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

So let me start. Welcome to AQ Group Investor Presentation for Quarter 4. So I'm James, I'm the CEO of AQ, and I also have together with me Christina, she is sitting here beside me. It's a great pleasure I can present our numbers for the full year 2022. And yes, let's go. So in brief, we have record turnover and record results. Net sales increased by about 32% to almost SEK 2 billion. It's way above our growth target. Our operating profit increased with similar 30% to SEK 148 million. EBT also increased a little bit less with 24% to SEK 137 million, and our profit margin for the fourth quarter was 6.9% which is a little bit below our target. We'll get back to that. Cash flow from operating activities was very good of SEK 140 million in the quarter, and earnings per share after-tax and dilution increased by 53% almost to SEK 7.27, which is a really good quarter. If you go for the full year, I think you read the report but yes, we managed to cross SEK 7 billion in sales, which was a milestone for us, it's first time. Operating profit increased with only 10% to SEK 491 million, still an increase from last year. Also EBT increased with 9.3% to SEK 482 million, and profit margin before tax was 6.8%. We'll get back to the margin discussion a little bit later. Cash flow from operating activities for the year was SEK 208 million, which is below our target, which we should be at a level close to our EBT in cash flow. But it has been a tremendous growth year and it [ eats ] some cash. We will get back to good cash flows going into 2023. Earnings per share after tax, after dilution increased with 12.2% which is a little bit lower than our average, but it's quite okay. Equity ratio is very, very high, and the Board of Directors with this strong growth in mind, and that we will continue to grow also very strongly this year proposes a dividend, unchanged from last year of SEK 3.33 per share. Earnings per share growth, we usually show this graph, and I'm very happy to see that we continue to grow, even though I would have liked to grow it a little bit more in 2022, but we had 2 quite weak quarters in the beginning of 2021, and then we improved as the year went by. Still, our earnings per share growth on average for the last 10 years has been 18%, which I think is, really, really strong and we will continue in this way also going forward. A little bit too much in front [indiscernible] here, but turnover in the quarter was record high and very, very strong of course, compared to the quarter last year, but also strong if you look at it sequential. We still have long lead times on some components, but it's getting better by the day. So I think the component constraints are becoming more like usual. We always have some components that are hard to find, and we should be good at finding those, but I think it's getting better and better. And we have also started to see deliveries of these battery systems that I've been talking about the last quarters from Bulgaria and our big Wiring Systems truck project is a little bit behind the plan, I would say, 6 weeks behind schedule, but we have started with about 50% of the volumes already now in quarter 1. And we will be in full swing in quarter 2. We grow very strongly in -- mainly in electrification. So it is inductive component for drives, for ships and med-tech for commercial vehicles. We have a very strong growth in almost all of our business segments where we operate. So, the organic growth is super high. Of course, this is in many ways -- yes, also an effect of the many price increases that we've had to do, to compensate for costs that are out of our control. But I would anyway say that the organic growth in this quarter is approximately 16% and then we have about 10% that is driven by price increases compared to same period last year. We also see -- if you can maybe recognize that the organic growth is much lower than the net sales growth and it is, of course, an effect of the currency, which was I think 7% in the quarter, had a positive effect on the net sales. Acquired growth, we are at zero in the quarter, it is below our target of -- we want to grow 5% per year, and I think this year, we had some spill of the Schaffner acquisition. We are looking at things all the time, but as I said in the last call, we are focused on our very, very strong organic growth this year. We will continue to have a big focus on our organic growth, also in this year, but I think there are a lot of companies out there that would fit into AQ. And we're trying to get them to like us and want to be part of our family. So we are as usual, continuously working with acquisitions. If we look at the margin then, I'm not super happy about our margin in the quarter. I think it should have been equal to our goal. You can say that last quarter, we were talking about compensating for increased costs with our automotive customers. I believe that we have done that in this quarter, even though the agreements were done very late in the last month of this quarter. But with that said, we are now moving into more normalized territory when it comes to price increases, we will continue to work on our pricing with all our customers and analyze our parts as we normally do, but it will be not the same story in 2023, as in 2022. We believe still that we can do a lot to improve our margins, by reducing -- we have some loss makers, some companies in the group. We have about 50 subsidiaries and some of them are not performing as they should, and we put a strong focus on them to improve their operations and profitability, with different countermeasures. And then we also have a number of high-growth factories where we have recruited a large number of people, where we -- it is natural for these people to increase the profitability the longer time they are employed with us. So in the beginning, they are maybe not -- maybe doesn't have the same productivity as someone who has been working for us for a year or 2 or 10. So I think that the productivity will gradually go up during 2023, and this will of course also improve our profitability going forward. What I do know, however, is that we will continue to be in this span between 6% to 10%. But of course, I'm aiming to be on the top of it, rather than now very close to the bottom of this span. If you look at the cash flow in the quarter, it starts to go back to normal levels. We are still a little bit behind where we want to be. We see that our efforts in improving the inventory turnover is starting to bear fruit. We can say that compared to last quarter, the increase in our inventory is very low, but increase in sales is quite high. And of course, that is a way to turn your inventory faster. So, we have appointed now dedicated resources that work on this