numbers, profit per share. The EBT converts into profit per share. And we noticed today that we have surprisingly similar profit per share here in Q4, Q1, Q2 like we had 1 year ago, Q4, Q1, Q2. So -- but that was like a coincidence that we noticed when we saw the numbers this morning. And some comments around EBT. I mean how can you have the same amount of profit when you dropped 20%, because you get, of course, a fantastic big reduction in gross margin when you lose that much volume in the krona. But the key -- the main explanation is really that a big part of the group performs better or same as last year. They are in segments who are not exposed to corona. Of course, they've been very much impacted from implementing virus protection procedures, and we had quite a lot of sick leave in the beginning and then it improved. And there's been lots of work to adapt to the new situation. And then we have actually done quite -- these entrepreneurs -- these entrepreneurial MDs in the companies have done great work on the cost reduction starting already 1 year back. So we were actually, when we came to second quarter, we had already done quite a lot of groundwork on the cost cutting that helped us a lot in second quarter. So we are now around 6,000 people working in the company, and we have done a reduction of 800 people, if you look 1 year back, and those are both employees as well as temporary employees and other people that worked on a temporary basis with AQ. There's also been, and I think you see the same for many companies, I mean there's been a big break on the travel costs and consumables and many other things. We do have subsidies because in this -- mainly Estonia, Poland, Sweden and Canada are countries where we -- they helped us with the short-term suspension of people, so we could have the people still in the company when the volumes came back in June. But the own cost reduction that we did is more than double the subsidy. So we really took us up. Operationally, we took it up to 3%, even though we dropped 20% of volume, and there's been a lot of hard work by the team around AQ to make that happen. So for the second quarter, we are relatively pleased with these. But of course, we don't like at all this decline of business because we want to be a growing company, both organically and with M&A. Finally, we move on to the cash flow and the balance sheet. We had a -- the last 5, 6 quarters, we have been able to generate a lot more cash than we did in the years before. We were growing organically a lot in '17 and '18. And then, of course, we have a little bit -- we need to build working capital because contract manufacturing is a capital-intensive business when it comes to working capital. But the last 5, 6 quarters, we managed to increase the cash flow generation, even though these bars are a little bit inflated with the SEK 20 million roughly with the IFRS 16 change. But even without taking into account, we have increased the cash flow generation, which is helping us to work with the net debt. And we increased the net debt last year when we made acquisition of Trafotek, we borrowed money for that, but we managed to take it down to the same level over 1 year, which is good because that has improved the liquidity and the cash position right now. I mean -- when it comes to the strengthening of the balance sheet, we also got help from our owners. They decided not to do any dividend in 2020. And we had a lot of postponing of investments. We basically told everybody that you have to get decision one more time if you really need to do anything. So we have been prudent there. Of course, it takes some time to put a break on investments. So the things, in Q2, we had some -- still, we had some investments ongoing that we couldn't stop. But hopefully, we can get help from that looking forward. We have renegotiated the loans. We have increased the amount of long-term loans. The working capital inventories are stable, slightly lower. Receivables and payables go down, of course, because of the business downturn, but we also spent a lot of time on overdues. We were afraid about the overdues going into corona quarter. And so we spent a lot of work on the overdues, trying to make sure we got paid from our customers and turned out reasonably well. And then really, I wrote that in the report today in my comment as an MD that, especially these 9 sites that were heavily impacted by the closure of our customers, it's been a fantastic effort because they basically got a press release that their business has gone in 2 weeks, and then there were little information and then the customers are changing their plans 200 times. Because they have -- the customers have a very difficult situation. They have uncertain supply situation from their suppliers. On the other end, with the customers, they don't really know the markets, what will happen. And so there's been a very, very dynamic situation in second quarter. And the teams in AQ have done a fantastic work to deliver to the customer. So we are really happy and pleased that we've been able to support and deliver to our industrial demand and customers in the way we have done in the second quarter. So all in all, so far, liquidity and cash has been strengthened. And AQ Group, we don't make any forward-looking statements because we have simplicity as a core value. So we have decided not to do that. So we don't say anything about the future. We need to adjust to whatever happens, whatever scenario, whatever happens in the future, we will have to adjust to that. But of course, it helps to have a strong balance sheet, and we have a solidity of 56%, we have a good cash position, and that will be helpful going forward into the future that we don't talk about. AQ Group targets. We want to be a very highly performing supplier. And you can see product quality target, of course, is 100%. We are at 99.5%. We are measuring the number of NCRs coming from our customers, on-time delivery. We have many sites who are above 98%, close to 100%. And then we have some of them struggling for different reasons. But the average is 94%, which is an improvement compared to last year. Equity ratio, we talked about. I mean in this world, you need to be -- in the sub-supplier world, it's good to have a strong balance sheet. It helps when things go up and down. It also helps to have this balance between different segments and a broad exposure. And finally, target is 8% EBT. That's a tough target. It can be done. So we never give up on that one. We reached it back in 2016. But since then, we've been a little bit behind, a little bit below. But we never give up on this one, and it's still the target that we have. So those were my comments on the report. And then I will move on into the markets and into what we do. And we are presenting in the quarterly report system numbers and component numbers. And we have 7 BAs. I will take you through all these 7 BAs now and show you what we do and also some comments that we mentioned specifically in the second quarter. First of all, we do take sheet metal processing here. Our Internet is slowing down here. I guess some of you are on the telephone and just you hear me speaking, some of you can see the slides as well. Now we have things freezing. And it's a natural break from me talking. Try to share one more time. Hope sharing is working, again. Sheet metal. We have 15 sites making sheet metal, and we are both into carbon steel with automotive and buses and trucks and mining equipment. We are into enclosures for electrical automation. So we do a lot of enclosures where we especially like to make dedicated custom-built enclosures for automation. And we are into stainless. So we do stainless products for medical customers. And you can see we are in Sweden, Bulgaria, Estonia, Finland, China and India. And so we have a good match between this one and the electrical cabinet BA, we will come to later. We have for precision stamping and injection molding. This is a smaller business. We have a site in Suzhou and a site in Sweden that can stamp very, very thin and very high quality and very high tolerance components for cell phones and other things. And also for the airbags and the safety equipment. We have injection molding. We have 120 injection molding machines. So this is a tool-based business. You need to be good in making the tools. And we're offering our automation close to the injection molding machine, and we make then plastic parts in many, many different materials for many, many different customers. And this quarter, we are really pleased to see, as an example, we have a site in Hungary and they have -- they are making this Bosch power tool, the drilling machine, the green and red plastic parts are made by AQ as an example. And we've seen a great quarter now because all the people are at home and corona started make do-it-yourself projects. And we also do e-bike plastic parts for the Bosch eBike System in the same place. We have inductive components. And this is actually a little bit different. This is a little bit different business because it's not really typical sub-supplier business because, here, this is not built to print. Here, we have the engineering. So we are working more from a functional specification, and we do a lot of electrical design. And we are a big supplier here to ABB drives and to Danfoss and Eaton, Siemens, where we make inductors for their drives, and the drives are used to control the big motors and the small motors for the industry. And we also have, you can see the one to the bottom there, the green one, that is for the trains, which is similar technology. You need filters to clean the electricity. Because when you have these power semiconductors, you need filters to clean the electrical emissions. Then you need these inductors, and we do the electric design. As you can see, they are very tightly squeezed into, so cooling and space is a very tough requirement here. The blue parts in the middle are power transformers, and these are dry-type power transformers, and we sell them from Trafotek in Finland. We sell them to marine, to ships, a lot of specialty ships. And we had a really good quarter in deliveries in these blue dry-type transformers in quarter 2 this year, and so that helped the result this time. And these inductors are used a lot, as I mentioned, marine industry, motors and drives, but also renewables and also coming in these fast chargers in e-mobility. It's a very useful filter cleaning product collected to