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

I guess you can see my screen now. So welcome to AQ Group Earnings Call for the Quarter 3 2021. I'm happy that so many of you are interested in our progress and what we do. I will try to go through this agenda. Here with me in this room is Christina Hegg, who is our CFO.

Hello.

This is the agenda for today. First, I will go through AQ Group quick facts. I think you -- most of you who are in this call know us already, but I will just go through it, it will be very quick. Then we'll go through third quarter in brief, first 9 months in brief with some comments to the bullets, and then some highlights and lowlights that we see in the quarter. They are also stated in the report, but we'll maybe paint a little bit broader picture. And then we go through some numbers, on-time delivery, a little bit about market segment development, and then we take your questions. Okay. So quick facts. We are 6,000 employees. We have roughly 500 million turnover. We are 7 business areas, and we serve 15 -- more than 15 market segments, with production, manufacturing in 16 countries. We deliver globally. We have shown profit every quarter for the past 27 years. And for the last 10 years, we have had an earnings per share growth of roughly 16% on average. We do 2 to 4 acquisitions a year, and we are part of the UN Global Compact since 2012. Let's move on to what happened in this quarter. So I think, it was very evident if you have read the report, which I assume you have, that we are working hard to get materials and components like almost everyone else in the industry, especially in our business areas in the system products segment, electrical cabinet business area and the wire harness business area. Net sales increased with 18% in the quarter compared to last year. It is well above our goal, which is 15% growth annually. However, looking at the corresponding quarter in 2020, we had COVID, and it's not really good to compare to. So we are not really happy with this growth, even though it succeeded our normal goals that we have. Operating profit decreased by 3.5% to SEK 94 million compared to SEK 97 million. It is a big disappointment. I'll go over that a little bit later. And then, yes, our profit margin, EBT was 6.9%, which is well below our goal of 8%. We are not happy with this performance. And we'll move on to the next one. If we look at the 9 months, January to September, net sales increased by 11%. But again, compared to COVID year, it's not what we expected. We expect to see higher growth numbers. The orders are there, but we are not able to deliver out. Our operating profit increased by 20.6%. Here, I say, again, 15% growth. I mean we want 28% EBT and then grow 15% per year. This corresponds to that. But again, we are not happy with the performance that we have seen now in quarter 3. EBT goal, we are above, if we look in the 9 months, but we should have been able to be even better, as I've said before. And then we have this equity ratio with a goal over 40%, and that is now 55%, which is well above our target. I mean we want to do more -- be more active with our M&A team to maybe decrease this a little bit. If we go to highlights in the quarter, there are not so many, but we have very strong demand. We have very stable customers that want to buy everything we can produce. It is a good situation to be in. The worst situation we could be in is that we don't have any orders. So we will not be happy with our order situation. And that customers want to use our knowledge and expertise and buy product from us. I want to highlight also this new order from a truck manufacturer that we got, which is really a breakthrough for us with this customer in this market -- business area. So we will do cable harnesses for the cabin of this truck, and it will go into series production in 2023. And we have not been delivering to this customer in this type of -- this type of product. We delivered wire harnesses to them before, but now we really expand our presence there. So this is really organic growth for real. Unfortunately, this volume will not show until 2023 and it is not huge. I mean it's SEK 135 million annually from 2023, but for 4 years. But still, it's really nice volume to get in. Also, since we are building a new factory in Lithuania, this will, of course, fill that up a bit more. The integration of the Schaffner companies is going according to plan. I believe we have no serious hiccups really. They are able -- those factories are able to deliver to their customers in a good pace. I also can mention that India -- we have really nice growth in India in the railway sector, especially, in all our market segments or business areas, so both sheet metal, electrical cabinets, inductive components, meaning transformers and inductors and also in the wire harness segment. So there we see a nice, steady growth of both of our Indian subsidiaries, and they are growing with profits. So it's a very nice situation to be in. I mean we have been developing these 2 businesses for more than 10 years from Greenfield, so it is nice to see that bear fruit finally. Lowlights in the quarter. Our EBT margin, as I've said, is too low. And as we state in the report, we see that price increases for raw material, we have a lag. So our price increases come 3 months to 6 months later