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

So now it's 9:00 AM, so let's start our quick call after our release of our quarter 3 earnings. So my name is James and this is Christina to those of you who are new to AQ. So let's go. So this is third quarter in brief. We have very strong demand, especially in electrification. Going to that deeper later. We see net sales increasing by 31% compared to last quarter, same. Operating profit increased also with 30% to SEK 123 million. EBITDA increased to almost 34%. Profit margin before tax is 7.1%, which is not reaching our target, and we will get back to that. Cash flow from operating activities was SEK 3 million due to strong organic growth and yes, we will get back to that more in the cash flow slide. And earnings per share after tax and dilution increased by 31% in the quarter. First 9 months net sales increased by almost 28%, SEK 5 billion. So they've grown SEK 1 billion in the first 9 months, which is really good actually. Operating profit increased a little bit with 3%, it is far from our target where we want to increase profit by 15% per year. We were a bit heavy on the back side of the year. But -- and we are catching up now from the previous 2 quarters. And profit after financial items also increased by...

Sorry, James, you are muted.

That's amazing. So you haven't heard anything or?

We missed the last 30 seconds.

That's very weird, okay. Okay. So earnings per share after tax decreased a little bit by 0.4% due to the distribution of profits between different geographical markets, that's why. And the equity ratio is still high, way above our target. See if I can -- earnings per share growth, this is the main thing for us to increase our earnings per share. And we want to do it -- it should follow our growth really. So if we grow 15%, then the earnings per share should grow 15%. I've told before that I think that we will catch up since we were behind during the last quarter, and I think we're catching up now. And I still believe that we have a chance to reach our target for this year, after the fourth quarter. We have a really good turnover in the quarter. We grew 30% versus same quarter last year. As I said, still we have some issues, supply of these kinds of computers that we put in the electrical cabinet and system products are still not coming as we want. And it's still long lead times, so it affects our ability to deliver. And we had a big customer in U.S.-Canada that were affected by strike in July, August. It affects about SEK 18 million. And of this increase, we see that it's mainly driven by electrification. It's batteries components for drives, inverter and electrical vehicles. I mean if it's in ABB's report today, you can see that they are really growing strong. We -- the Hitachi spin off from ABB is also -- they are also growing very strongly. So I think that's also why we are growing. I mean and our customers are growing because there is a huge demand for electrifying the society as a whole. And I think this will continue as I write in the report. So organic growth is super high. And of course, some of that is related to price increase. I think if we compare quarter 3 last year and quarter 3 this year, I think we have increased the prices roughly by 12%. Although it's very hard to say an exact number, because we have -- I would say we have around 3,000 customers, and then we have unique parts for all those customers. So it's very difficult to say where we have increased or not and how much we have increased, but this is our approximation. And this is to compensate, of course, then for higher cost for material, energy and transportation. Acquired growth will be 0 now. We had -- we acquired a Schaffner unit it's now more than a year ago. So -- and I think you should not expect really to -- that we will -- we are opportunistic, so maybe we will do an acquisition. But I would say that this is not our focus area now. We are growing extremely strong with the existing companies that we have and we need to focus our efforts on making profit and deliveries and good quality to our customers in those projects that we have for this year, but also for next year. So I would not expect any large acquisitions. It is if we can add capacity and make a very cheap acquisition and find that, then of course, we will act. We see also that -- we hope also that also these multiples will go down now when the activity is a little bit lower in the market regarding acquisitions as we see it. But the main focus is on organic growth. I think it also represents in our lower ambitions on percentages as well. A comment on the Schaffner acquisition is that we see a very strong growth in that acquisition, and we believe that we are now done with the integration, and we are very happy with the synergies that we managed to get out of it and the capacity that we have increased due to it. So I think this is a really good acquisition that we have made. And I would say profit margin will be when -- in the long term it will be same as for AQ as a whole. Our EBITDA margin increased versus last quarter by about 1 percentage point. I think, as I've said before, we will be 8% plus/minus 2% in EBITDA margin every quarter. And I think we are on the way to getting back to our target level of 8%. We still need more price adjustments versus our automotive customers, and we are working very hard with that. I believe that we will be finalized in quarter 4. I'm very confident that we will be finalized with those. Then of course, if costs increase more, then we need to increase price more and so on. But I think that we are in a good way with all our customers now. And it has been really hard work for us. But I think we are able to do it. So it shows also that we have some kind of moat that we can really increase prices when we need to. We still have a number of companies, 3 with need to improvement program to improve profitability. And this is a little bit business as usual in AQ. I mean we always have some companies that are performing not as good as others. And then some are performing better. But I think we are in a good way and we are improving these companies, and we write a little bit about that in the report as well. Cash flow then, yes, it's not great, I must say. And we are still increasing our inventories a little bit. We are getting more accounts receivable, of course with this rapid organic growth that we have, also going forward. So it's not only -- if you look quarter-over-quarter, then actually this quarter is a little bit lower than the quarter before. There is summer holidays and so on in this quarter, so it's normally a little bit lower than quarter 2. But we will continue to grow. AQ is a growth company and we will continue to grow and we have committed to grow 15% per year. So we will continue to grow also next quarter and next year and hopefully the year after that as well. Of course, that I cannot see now, I'm no oracle. But anyway, we see also that we need to focus more on our inventory. We have put the pre-program together with a strong leader that is focusing on certain companies where we see that the inventory turnover is lower than in the peers of the Group, and it will be run now during quarter 4 and for the whole next year, this is not the fast thing to implement, it takes time to get the things in place. Once you have all the parameters set in the system in the right way and so on, then you will see the inventory start going down slowly. So I think it would be something that we will be working on during next year as well. Also here is a little bit about inventory turnover. As I said, we are very far from our target. However, you should notice that I've also put in how we calculate it. So we calculate it based on rolling 12 months backwards. So if you have a strong growth in the future and then you have to build inventory for that, then the inventory turnover at this present day will be low. So yes, we are -- but it doesn't excuse for, I would say, a really very low still development in this area. So we -- as I said, we have a program in place, and we aim to get back, but I believe it will be hard for us to get back to 3 turns per year by the end of the year, depending on the high growth that we and our customers are having at the moment. So I started this presentation with the picture of our factory in Panevezys, Lithuania. It is the picture on the left there. It is a finished building. We own the building. We have invested a lot of money in this factory to double the capacity in Lithuania. It was ready in April 2022. We have made investments in machine, but more will be needed. We have recruited now during this quarter 500 people, but we will recruit during quarter 4 another 300 people. Of course, it takes time for these people to reach the productivity level of the people that have been doing wire harnesses for 10 years. But I think, normally, we say it takes like 6 months to learn how to produce a harness with good productivity if you have the skill set to do so. And we believe that this factory should increase turnover with EUR 40 million in 2023. So it's really -- we have won and communicated previously, if you look back in our press releases, and that we have won major projects with truck manufacturers. In the last quarter, we reported that we won an order for EUR 9 million to a big construction equipment supplier. We see also that bus volumes are doubling going forward. So this factory will have a huge organic growth in quarter 4, but mainly during next year, it will be substantial. So that's why I'm telling you now. Then the next photo you see is -- it looks like a construction site. It is our brownfield in Bulgaria. We bought it in July, we bought it in -- we signed a contract in June and communicated in our last report, but we gained access to the building now in July. And this is the way it looks like. We have fixed the roof. We have cleared out all the walls. I think now there are walls actually. It goes really at Bulgaria speed over there. When we bought this place, it was trees and everything inside, but now we have cleared everything and we're going to make an industrial floor. And here, we're going to make battery system factory, and we will deliver out the first batteries now in October. And we believe that this factory will be in full production in April 2023. This is typically an AQ project where we take something that is really -- for some outsiders, it would look like this isn't worth anything and we will make gold out of this. We believe that the turnover in this factory with full utilization will be EUR 40 million per year. We will then build about 1,000 of these huge batteries per year and around 500 control cabinets that sits together with, not each battery, but many of them. Yes, that is a very exciting project. And it will be sheet metal fabrication first, so it will be sheet metal processing, a lot of welding robots. There will be a surface treatment, meaning painting and then we will assemble these big batteries that come from different suppliers, both from Europe and China. And then we will send these ones to our customers and customers which are, of course, located all over the world, and it will go to renewable storage -- storage of renewable energy and backup power. Very exciting project, we believe. When we talk about net debt and you see that it's increasing quarter-over-quarter. And we can say that we have invested now in -- or cash out in the quarter is SEK 90 million for investments we're doing in equipment and also this Pernik facility is included in that in the quarter. So since we have high increase in working capital and then we're doing investments and our net debt is increasing, but we're not really worried about this. I would say, I think we will get back to normal levels, and we're not geared in a big way anyway. And I think there are too good growth opportunities to be caught to not continue to grow. On-time delivery is still an issue for us. And I have actually found a competitor that also reported this, and we are on the same level as them at the moment. So it is not unique for us to be on this level. But normally, we like to be a bit better than our competition. So we're putting in more efforts to improve here. And I think once our wire harness factories will be back on track, because they have had problems with components, I believe they will be back on track, then we will see these numbers improving a lot. So -- but in business area, Electrical Cabinets and System Products, we still have issues to find these kind of PLC's which will have semiconductors inside that product. It is not much we can do about that really, because we don't want to start