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

Okay, it's time. So welcome to AQ Group Investor Presentation from quarter 2, 2024. Let's go. First, as usual, I'd like to show why we should invest in AQ Group. We have earnings per share, CAGR of 15% over the past 10 years. We made profit every quarter since the foundation in 1994. We've exposure to industrial market segments with underlying growth and we will talk about JIT Mech and Rockford today which is our acquisitions. And then we will talk a little bit about electrification, railway and marine as well. We have a long history of acquisitions, two to four factories per year. And currently, this year, we have added five factories. And we have a strong balance sheet. And then AQ in short, we've about 8,000 employees with SEK 9 billion in turnover, seven business areas, 15-plus market segments, and now manufacturing in 16 countries when adding U.K. We have deliveries globally, and we have made profit every quarter for 29 years. And as I said, 15% earnings per share CAGR, and we buy some factories every year. And then we have our sustainability initiative, UN Global Compact, that we've been part of since 2012. Let's go into the quarter then. So net sales decreased by 4% to SEK 2.2 billion, and it is much lower than our target of 15%. We'll come to it later. We have an EBIT, which increased by 9% to SEK 222 million, and then we made profit after financial items EBT, it increased with 11% to SEK 218 million, with the profit margin before tax of 9.7%, which was much better than the same quarter last year. And our profit after tax was SEK 181 million. And then our cash flow from operating activities was record high at SEK 301 million in the quarter, really good. And earnings per share was a little bit lower than the previous quarter at SEK 1.97. We continue with the first 6 months, where net sales decreased 3% to SEK 4.479 million (sic) [ SEK 4.479 billion ] and operating profit increased to 12%, and profit after financial items increased with 16%, and profit margin before tax was 9.8%. It is very much higher than our target of 8%. And profit after tax was SEK 366 million and cash flow from operating activity was at record high SEK 545 million for the first half year. And our earnings per share before dilution was SEK 3.98 per share, and our equity ratio is very much above our target of 40%. Earnings per share growth, so we had a 6% earnings per share growth versus the same quarter in 2023, but a decline of 2% versus quarter 1, get back to it. So some comments regarding the sales. So we have an organic growth or nongrowth of 6%, whereas we acquired growth of 1.7%, and we had some positive currency gains in the quarter. We have a high activity in our sales pipeline, you can say, but -- and we have many nice projects coming in, but it's not really -- we're not really seeing it in the turnover just yet. A lot of it has to do with that we had a lot of energy storage projects last year, but also that we see a decline in volumes from trucks and yellow machines as well as for drives or inductors for drives for transformers. So that is -- it's a little bit mixed -- a little bit more normal picture, I would say, than it was in the previous quarters where we had an extreme growth in all market segments. Today, very much the same picture as we had painted already in quarter 1, I would say. But the organic growth is disappointing at minus 6%, very much below our target. We already commented on what is decreasing. A little bit, we see the increase still in electrification, in defense industry and railway and marine and somewhat in vending machines as well we see an increase. But it cannot compensate for the decrease in the other market segments. So therefore, we see an organic decline, and that the decline is, I would say, mostly in Europe, actually. U.S. -- North America is doing fine. China is doing fine. India is okay. Europe is a little bit more down than the others. And acquired growth, happy to see a small bar there. It would have been a little bit more if we would have a full quarter with JIT Mech acquisition, and then I will come back to the Rockford acquisition that we made now two days ago. It will add another 1% from Q3 onwards. And as I write in the report, we have more prospects in the pipeline, and I hope that we can finish or close some of the deals before the year end. And the margins are really high. We're happy with margins in the quarter. Our cost control is really good. So despite having one-off costs in India where we wrote down some inventory of SEK 10 million in one of the plants there, we still have a really, really good margin. And we see that there's still big opportunities to improve in the site in India, but also in one site in Sweden, we see big opportunities to improve going forward. Inventory turnover a little bit down compared to last -- the top level last year. This -- it really becomes a small amount, but -- and we have a training program now that we are launching and we are very focusing on the sites where we see the biggest improvement potential. I think we can still release quite a lot of cash from the inventory going forward despite a little bit lower volumes, which is good. And balance sheet, I will almost not comment. I mean we have -- excluding IFRS 16, we have a net cash position. So it's looking really good and we're able to withhold the good cash flow that we started already in Q4 in 2022. So it's really good. We have a fantastic cash position, I would say. But we want to do more acquisitions, and we want to grow more with our customers. So we have to put the cash into use as well. Regarding delivery precision, we see that we have capacity constraints in the acquired unit, JIT Mech, in both of their factories. So therefore, we have announced today also that we are buying machines for about SEK 30 million to accommodate the growth in electrification and in defense industry. One of the machines already in place but it will take, I think, July also to get it started. The second machine will take roughly, I would say, a year before it's in place, this floor milling machine, which is a huge milling machine that could be used for electrification and defense projects going forward that we have already won. We also see a challenging delivery situation in Mexico and India towards some of our high-growth customers, but we have also some problems generally in inducted components where we see a huge demand for railway components. So therefore, some of the sites have an issue to deliver on time. We are working on it. And it's better than the quarter last year, but still a disappointing with 92, to be honest. So we will continue to work to improve this. And then quality is on an extremely good level, I would say. We're very happy with that. I mean we have a target of 100%, but 99.7% of the goods that we deliver is of good quality that the customer is happy with. And this is more important than the delivery performance because if you deliver something on time, but the quality is bad, then still the delivery time is scrapped. So this is a really important metric for us. Let's talk a little bit about our acquisitions. I write about it in the report. So JIT Mech, we see a very strong growth there. And last year, they had a turnover of SEK 130 million. This year, the TAT for the first 6 months is around SEK 200 million per year. Therefore, we have then bought a number of new machines. And you can see on the bottom right there, this your -- is the floor milling machine that we'll be very happy with when it's installed in Örnsköldsvik, and it will support our customers to continue to build more products that they need. So I'm very happy with that one. We want to get now in place as soon as possible. But in general, JIT Mech acquisition running better than expected, both on the turnover and on the profit side. Then we have our newly announced acquisition, Rockford. It is, I would say, quite -- it's not a huge acquisition. They have three manufacturing sites. Some of them are design and prototyping, but the main manufacturing site is in Worksop, which is Nottinghamshire. It is quite close to Sheffield, you can say. And then in the south, we have a customer site, which do prototypes and work very closely with some customers in Salisbury. And then there is what you could call a head office in Rendlesham on the East Coast. They are extremely well positioned with customers that we really appreciate. Some of the customers we have in other parts of the world, but some of the customers are also brand-new for us. We have a lot of customers within the defense vehicle industry, on land and -- mainly on land and air. And we believe that we can bring a lot of production knowledge to this company, improving their production equipment, but also to finance their working capital needs in order to facilitate the growth going forward. And as we write in the report, we put one of our managing directors that has been with us in China and India for several years, Andreas Björk, he will be managing this company, and we believe that they will have a strong growth going forward. I think I mentioned most of it. But yes, I mean, I will not mention anything more. It's better that we can go to the questions instead. [indiscernible] AQ Group we have had. So let's go into the Q&A.