when the prices for raw material go up and this affects somewhat the EBT margin in the quarter. But the biggest effect is still that we have a lot of orders that we're supposed to deliver out, but we're not able to, because we're missing 1, 2, 3 components for that particular order. And then you have -- maybe if you look at the electrical cabinets, it can be 500 different item numbers in one. And then you miss 2 or 1, cannot deliver out. Increases the inventory, but also it impacts the total turnover and hence, the EBT margin. I think also cash flow is rather poor in the quarter since we are not really -- it looks like we're growing, yes, versus the same quarter last year. But if you look at the quarter 2, we are actually not growing our top line. And then this kind of cash flow is not good enough. And again, it's affected by the same example, like I talked about in the EBT margin, that we see that we cannot deliver out everything that we should or want to deliver out and that our customers want to have. And then component supply, we write it a lot in the report, and here it comes again. It's really, really tough out there now, especially in certain areas, I would say. In the wiring business area, we have a huge problem to find connectors mainly for different customers and their products. Also in the electrical cabinet field, there it's this semiconductor shortage, because in this low voltage components there is a lot of semiconductors. But there, we have delays from the likes of Siemens, Allen-Bradley, Rockwell, ABB, Schneider, everybody is delivering late. We are trying, of course, to suggest alternatives to our customers, but also now the alternatives are starting to be in low supply, so it's becoming more and more difficult, I would say. And then we have this delay in transferring raw material prices to customers that, of course, affects the EBT margin. Here, I would -- I must be a bit critical that we can be and should be more proactive when it comes to this. We have sold some things during the quarter that I'm happy about, but they will have effect first in the fourth quarter. So we need to monitor this and work harder on it. But I don't feel that it's a lack of pricing power. It's just that we have been a little bit slow to be critical. Mexico is still a low light in the quarter. We have huge demand increase in Mexico, but we don't have the management to take care of that demand increase. So we need to support them a lot from our European subsidiaries in order to deliver to our customers. So it's a big challenge for our team over there. And we try to train them and we recruit new people and we add competencies, and we support them from Europe. But it's a huge challenge. We're basically growing with 4 of our big accounts in Europe, but for deliveries in Mexico and the U.S., and it's a big challenge over there. But we believe we will be successful. We know how to produce the products in an efficient way. We need to transfer that knowledge. And then the acquired company sales volume. Here, I'm specifically talking about the Chinese Schaffner subsidiary that we bought. They have lower sales volume than what we expected in the transaction. And it, of course, affects also the bottom line there. So that is a little bit of a disappointment. But there are some projects that are delayed -- railway projects, and it is driven, of course, by the Chinese government. We hope and believe that they will come back. Then earnings per share growth. Here, I made a graph that I showed in some investor presentations before. But basically, it shows our earnings per share. The blue ones per year. And then I've added now a rolling 12 there for 2021. That means that we -- if we have the same profitability as we had quarter 4, 2020, we will have around SEK 20 earnings per share in 2021, and that would mean a 20% growth compared to 2020. And of course, if we look at our targets that are specifically, 15% top line growth with a stable margin of 8% that gives normally -- should normally give a 15% earnings per share growth. So this is a little bit above our target. It's not that bad. But of course, we cannot continue like we have done in quarter 3 with the poor EBT margin. So we're working hard to get back to the similar picture as we saw in quarter 1 and quarter 2. Net sales per quarter. I think this is a good growth, because it really shows that we are not -- even though the numbers look like we are growing the top line, we're not really. We are basically back to where we were in '19. And I can -- we can say also that '19 normally is a little bit slower quarter for us. But that shouldn't -- we still are disappointed in the development, and I would have liked to see that the quarter 3 bar was higher than quarter 2. But we're working hard to really get back on track and find components and work together with our customers to solve those component issues that we have. Organic growth, I think this is also a good graph. We have a target of 5% organic growth per year. If we mirrored the quarter 2, 2020 and quarter 3, 2020 versus quarter 2, 2021 and quarter 3, 2021, they are almost identical, which means we basically have gotten back the volume that we had a little bit more, but basically, it's just back to status quo. But we have a certain growth. But we -- since we had difficulty delivering out products, we