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

Okay. It's 9:30. I welcome you all to the AQ Group Investor Presentation of the Q2. We start with a picture from a data center because I will talk a little bit about data centers today. What we deliver to data center, you can see on the left, I will try to show these cubicles here. They are part of our delivery to our customer, and then this is part of their delivery to the data center. And it's a transformer and an inductor inside. I think it's a really beautiful product. I hope you agree. So normally, I start with this slide why to invest in AQ Group. As we see it, earnings per share CAGR, 14% over the past 10 years. We made profit every quarter since the foundation in '94. We're exposed to industrial market segment with underlying growth such as electrification, where we also include data centers, defense and med-tech. We have a long history of acquisitions. We acquired 2 to 4 factories per year. We have acquired 2 factories this year. We have a strong balance sheet and a net cash position. Quick facts about AQ, we are 8,000 employees. We have roughly SEK 9 billion turnover. We have 7 different business areas and more than 15 market segments where we deliver to. We are manufacturing in 17 countries with 4,000 customers globally. We made profit every quarter for the last 30 years. And then we talk about earnings per share, not something else. And then we have a 14% earnings per share CAGR in the last 10 years, and we make acquisitions and then we are part of UN Global Compact since 2012, which is our sustainability initiative, which we think is really good. Now to some numbers, second quarter. We increased net sales with 10%, which is shy of our target of increasing with 15% to SEK 2.5 billion. Last quarter, we had SEK 2.3 billion in sales. Operating profit increased with 17% to SEK 255 million and profit after financial items increased with 13% to SEK 256 million. Our profit margin before tax was 9.9% and profit after tax was SEK 202 million. Cash flow from operating activities amounted to SEK 23 million compared to SEK 232 million last year. I will get into it a little bit later why there is a difference and earnings per share before dilution amounted to SEK 2.20 per share compared to SEK 2.06 last year. It's a good increase. In the first 6 months, January to June, we increased sales with 6% to SEK 4.9 billion and operating profit increased with 11% to SEK 480 million. Profit after financial items increased by 11% to SEK 480 million roughly, and profit margin before tax was 9.7%. And profit after tax was SEK 382 million, a little bit higher than last year's SEK 355 million. Cash flow from operating activities in the first 6 months was SEK 362 million compared to SEK 477 million last year. And earnings per share before dilution was SEK 4.16 compared to SEK 3.87 a year ago. And our equity ratio is very high, 67%, very high compared to our target of being above 40%. So some highlights in the quarter. We have the highest net sales and result in a single quarter in AQ history. It's great. Growth in data centers and defense, and it's accelerating. We have doubled our output in the quarter of transformers for data centers, the ones you saw on the first page from our sites in Hungary, Finland, U.S. and Czech Republic compared to the previous quarter, meaning quarter 1. Ramp-up will continue, and our capacity is now 70 systems per month, but we delivered 70 systems in the quarter. So -- and we believe that we need to continue to increase the capacity also in 2027. Defense sales is strong from our sites, especially in Northern Europe, U.K. and Scandinavia, and we will believe that, that will continue. We also see big productivity improvements in newly acquired sites in U.K. and Czech Republic, where we have made them more profitable by reducing overheads mostly. We have also in the quarter, high sales to construction equipment in Europe. And then we also acquired Time24 in the U.K. that deliver systems for customers in the semiconductor and railway industry in the U.K. And we delivered SEK 20 million of turnover from that acquisition in the second quarter, and we acquired them in mid-May, so it's like 1.5 months. It's quite a good delivery there because they couldn't deliver out anything when we bought them because they had the cash problem -- liquidity problem. So we are very happy that we could start the deliveries to their demanding industrial customers again in a very quick way. Not so many low lights in the quarter. The quarter is quite good, I think, so not so many low lights, but we still need to improve quality and productivity in our transformer factory in India. We're doing some things there to improve. Then we have low capacity utilization in Mexico and New York still. It's getting better, but it's still too low. We need to sell more. And then we want to do more acquisitions as well. Our earnings per share growth, if you look on rolling 12 months after the second quarter, we are at 14% CAGR in the last 10 years as we have been and dividend per share haven't changed anything. So it's still 14%. And the target is to double this every 5 years, and it's natural if we grow 15% and the profit follows, then we will double the business in 5 years. So the net sales development in the quarter, we had organic growth of 9.1%, which is just below our target of 10%. We had acquired growth Time24 of almost 1% and we had a currency effect, which was almost nothing, which gives the net sales growth of 9.9%. And that gives us the best quarter in the company's history. Happy