and help our companies to improve in this area. We believe also that better control of this will also improve our profit and on-time delivery going forward. So this is a key focus area for us in 2023. Here is the slide on inventory value and inventory turnover, and our normalized level is at 3. And because of different reasons, partly high growth, inavailability of -- not available materials, in combination with high increase in raw material prices have seen that our inventory turnover has gone down. And now we see that it's starting to pick up again and my target is that we will be back on a normalized level this year, meaning 2023. We still have quite big investments in increased capacity, and we can say that we are pretty much done in our facility in Lithuania now. All machines are in place, all people are recruited, the volumes are picking up gradually during quarter 1 this year, and we'll be in full swing, as I said from quarter 2. This will impact our turnover this year with EUR 40 million or so -- compared to 2022, it will be EUR 40 million more turnover in this factory alone. Then on the bottom picture there is our renovated new electrical cabinet factory in Bulgaria. In the last quarterly report, I showed a picture where there was no walls and it was not finished. Now building is finished, machines are installed in some parts, so we have welding machines in place, blasting and so on, and we are starting now to do serial production in this facility from February. But full production, I believe, will be end of March also in this factory. We believe that we will add another EUR 40 million of turnover for this product group and in this factory compared to 2022, in 2023. It is a very exciting project and take a lot of our efforts to make these fantastic customer opportunities realized. And to move from there to our net debt. So our cash flow is quite good in the quarter, meaning that our net debt is decreasing. But as you can see, our investment activity in quarter 4 has been quite high. Also in quarter 1, we will be at the same level as in quarter 4, I think, with capacity investments, and then it will flatten out a little bit during the rest of the year. I believe that our debt situation is very much under control, and we have a very low net debt-to-EBITDA. This gives us of course opportunities to do opportunistic acquisitions, but also to invest in this kind of big customer projects that we keep seeing. We'll get back to some more opportunities later on in the presentation. Our on-time delivery is really at its lowest level ever I think in December, so we are delivering about 88% of our order lines on time, which is not what we are used to. However, I believe that now we are starting to catch up with our capacities. As you've seen, the turnover in December is very good. So we have been able to deliver out quite a lot of delayed orders. And I think the trend will start to reverse now and we will get back to normal levels, so it will pretty much follow the inventory turnover improvement. We are of course putting a lot of efforts into this area to work with our suppliers and customers to make them happy, I mean, to make our customers happy. It is still a challenge for us with the high growth we have, I can say, but I think we have many strong local entrepreneurs that are managing their customer relations in a good way, and also increasing capacity in an extremely quick way, I would say. So not happy with result, but happy with the actions we are doing, and if you do the right actions, the results will come. And then we have some projects for future growth. We've had the same ones for quite a long time, and it will be a little bit the same. But we have still this battery storage project in Bulgaria, and we believe that the customers we have in this area will continue to increase in the coming years. So we believe that this should still be on this slide. And we're working with 1 global leader in high-voltage systems to design and produce supercapacitor banks, and it is also an exciting growth project that we see in Europe at the moment. And so here, we do the design work and the development of the product together with a customer in Sweden, and then we produce the -- all these big electrical cabinets in Bulgaria. So we believe that we together with our customer will make this a success. This is a little bit new slide. So we're growing a lot in electrification I've said, and we see a strong trend at several of our big drives customers that they are selling more drives now to reduce their customer's energy bill. So if you change the drive -- old drive for an electrical motor with a new one, you can save between 20% to 40% of the energy consumption. And we delivered inductive components and sometimes the complete drive, it's the top left picture there, for our customers. And we see an extremely strong growth in Estonia, where we believe that we will add a lot of volumes this year. It was already a very strong year last year, but we will add even more volume this year. And we are even starting now to support these factories, with some other factories that we have recently acquired as well. On the low, the blue ones you see there, that is typically marine transformer, where we build -- we design and produce the whole transformer. This is something we are doing in our factory in Finland, and this factory is now fully booked for 2023 and 2024, meaning that we will have a fully loaded factory with good, previously unutilized equipment will be fully utilized now. So we believe that this will be also a growth factor in 2023 and 2024 for us. And these transformers are the marine approved, it's very high requirements and they're sitting on ships -- different types of really big ships. Last one is a new one maybe for you, but we are also working hard with our defense customers, and they have now -- through many sad circumstances, been very successful in securing a lot of new orders. These are existing customers for us, where volumes have been quite low for several years, but now volumes are really picking up. So we are both delivering Wiring Systems and Sheet Metal Products to different defense vehicles, mainly in Europe and we believe that this is -- somebody has to do it, and we believe that we have a good setup, where we have designers in Sweden and the low manufacturing footprint and also production capacity to deliver these systems to different customers that produce transport vehicles and armored vehicles of different kinds. We believe that we have already secured orders for about SEK 200 million, that should be delivered over the coming 4 years. So that is some exciting new opportunities that will ensure that we continue to grow also in 2023 and 2024. And with that, we have still 12 minutes to go, and then I open up for questions.