don't really see enough growth. And yes, again, it's the same explanation as before. Net growth then, I think, it's a nicer picture, because we have been basically not doing anything for 4 quarters during COVID and now in quarter 3, we are back with some acquired growth. But of course, our target is 10%, and we're not really there yet. So yes, we have some more work to do. And we have our list of companies that we are looking at and we are visiting. But unfortunately, we are -- or fortunately, you should say, since your investor, we are very picky with what we buy. We do really thorough due diligence, and we do it ourselves, because we know this type of business better than anyone else, we believe. So we're really picky, and we say no to a lot of things. So it is still a challenge to find cases, but I'm confident that we will continue, like we have done in the past, to buy a number of factories every year -- between 2 and 4 factories. And this year, we have added actually 3 factories then. So in a number of factories we are there, but turnover wise, we need to be doing little bit more. If you talk about EBT margin, then this -- well, how I would like to explain it. Normally in AQ, we have been between 6% -- very seldom being over 10%. But in quarter 1, we were very close. But on average, we should be around 8%. This doesn't mean that I'm happy with the quarter 3 performance, because it is also a negative trend that we don't like. And we're doing everything we can to reverse that trend. But we should deliver around 8% EBT margin on a long term note every quarter. That is our target, and I believe that it's definitely possible to succeed. If we look at cash flow, I mentioned in the lowlights, it is -- the majority is that we are unable to deliver the result. Of course, we are also a little bit impacted that -- when we have this kind of supply situation, when we find material, we, of course, try to stock up a little bit. So we have a certain amount of increased inventory that is -- we can say it's related to the component shortage, but it's not directly related as the other part where we just cannot deliver out, and we have semi-finished goods or parts that we didn't start, because we don't have all the material. So it is impacted, but I believe that in a normal situation, our cash flow should be roughly the same as our profit on EBT level. Okay. Normally we show this net debt. It is -- it has increased a little bit based on the Schaffner acquisition, where we actually buy a lot of assets, and we get a little bit of goodwill as well, but it increases the net debt a little bit. We're in a very safe level, so to speak. But I think this gives us some ammunition, of course, to do more acquisitions when we find the right companies. Then I want to mention this one. It's very uncommon for companies to show this graph, but I can tell you that all industrials that you invest in, they have this kind of information. This is our delivery performance in AQ. We measure it every month for every single company that we have. It is measured versus our committed delivery date, and then if you are on-time, early or late. And this one shows everything that is early -- delivered too early or delivered too late. And I can say this is, unfortunately, an all-time low for us of 90%, at least since I started in AQ, and that is many years ago. And of course, it's not a nice picture to show, but one in 10 of our orders is delayed, and I mean I think that can represent how much we are lacking in delivery, really. So it is -- I think it's a telling graph, really. And we are normally very, very good at acting quickly and adapting to current demand situation in order to have this at a quite high level. But it is an extremely challenging situation now with components. But we're fighting hard. We're not giving up for sure. Then when it comes to market segment development, I mentioned it in the report. Basically, I would say, all market segments are back in full swing, and many of them actually want to buy more than pre-COVID, but they cannot, because they're both limited by -- we cannot find components, but they are also limited by other suppliers. And the only thing that's really not completely back are buses, that's easy for you to see also, just look in any other bus company report. But buses are definitely not back. Railways are still, in many cases, postponed, not completely back. But both of them, we start to see that they are coming back again. And you can imagine that it will be a swing upwards when you've had basically one year of COVID with no bus orders at all. The buses that you have in your fleet, they wear out, so then you have to buy more than you normally do. So we believe at least that it will be a big swing upwards in that -- in those market segments coming forward. The third one that is not back either is the marine segment, but we see a very high activity on the RFQ front that we get a lot of requests for quotations. We deliver mostly transformers, but also electrical automation for the marine segment. And we see that -- we believe that it will come back sometime during 2022 and be fully back in 2023. But then again, it's very hard to look into the future. That is the picture we see now, at least. And that was basically what I had in presentation wise. So now we go into the question segment.