about that. Organic growth again. And as I've said, we see high demand in defense customers and data center, which is really electrification. But we also see a good growth in construction equipment sales from our side, especially in Europe. Some more on sales growth and investments. I've already talked about Time24, and they are working with very nice customers such as Applied Digital, Oxford Instruments and Alstom. We believe that the growth here will continue, and we can do a lot more to sell our Eastern European footprint into this factory and then sell it to their customers. I think it will be very beneficial for those customers because they will get a lower cost, but also we will sell more. And then inductive components, data centers is now 6% of AQ Group total net sales. The share is expected to increase going forward. It is a good growth segment, and we are trying to sell more to more customers. And we are now having, I would say, 5, 6 customers already that we are selling inductive components to data centers, and we can grow with all of them. We have several large RFQs for the different defense programs in Northern Europe in the pipeline. We expect nominations during or after summer. We think -- we hope that we will win something there. Nothing is certain, but we believe that we have a good chance. And then also power grids who has been a little bit weaker in the first half year will be growing again in the second half of the year. And then as I said, construction equipment sales have been increasing. And we have, as I write in the report, invested in some machines for defense and electrification customers in North Sweden. You can see some of the machines on the pictures. On the left is a welding cell, then we have a laser cutting machine that can cut thick sheet metal, we have a machining center and machine parts. And then we have on the right, a big machining center that can machine really big parts for defense applications. And this is a shortage in Europe, I would say, to have really high big-size CNC machines that can do yes, very complex parts. So this is something that we continue to invest in. The acquired growth is nothing to brag about. It's like 1% in the second quarter. We acquired Time24, as we have said. We need to do some things there on the productivity side, but I'm quite confident that we will get there by the end of the year. We are doing improvements in purchasing and utilizing our own manufacturing footprint to improve their margins. Then mdexx that we acquired roughly a year ago or a little bit more than a year ago, is developing according to plan, and we have a big improvement compared to the second quarter last year, but also versus the first quarter in the results. We are increasing workshop utilization, especially with these data center transformers, where we have a great demand. And we are evaluating several targets. We are, I think, working in a good way, and we have several interesting things that we are working with. Let's hope we can close something now because we want to reach our target of 5% also this year. Margin development. Here, normally, we don't say so much. And normally, I get a question about the margin target, but now I hope that this question is not there anymore because the Board now took the decision to increase our target to 10% now just before the quarter ended. It is natural since we are increasing our products with more engineering content and more complexity. And also we've had, I mean, EBT margins above our target now for 14 consecutive quarters if we count also quarter 2. Of course, now we're not above the target anymore because we increased it. I believe that the cost control is very good. As I said, the margin has improved very well in quarter versus quarter in mdexx and Rockford, but also in the inductive components business area in general. We still have improvements to make in Bulgaria, Mexico, New York and India, but this is normal. I mean we always have companies where we need to improve. So we will continue to improve those companies to become even better. And it's good now. We have a new challenging target as well. Inventory turnover and inventory value. You can see that the inventory is going up a bit in quarter 2, and it is because we are preparing to deliver out a lot of things in quarter 3. Despite doing a lot of improvements in many sites, the KPI goes down. And it's interesting that it goes down because really what -- how we are measuring this, you can see it in the small square below the chart. So it's rolling 12 months raw material goods for resale and change of inventory and products in process 12 months back. So meaning if we are growing the business going forward, maybe acquiring some companies, then this KPI will go down for a while because they are not in 12 months back yet. So we believe that this KPI will improve, and I don't see a big change really in our inventory turnover. And again, it is good that we have a net cash position because that means that we can actually grow with our customers. And sometimes growth require us to increase our working capital. And the net cash flow in quarter 2 was quite poor, and we have a lot of deliveries at the end of the quarter. So we have a lot of increase in accounts receivables, but those will be converted into cash. So the net debt has decreased a little bit, but still, we have a very, very good position. So I'm not worried there. It's good to have cash when you're growing. It makes your life much easier. And this I went through before, so I will not go through it again. And we head into Q&A.