to manufacture PLCs or sets that we hand over to ABB and these kind of companies is that. But we are working with our customers with scheduling and so on and I think it works quite well. But of course, it has an impact also on our working capital. Some projects of future growth. This I normally try to share. So battery storage, we talked about that. That was the Pernik factory. There, you can see our first prototype. So we built a whole sheet metal structure, we paint it, we put in all the batteries and fans and the electrical components and so on and sell it as a complete module. Normally, in a battery installation, you will see 4 of these packs, you see how big it is. And it weighs, I think, 14 tons when it's ready. So 4 of these batteries and then an electrical switch gear at the end. It is -- our customer has secured a lot of orders going into the future. So we believe that we have a good opportunity here to continue to deliver to them. I talked about the Supercapacitor banks before, so we are working with one of the leading power grid suppliers in the world. We co-develop this supercapacitor cabinet together with them. We have helped them to do the electrical design and so on, and they are trying to get their first project. So difference between the battery storage, like you see on the picture, which is run with lithium-ion batteries is that, that is very slow energy. You charge it slow and you discharge it slow. But in order to balance the power grid, you need to sometimes charge and discharge energy very fast, and that is when you need a supercapacitor, it is that. So it is similar stuff, but different speeds and you need both. Electrification wind power. So on the left, you see a stator housing of wind power, yes, a windmill really. And you see that there is -- it's a little bit hard to say. But in the circle, outside circle, you see a lot of white dots there that is pole shoes. And our site in -- a new site in Hungary is in negotiation with one of the major players in the wind turbine manufacturing and that we will manufacture on these pole shoes for the European market and for the new development projects. And it is a big project, I would say, and we are selected as a supplier, but we have not signed the contract yet, because this is a new product and a new customer and then you need to be a little bit careful on how the contract looks like. But I'm confident that we will get this signed and then we have a nice growth potential for several years going forward in Hungary. On the bottom, there is a water cooled transformer, which is used for the inverter in the wind power plant. So you have water and electricity combined, so the water cools the transformer. And this particular product, we have already sold 10,000 pieces of, and we continue to see growing volumes in wind power. So our factories in Estonia, India, China, Hungary and U.S. are delivering these kind of products. And we will continue to see growth in this area as well. We see a big growth potential also in our factory in Brazil for this type of product. That is nice. That's what we talk about when we talk about electrification. Then on the top left there, I've talked about this before. This is the Tesla of the railway. It is a battery electric locomotive for the American market, because I think the railway is not electrified. So they need to change their diesel locomotives for battery electric ones. We're delivering several components to this solution, and it is the first one in the U.S., and we think that Wabtec, which you see the customer name on the train, it is going to be a leading player in delivering this type of drive systems in the U.S. So -- and we will be a part of that through our factory in Virginia in the U.S. This e-bike drive system from Bosch, also in the picture, and we deliver components for that from our factory -- one of our factories in Hungary. So it's a sheet plastic injection molding, overmolding over magnets that are part of the drivetrain for Bosch. And we have a new contract of EUR 15 million over 3 years from Bosch. We had another contract before that, but we think that this is really a good business, and it is electrified bikes, just you see them everywhere. And then you have a typical bus harness for electric bus on the right. We see a dramatic increase in electrified vehicles in our factories. So if you see orange cables, then that means it's high voltage. So that is typically bus and truck cables. We have learned now during our years working with the electrification of Volvo's buses and Scania's buses, how to do these high-voltage cables, and it's really a nice growth in that area at the moment. So we believe that AQ will continue to grow and that's why we have written in the report. So we have grown already this year, first 3 quarters that we will grow with SEK 1 billion that we have grown only SEK 1 billion. We believe that for next year, we will be able -- because of the projects we have already won or are in negotiation, we have forecast for that. We have the opportunity to grow with new customers and new products with the same amount next year. Now we open up for questions. And I will close the presentation also, I think. We can see us instead. Let me see here if I can do with that. Yes. [ Sindre ].

Yes, I changed. Do you hear me okay?

Yes, I do.

Okay. Excellent. Congrats with a strong number, James. Just 3 questions. I mean if you take out the -- what you claim is approximate price driven growth, I think you have implicit to say that your organic growth increased from approximately 11% in the second quarter to 15% now. And if you can give some comment on what is, let's say, demand driven of that acceleration, and what is more due to the fact that you have caught up with your supply chain? If you understand my question.

I would say it is more demand driven than supply chain driven. I think we still have the same problems like we had last quarter. We are catching up some backlog in some segments. But I would say, it's demand driven. And I mean, 2 of our biggest customers have reported today. It's AB Volvo and Hitachi and they are growing strongly and they have strong order books and we see in the forecast that they will continue to grow. So I mean, we are very confident that we see a continued strong demand, and I must say that I cannot at all see a recession coming.