I will see if I can bring this one back up again. So I will try to unmute you. Maybe can you unmute yourself? Or do I have to do it?

We can unmute.

That's great. So I see a question from [ Yvonne ].

Can you just talk about -- looking at your competition, would you say that you're sort of a preferred taker of sub-suppliers' goods or are you at the disadvantage compared to your competitors? I think you talk about this home sourcing trend, et cetera, I guess, that would be positive for AQ. But if you just look on a broader perspective -- I'm basically trying to get at if your risking market shares here, because it's going to take a couple of years probably to rebuild this whole supply chain to increase capacity.

I don't believe that we are losing market share. I think it is -- in this kind of market it's the one who works the hardest that sprints the most to get the most components. And we -- I can take a concrete example. We -- one of our big suppliers for -- and all automotive OEMs, big suppliers for connectors is TE Connectivity. They called Tyco in the past. They are both -- they are the biggest supplier in the world for connectors for automotive industry. And they also produce wire harnesses themselves. And we -- and we also produce wire harnesses for them, and they are the worst to get their own connectors, which is a very strange situation. Because if I own the connector production, then I would be -- I would think that I would be able to give them to my own production, but they are not able to, because their customers are screaming -- they have Volkswagen and the other screaming at them to really get components and then they give it to them before they even give their own production. So -- but we see clearly that when we work hard and really have a loud voice, then we also get components. So I don't think that we are really in a disadvantage. We also, of course, use our customers and work together with them towards these suppliers to really get components in for their specific product. So I don't think we are at a disadvantage, really, I wouldn't say so. But yes, it is -- no, I think it's about working really, really hard, really, in the supply chain. That's what…

Can you also just -- I mean you talked about a lot of things you were discontent with in the quarter. But how is the organization responding when you sort of make clear, James, that these are not acceptable poor performance, et cetera? And what is the likelihood of you actually getting this fixed in the sort of coming quarters?

Now I would say that I think the organization is responding in a good way. Then, of course, you always have -- I mean we have a lot of people. So it's -- of course, there are good and maybe not as good people. But I think the organization is really -- to be really honest, they are working extremely hard just to deliver out this -- the amount we have been delivering out now. So I think that they are doing their utmost, and I know a lot of our people are working more than maybe they should, but not because we force them, just that they are really committed to delivering to their customers. So I think that we are committed to really to fix the supply chain issues that we have or I would say, most of the people that are in our business had. But then it's different in different segments. So if I take for my business area sheet metal, for example, there, we -- there is material. I mean both sheet metal, aluminum and copper, you can find it, it's just that the prices have gone up. There, we don't have the star buses in that sense. There, we just have to push the prices to our end customers. And I think we've been successful doing it in this quarter, but it will take effect from next quarter. And -- but for this component businesses, where we have a lot of components and our delivery is quite complex and big, there we are really hit by the lack of -- yes. I don't know if I answer your question, but I tried. [ Cindra ], if you are on mute, you can go ahead.

Just a question on -- I mean you're obviously not completely satisfied with your profit performance. But looking at one way to -- when you read the report, it says that Schaffner contributes negatively with the SEK 3 million and also SEK 99 million top line. So I mean, if you kind of subtract that, you get from 7% to 7.8% EBITDA margin. So at least that brings some comfort to, let's say, the underlying picture. But I mean, in order for that to valid that assumes that that you will improve the profitability in Schaffner. And you explaining that some part of the Schaffner is performing quite well, but especially China is a problem there. So how do you see the, let's say, turnaround of -- on Schaffner, and particularly the Chinese operations? Is that the kind of easy to fix? Or is it a situation you have to solve over several years?