If you raise your hand, then -- and then I will try to -- first up is Johan Dahl.

Just a few questions, you just -- you talked about many of the growth projects now just recently and you put a number to some of them, but if you just try to add up the various buckets from where you have sort of firm orders that can be incremental growth '23-'24. I mean, you put a number on the wiring factory in Lithuania for example on the marine system. But if you add it all together, what are we talking about? No one knows exactly what the outcome will be?

But I think we are very careful people in AQ. So I'm sorry, I will not give you a number. Of course, I have an idea, but I don't -- we don't like to predict the future. But I think we already wrote in the quarter 3 report, that we will grow at least with SEK 1 billion in 2023. And if I don't beat that, I will be very, very disappointed. So yes...

Okay, I got you.

And that is fair to say, because things can happen very quickly, but we are extremely optimistic about our growth prospects in 2023 at least.

And just finally on the -- you talked a lot about previously in 2022 about erratic customer behavior affecting your on-time delivery, et cetera. If you look on profit improvement in '23 potentially, how much does that correlate with your on-time delivery, and have you seen your customers becoming more predictable in how they order from you?

I believe in several segments, they have become more predictable and the thing is that, of course, if I have a customer delivering a system and they have other components that are late, then they will try to postpone our delivery as well. Otherwise, they will get overflown with equipment. And we see that they are getting more predictable and that they are able to meet and deliver what they believe is on time and that helps us of course as well. However, there are still disturbances in the market and there is always, but I believe that our on-time delivery will be very much improved, it will improve our inventory turnover, which will give us a better cash flow, and at the same time, it should give us also better profitability, because then we don't have to do a lot of -- when we have disturbances ourselves and our customer disturbances, that gives us lower productivity as well. So it should give us a margin improvement. And as I said. we promised to be in this band between 6 and 10, and -- but of course, we should be able to reach our target, so to speak. We have another question here. I don't see is who it is. [Foreign Language] I don't know who it is. There we go. Sindre, maybe. You're muted.

Okay. James, you hear me?

Yes, yes.

Okay, yes, it's Sindre from Arctic Asset Management here in Oslo. Congratulations with good numbers. Just a couple of questions. Firstly, it appears that the tax rate is close to zero, is that kind of correction of previous quarters, and what can we expect going forward?