the power electronics components. Then we come into electrical cabinets. And in AQ, we always call this electrical cabinets, but this is really an automation. So we're -- all these Eaton, Rockwell, Allen-Bradley, ABB, Siemens, Schneider, they make all these components you can use for automation. But before they can be used, you need to put them into an enclosure and you need to assemble all these parts and you need to make all the wiring. You need to make sure that every wire is firmly connected to the right place, et cetera. And we are such a panel builder. We take all these great products from these companies I mentioned. And we make automation for real. And they have 2 good strengths here. We are international. So we are in many parts of the world. So we can follow our customers around the world. Panel builders are typically very local companies. The other benefit is that we can make the enclosure. So we can make a really high-quality special enclosure in whatever material, and then we can fill it with these automation components and be a panel builder for the machine OEM. Because everywhere you see a machine, there's always a control cabinet or automation cabinet or as we call them, electric cabinet. We have some other niches. You can see we make these driver discs for trains. We are supplying the nuclear industry currently with relays. That's been also a good contributor to the first half numbers in AQ. Then we're going into wiring systems. Wiring is really the most international part of AQ because we are all over. We are also in North America. You can see we're in Sweden, Poland, Lithuania, Mexico, India, U.S., Canada and China. And wiring systems are related to the customers that have a big assembly line. Because if you do the wiring before, then you can reduce a lot of time on the assembly line of the customer. And here, as an example, TE Connectivity is a big supplier of components for the wiring, and then we have many cable suppliers, et cetera. We have -- this is a very labor-intensive business where you need to be able to train people really well. And we also have automation equipment from Comarch, as you can see there in the last picture. This is a very exciting and fun business to be in when you deal with industrial OEMs providing the harness. This is very logistically intensive because the customer, we buy tens of thousands of components and every harness is different, especially buses are extremely -- every bus is different in every city. So it's very, very high requirements on the flexibility of supply. Then we come into system products. We like to be entrepreneurs, and we start with the plastic part or the sheet metal part. And then we do the assembly of the cabinet, and then we try to take a bigger and bigger share for the customer. So we are really willing to make the whole machine for them if they want to outsource it. And we do that for Tetra Pak. We do that for Cytiva, former GE Healthcare. We have this parking meter business, and we have a few other interesting prospect, where we also take quite a big responsibility in the mechanical design and then also in the procurement of all the parts. And this is project business quite often. So you need to be able to buy all the material and then make the machines. And then at the end, after the project, you should not have any remaining components on the inventory. So it's mechanical design intensive and it's also logistical and procurement intensive. And of course, then the quality and assemble and everything else. So that's the system products BA. And then finally, we have also some special technologies. We do have this machining. We have a very strong company in Hungary that can do EDM, [Foreign Language] in Swedish. And then we also have a small consultancy company. We have a small consultancy company providing consultancy services for these OEMs. And we are then very linked to the manufacturing capability vehicles. So we try to offer these consultancy services. And then we can also -- and we are close to manufacturing, so we know how to design things that can be manufactured. Now I need some water here, I'm talking too much. And then finally, I mean the outlook. We believe we have handled COVID-19 so far quite well. We know, of course, that the future is uncertain, and there will be a lot more to do. But we believe we are positioned to handle the challenges and opportunities that will come from the pandemic in the future. This will be a long-term situation. I mean we will have the virus here for a long time, so it has to be sustainable and persistent actions over time. And there is no change in AQ strategy. We have a growth agenda, and you need to do growth, both organically and through acquisitions, you cannot do either/or. When we acquire a company, they have to come into AQ and they have to have a better situation with our core values and our leadership and our management, so they can find more business, so we can fill and utilize the resources we acquire. At the same time, we really need to fill and continue the growth with -- and a good thing in our world, we don't have -- I mean the market is very, very big, so our market share is very, very small. There's lots of room to grow if you do the right thing. And we