What should I say there? I mean we have a clear plan, I think. And it -- to be honest, it's not only China there either. We need to do some restructuring in this German sales and technology office as well. But we have a clear plan for Schaffner, and we knew the profitability level when we bought it, and we knew we had to do things to get up to our level. And then we are a little bit surprised by the low top line in China, which, of course, also affects that. But we have a plan on what to do with it. And as I can say that we have already another transformer factory also in China and there are opportunities where we can consolidate some business between those 2 and make that together a nice unit. So we have a plan. I don't believe that it will take several years that is way too slow.

Okay. Can we say that your ambition is to be, let's say, breakeven on the Schaffner operations already in Q4?

We don't do forward-looking statements, but I mean, of course, we wanted to be -- I mean our target is -- we can say like this. Our target is that it should make EBT 8% as fast as possible. And I mean, that is what we normally do. If we look back in history, what we buy -- we don't buy -- we very seldom buy companies that lose money. But normally, we buy companies that are not so profitable, because we get them really cheap, and then we improve the margins, which gives us a very nice leverage versus the purchase price. So I mean, that is what we will try to do also in this case.

My second and final question is regarding Mexico. I mean you alluded to that previously. And it was also stated as a, kind of, an issue in the Q2 report. And you also said that management was part of the problem there. So -- but are you seeing it improving or is it due to the, let's say, logistical and component issues that things gotten worse?

No. To say that it has gotten worse, is maybe not the right. We're just not finished. And we need to take a number of steps still in this company to -- and as I said, we have -- we are giving them a lot of support from our -- within our business area. We have units -- so have the same customers as in Europe that we have in Mexico, and I strongly believe that we will be able to sort this out. But it's -- and at the same time here, we are seeing quite a good growth in that unit, which complicates things, because it's easier to fix it when they are, sort of, unstable and when they're growing. So it is a challenge for sure. But we -- this is what we do. So I'm sure we will fix it.

I mean you're delivering to, let's say, a world class or big firms with a lot of resources, are there any risks on, let's say, getting penalties or cancellations or that you have to pay compensations to the customers?

I would say that there is always risk in all business. And I wouldn't say that it is bigger now than it normally is for us. Also, we try to have back-to-back agreements with our suppliers. So in this case -- in many, I would say, in the general case here, we can -- if we get penalties, we can transfer it to our suppliers. So that is what, of course, we try to do, because it's not our fault that our suppliers changed their delivery time and that they don't have enough capacity. So I mean, we try to, in a way, act in the same way as our customers in this regard. We are not, so to speak, Mr. Nice Guy in this -- and we bear the costs for a meltdown in the supply chain globally. So I can say that we would do what it takes. And historically, we have not had any big penalties, and we have been doing this same type of business for 27 years or so. So I say there is a risk, but I wouldn't say that. Yes, based on history, at least, we haven't been able -- we haven't been hit in a big way. And then we have [ Matthias Vivi ] with the question.

Just on the supply chain issues. Can you -- do you have any visibility on when you expect them to be resolved? Is it like months, quarters, perhaps longer?

Yes. I would say no visibility is very, very -- it's very hard to get visibility, I would say, in -- yes. Now because it's not only one thing. I mean it's not like one component or one supply, it is so many different suppliers that have -- that are struggling to deliver. So if I knew the answer to that, then I would become a very rich man, I guess. So it's -- I think it's very hard for anybody to say when this semiconductor shortage will end. So I guess…

No, I understand. Yes. And just to get an idea if things turn to normal, what sort of revenue would you be able to do on a quarterly basis based on current demand and capacity? Can you share anything on book-to-bill or like give the flavor of what is…

Yes. The problem we -- I think that this on-time delivery chart should show a little bit the flavor, I would say. Yes, exactly. If you think that one out of 10 orders are delayed, that is 10% delays, and then you look at our turnover, and then you can do the math. So I think that -- and I think capacity wise, in some of the factories it can actually deliver more if we would have, in a fantasy scenario an infinite supply of components. So I think that is a realistic number to say that it could have been like 10% more in this quarter.