I think I will let my CFO answer it.

Yes, no, it's not the correction. If you look in the balance sheet, we have increased the deferred tax assets. It is related to lower taxes in the future. We do a lot of investments in Europe, for instance in Lithuania. We have also done it in Sweden and so on, and specific countries are giving tax incentives, if you do a lot of investments in buildings and machines and so on. So that is actually due to deferred tax assets, in relation to big investments in Europe. So yes, we will benefit from them in the future, with paying less taxes for profits we are making.

But we have been very careful in putting those in because -- yes...

Yes, because the tax situation in Europe going forward is going to be -- it's a lot of new EU legislation affecting taxes and so on. So we have made a very prudent estimate of tax benefits going forward.

Yes. Okay, thanks. And then on growth and I appreciate that you don't want to guide specific numbers, James. But I mean, Lithuania and Bulgaria should add close to SEK 800 million, maybe a little bit less, since it's not still fully 12 months for both of those. But then you are pretty close to the -- well, quite close to the SEK 1 billion, then you have price increases and then you have new initiatives, so just taking the current price increases for the full year of 2023 soon to be, let's say, aiming much higher than the SEK 1 billion mark.

Yes, I agree.

Okay. And just maybe on the more cautious side, you have never said it, but at least a couple of your, let's call them peers, have expressed that during 2022, on occasional orders, they got very well paid, in the sense that they were asked to buy components in the gray market, so to speak, at very high prices. And they just put that extra [ on the bill ], and I mean, it doesn't impact the margins, but it impacts topline on volumes. But you haven't been subject to that impact at all, have you?

No, no, I think it's more when you are doing PCBs and circuit boards, that is more common practice. I think occasionally, we do the same, but it is nothing that affects our top line significantly. So I would say, no, it does not affect. Then again, we can say that we have had one-time payments for customers for -- to compensate for electricity during 2023, to compensate for certain extra costs that we've had. But I think it's not big and it's not a significant amount. And that's why we don't mention it in the report.

Okay. And then finally on -- you revealed some numbers that -- indicating that Schaffner factories actually delivered positive contribution, but it's still, let's say, far below the group average. So how does that look for 2023?

I think it -- I'm quite positive still, I think that we have been able to do a lot of changes. So 2023, I am expecting them to deliver according to our average profitability.

Okay. And finally, Mexico is progressing on its turnaround and do you expect positive EBIT contribution in '23?

Yes, Mexico is now showing a small profit. Thank you. Any other questions? Still have 4 minutes. Meeting is one hour, but I don't think we will -- we like to be fast.

Can you hear, James? Just a question, can you just talk a little bit about what's happening in the Board? There were some announcements this morning and not any sort of judgment as such, but just explain to us what's happening?

No, no, but we can say, how it is. I mean, Patrick has been in our Board -- Chairman of our Board for a very long time. He has several other assignments and he feels that he is overloaded, so to speak, so he has decided to leave us. And then -- he's not overloaded, I wouldn't say, but he has decided to prioritize his other engagements and then Claes Mellgren, who is the founder of the company and has been the CEO, he decided to take the position as Chairman. And yes, then we also have a change, of course, Vegard leaves the Board, and he is replaced by Catherine -- Christina, sorry, Christina, who has been with -- I'm very happy that she's joining the Board, because she has a great experience running AddLife, which is a really nice group of companies, which operate in a little bit similar way, even though they are more letting their subsidiaries -- be a -- little bit more than us, but still they're building their business in sort of the same way with the same values. And she is also an advisory to -- I don't know how to say this, Aeternum Capital, who is one of our biggest owners. So she will represent their shares in the Board, so to speak. So she is replacing Vegard. So I don't know what to say more about that because...

No. That's good enough. That was all, I was just wondering, all those affiliations, et cetera.

Yes. And by the way, if there are any analysts in the meeting, there is still a chance to be the first one who have coverage on AQ. It's either you are first or you need to be better than everybody else. So it's a good opportunity to have coverage of a company that will continue to grow and make profit and have fun. Yes, if there are any other questions, then I think that we are done. Another great AQ year and I believe that 2023 will be better. Thank you so much from me and Christina.

Thank you.

Thank you.