We have a question from Jonny. Can you unmute yourself or do I need to do it for you?

Yes, I hope you can hear me. I have a couple of questions. I want to start with the strong organic growth here in the quarter, which is good to see. And I understand that a large part of these deliveries took place at the end of the quarter. But is it possible to say something how orders developed during this period? And what sort of book-to-bill are you entering second half of the year with? That's my first question.

And you will get a boring answer because we don't really comment on the order intake. But I mean, we are confident that we will continue to develop well in the quarter. I mean I don't see that the deliveries we have done to data center as we write in the quarter, I mean, we are investing to increase the capacity, and we don't do that if we don't believe that there will be more orders to deliver out.

Understood. Understood. Sounds like a positive book-to-bill at least. That's my feeling. Besides the data center and Defense then, was there anything else that drove this pickup in organic growth? Or what was sort of the background to this large deliveries at the end? What is the background to that?

No, I think that we managed to get out a lot of things and especially to the defense sector and to data centers, I believe. I think that is the main part of the explanation. I see as we comment also, I think construction equipment, meaning yellow machines had a good development also in the -- I mean, in the whole quarter as a whole, but in the end of the quarter as well. So I think also there was quite a few working days actually in June. If you compare it to last year, I think it was 2 days more. So it also has an impact, of course.

Okay. And then on data center, then I see that inductive components data center, 6% here of the sales in the quarter, you said I think that implies some -- a little bit more than SEK 150 million in revenues. My question is the capacity ramp-up, how should we think about that going forward? Because I think you said in the last quarter, 60 unit capacity in Q1 and now you aim to double it in Q2 here, which it seems like you did. So the outlook entering the second half of this year, what should we think then? Is it fair to assume you can maybe increase, let's say, 50% capacity to some 180 units in Q3? Or can you say something there?

I think I'm confident that we believe we will deliver out more products in quarter 2. Then how many it will be -- I mean, I know how much orders I have, but I think it will be more than what we delivered in quarter -- it will be more in quarter 3 than we delivered out in quarter 2. And as we have commented, we have increased the capacity. So we are able to do 70 pieces per month, but that will not be the pace in quarter 2. The pace will be lower than that, but it is -- we think it's good that we have a little bit extra capacity here because we see that the growth is coming going forward.

Okay. Sounds great. Just one final from my side, so a lot of questions. But when you talk to your customers in general, I mean, on the truck side, buses, yellow machines in general industry and such, what do you hear now? Do you see any changes in customer forecast on your end? Or can you say something there?

No, I don't see any difference really. I think it is quite solid in most cases. And then we have commented a little bit on the growth that we have had and that we see. I think it will continue the same. The business doesn't change so quickly, I think. So I think we will continue to increase the sales with inductive components to data centers. We will continue to increase the sales to defense. And I think -- yes, I think that will be the main story for us also next quarter, I believe.

Sounds good, sounds exciting.

We have Albin who wants to ask something. Can you unmute yourself?

Starting off with the data center sales or inductive components to data centers in terms of sales. I think you mentioned that you had some 5 to 6 customers in that space. So can you maybe talk about the size of those customers? Are they even or yes?

I wouldn't say it's even just yet. I think we have a few that are reasonable -- I would say it is one which is quite big and then there are some which are smaller.

And the big one is that like 50% of that or more?

No, I would say 50% is a good guess, I think.

Okay. Great. And then input prices and similar, have you -- yes, how have you been affected by that? And...