are -- our customers have had a really, really difficult second quarter. And we are really happy we have been able to be a reliable supplier to them during this quarter. And reliable is AQ's slogan. We are reliable, that's the slogan we have. And when we meet the customers, we really point on these bullets at the end here, that we are really long term. We really want to be -- the core of everything is the performance. We want to be a world leader in quality, OTD and the way we interact with the customers. We always want to improve. We have this international presence. We grow a lot because we have a relation with one customer in one country, and then we find we can also deliver to this customer from another place in AQ in another country. We are financially strong, which helps. And we are also -- I have not talked so much today about sustainability and responsibility, but when you are a supplier to these demanding international OEMs, you need to be on top of the sustainability agenda. You need to be a very reputable and strong company, following all the rules and really contributing. And for us, of course, the biggest piece in sustainability is the resource efficiency. We have this ISO. We have been implementing this ISO 14001 systems in every site, and we make sure we have targets in every place on reducing carbon dioxide emissions. And also, you need to work with the integrity and really be on the highest standards. And then, of course, when you are a manufacturing company, you also need to be good in health and safety. Because if you're good in health and safety and really work with health and safety, then you will become a better company and you will also have -- it will also be easier to attract and hire good people on the local labor market around the factories. So the health and safety is like a recruiting argument as well. And with that said, that was everything I prepared for today, 36 minutes. I hope it had been interesting. Thank you for listening. So with that said, we open up for questions, if there are any. Anyone still out there? I see that we have -- we are now some more people. If you don't want to take the questions in the call here, I mean you have my number in the quarterly report, so feel free to call me if there are any specific questions. And some of you here, I have talked before, I recognize some names here. So if there are no questions, I can try to make a short summary then of the call before we close. To start with, AQ Group, 25-year of history, 25-year of growth. We have always made profit in every quarter. So we have no quarter where we have lost money. And we have invested in acquisitions and organic growth. We really want to be with the demanding industrial OEMs. We want to be with them long term. We want to be close to their R&D team. We really want to base everything on our performance with quality and on-time delivery. We are very international supply group. We have this broad exposure to a very large amount of segments where no segment is dominating. We have many strong customer base. We're also in 7 different segments, and sheet metal and plastic, they are more -- a little bit more normal basic parts. We have the wiring and cabinet and system product business, that's very logistically intensive business where you have many, many parts you buy. You need to be very good in procurement and purchasing in this business. We have the inductive components, which are -- where we do more of electrical engineering. So we are more electrical engineering company as well, not only like the manufacturer. And then we spice it up with some high tech and some consultancy as well in our seventh BA. And this quarter, of course, we have a big impact from the COVID-19. We have the 5 closed sites. And in the closed sites, we were lucky because customers are in the same country. So we had no problem to hold our customers close at the same time, and then they opened up so the situation was quite easy. And then we have the big impact from the European automotive industry. You -- these 9 sites give you a little bit of a feel how big that exposure is. And here, the team has done a fantastic work to manage this situation. And we were supported by some governments on subsidies to manage this up and down, this V-shaped scenario that happened. And then the rest of AQ has continued pretty much like before and also with some nice growth in some certain segments that we talked about. Profit-wise, we dropped 20%. Operationally, we are 3.2%. And then with some [ subsidies ], and we had a one-off release provision as well. Took us up to 7%. We have strengthened the balance sheet and improved the liquidity and cash position in the second quarter. And even though we don't say anything about the future, to have a strong balance sheet and a good cash position will be needed next years. And then finally, I talked about all the different businesses we do. We talked about -- and also did that already in the beginning of the overview here. So with that said, I thank you for your interest in AQ and for listening and wish everybody a nice summer with good weather. And hope everybody will be safe and have a good summer out there. With that said, thank you for listening, and have a good day. Bye-bye.