[Operator Instructions] We have Karl.

James, some questions from my side. First one is just related to the energy storage, the best year-over-year. Is that as I said, around SEK 100 million in lost revenues.

In the quarter, yes.

In the quarter, yes. So if we adjust for that, organic growth should be like minus 2% then, something like that.

Yes.

Okay. And then I just have one question on the trucks and construction equipment, which you mentioned are seeing continued weakness. Would you say that there is even more weakness compared to Q1? Or is it similar levels?

I would say that it is similar levels to Q1, but I would expect it to become weak going forward.

Okay. And then a question on the newly acquired Rockford acquisition. I mean, JIT Mech is looking to be tracking quite good in the books here. And just a little bit on what you expect there going forward? You said that the margins should be in line with AQ Group in 1 year. But on the top line side, do you expect similar kind of growth in Rockford as in JIT Mech or...

I think it will take a little bit longer time to get into growth. This company is -- they have had, I would say -- they haven't had enough money to facilitate their growth for quite some time. So we will need to put in the resources to support them in growing. And I think we have a good opportunity to support them with growth from our factories in Poland and Lithuania and Sweden and Estonia. But the main rationale here is that we get a lot of competent people and we get access to these customers that we don't have today. And we will be able to deliver a lot of products to them going forward, but it will take some longer time than for JIT Mech, which had a lot more in the pipeline already when we acquired them.

And then on the margin topic, I mean, you're now 2 quarters in a row where you're doing 10% around. I mean, if you adjust for the 10 million inventory write-down, you're doing a better quarter now than in Q1. I don't know if you should adjust for it, but still. I'm just wondering a little bit on how you view your margins here, if you see them as sustainable or -- yes, you're doing very good margins compared to your historical margins.