And then just maybe a last question on the -- you provided, sort of insight into the different end markets. But have you ever provided your turnover profit by specific end markets? Have you ever provided that breakdown? Because I just mainly wonder how much, how exposed you are to like high-growth markets like energy transition, like storage, EV, renewables as opposed to more mature markets? Because I was a bit surprised, because some of your peers like [ Nodes ], they managed to grow at a very high rate, and they have quite high exposure to these type of clients and segments. So I just wonder how different you were compared with them in that respect.

I mean they do a lot of electronics and -- yes, I would say, different type of product. So in general, they do a little bit box build, but very small boxes compared to ours. So if I would say like this, if they are into a lot of these EV chargers for personal vehicles, which is high-volume stuff. We are more into high-voltage EV chargers in -- so to get a comparison, I think there is a higher complexity and a different product mix. Meaning, we have more low volume, high mix than what they have, which if I should try to answer your first question there, with how exposed we are to this sort of electrical vehicle, new energy, these kind of markets. It is very difficult for me to give a number, because if I am delivering to, for example, big customer like AB Volvo, a big, big -- it is a big account for me. Both -- we deliver to their buses, to their trucks, to their construction equipment machines and also to Penta. They are also transitioning towards electrical, of course, and we are delivering to those vehicles as well. So we -- but, of course, they are -- I would assume that you mean that they are a traditional one. But I mean, we are part of the development of their electrical bus. And we have many components and systems in that bus -- in those buses and have had for many years. So I would say, we are into that. But I think that transition is also slower than on the commercial side more than the business side. Then certain of our business areas are very linked. If we talk about these inducted components where we have made the Schaffner acquisition. I mean everything, all the products that are produced there goes through some sort of electrical transformation. So it is everything from water cooled inductors and transformers for wind power and solar power to driving electrical motors of different sorts in different drives. So that, I would say, is all into a good new space. And even if it's very, sort of old technology in a way. I mean transformers have been part of the business for a very, very long time. So -- and in fact, if we look at pure renewables, we'd -- normally, we would say we are at 4% of the total turnover. But then as I mentioned in the report, we have a number of projects with both start-ups and experienced peers for energy storage. And then we are talking about also then big type of energy storage plants more than small batteries. And here we are doing -- like this it's part of our electrical cabinet business area, our sheet metal business area and our transformer -- inductive components business area. They're all involved. And we have some project orders that are known also, I think, to the stock market. This Azelio who are doing this aluminum heat storage, you can see with the Stirling motor to make electricity is a very different way -- type of battery. There we are the main supplier. We're building the whole system for them. They have not gotten so much orders, I believe, as they had planned. But still, we have a number of orders there that we are working on and delivering. And then we have some other very experienced, I could say, customer within backup power solutions for factories and cities where you need to have backup power, where we are doing a big project now for their battery plants, so to speak. And they have some kind of battery module, which is a 15 tonnes, and we are building it for them in Bulgaria. So we believe that this will grow. Very long -- it's a very long reply to maybe a short question, but yes. Okay. And then we have -- [ Cindra ] you're raising your hand, but I guess you maybe didn't take it down.

Yes, I'll try to take it on. So no questions for me.

Okay. Do we have any more questions?

Is now joining.

Okay. I mean you have also our contact information. And feel free to also give me and Christina feedback on this call, because it was actually my first earnings call, so if you like to see something else or you think it's -- that I speak too -- have too much Swedish accent in my English, then please feel free to comment. I mean our e-mail is available on the website. But also if you have other questions regarding the third quarter. And we will have another call again after the year-end report. And we will have 2 calls a year that is our plan, at least. But feel free to get in touch if you want more information. Okay. Thanks, everybody.

Thank you.

Have a good day. Bye-bye.