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

Okay. It's 9:00. Welcome to AQ Group's investor presentation for the third quarter 2026. And what you see in the picture is our newly acquired site in Cleveland, Ohio. It is, and we will talk more about it in the presentation. It is our beautiful new transformer manufacturing site in the U.S. So why to invest in AQ Group? As we see it, earnings per share CAGR of 14% over the past 10 years, we've made profit every quarter since the foundation in '94. We're exposed to industrial market segment with high underlying growth, such as electrification, where we include also data centers, defense -- we have a long history of acquisitions. We buy 2 to 4 factories per year. This year, we have booked more than 2 factories. We have a strong balance sheet and a net cash position. Some quick facts. We have about 8,000 employees. We -- on a rolling 12-month basis, we have almost SEK 10 billion in turnover. We have 7 business areas, 15-plus market segments and manufacturing in 17 countries, with 4,000 customers globally. We made profit, as I said, every quarter for the 30 years and the rest, I've already mentioned. So now to the third quarter. Net sales increased by 21% to SEK 2.5 billion. Operating profit increased by 36% to SEK 259 million compared to the same quarter last year. And the profit after financial items that we measure increased 38%, and the profit margin before tax was 10.0%, which is in line with our target. Profit after tax amounted to SEK 205 million, and cash flow from operating activities was okay at SEK 269 million. Earnings per share before dilution was 2.23% compared to SEK 206 million last quarter -- or not last quarter, but the same quarter last year. And for the first 9 months, we have increased sales by 11% to SEK 7.5 billion. Operating profit increased 18% to SEK 739 million and after financial items, increased to SEK 736 million. Profit margin before tax was 9.8%. And after tax, we had a profit of SEK 586 million, and the cash flow from operating activities was decent on SEK 631 million, and earnings per share was 6.39 compared to 5.54 a year earlier. And our equity ratio was 68%, way above our target. Highlights in the quarter. So I'm very proud that we have doubled the earnings per share since 2021 from SEK 4 to SEK 8, above SEK 8, actually, if you look at the rolling 12-month basis and adjust for the split, 1 to 5 that we did a couple of years ago. We see high growth in the U.S. and China in inductive components and electrical automation, especially for data center and power grid electrification. Our growth in data centers and defense continue to accelerate. And all our data center factories are on full throttle, especially the inductive components ones, but also metal fabrication. We believe we take market share from others, but this -- that's nothing I can really prove. But together with our customer, I'm sure we are. But I'm not sure if we take market share at our customers. Defense sales has also continued strong in Northern Europe, especially, which we include Sweden, Norway and U.K. And then we have made a couple of acquisitions in the quarter. We bought Gumboda in Robertsfors to increase production capacity towards power grids and defense in Sweden. It's basically organic growth acquisition, you can say, because we buy a building, and we get some employees so that we can fit more machines to accommodate our growth in that factory that we bought in 2024, which was AQ. So this will be a bolt-on for. And I think the acquisition value for -- or the enterprise value for this acquisition was SEK 5 million. So it's not a huge acquisition, but it will help us to continue to grow. We also made a bigger acquisition where we bought the assets of Norlake in Cleveland, Ohio to double our production capacity of Made in America inductive components. We can say we have a factory in Virginia. I think turnover this year will be close to $50 million in that factory. It is basically full. So we have an option that we considered to extend that factory. We have already extended it a bit. We will probably extend it even more, but then one of our customers came to us and said, we have this company that we buy inductive components from. They have a financial problem. So basically, they run out of cash, they stopped paying their employees. We came in. We restarted the factory with the former owners. So we gave them a loan to get the employees back. We did a quick due diligence over the summer, and then we now made the acquisition in this -- in the third quarter. And this adds a lot of capacity. So we get a lot of machines and other equipment that you need to make inductive components and also you get skilled operators, which we need. And we can say basically every quote we send out for inductive components in the U.S., we win meaning there is a big demand there. So we believe that we can make this factory great again by just filling it up with AQ customer orders. And we can utilize our sales and design team in Roanoke in the U.S. as well to increase the growth in this company. So it will take basically a little bit more than a year, I guess, before we see the volumes that we have indicated in the press release which is -- let's see how fast it goes, but we believe that we have at least equipment and buildings to accommodate $35 million in sales in the Norlake asset that we have bought. Some lowlights in the quarter. We're not happy with everything. We feel we need to improve both quality and productivity in our inductive components factory in India. We have changed the leadership there. now, and we believe it will get better in time. We have also some delays in certain defense projects due to delayed equipment. We are taking action there, and I think we will be back on track by the end of this quarter, quarter 4. We also have some backlog in data center deliveries that need to be recovered in Q4. So despite the organic growth was really impressive. I think in quarter 3, we still have some more orders that we would have liked to ship out. So this would need to be recovered in Q4. And yes, we have a challenge there, but I think we will be able to do it. We have had some issues to get all the equipment in place in Finland. So it will be in place now in October, and I think we will be able to go at full speed in order to catch up this quite smaller delivery backlog, I would say. We have also low capacity utilization in Mexico and New York, in our wire harness factories. I think New York is on the verge of becoming better. We have won some new orders there. Mexico also increasing a little bit. But we need to do more. So we are not happy with the performance there. Then Time 24 that we bought in Q2, we think the output is okay, but not as we want. We have a backlog there and we want to get back on track there because we see that the semiconductor equipment companies that they have as customers are growing very rapidly, and we want to get back on track with the deliveries there. And we believe we can make more money in this company if we just improve, and we have put in some new people in that team, but we need to do more there as well. On-time delivery needs to improve in several sites. We are down to 91% in the quarter. It's a little bit due to the high growth that we have, but also I think that we can do better, and we should do better. So we have work to do there. And as I said, we had some backlog issues in some sites already mentioned. And then we also want to do more acquisitions, of course. That was the low lights. So earnings per share growth, we see after a couple of years where it's been a little bit flat. We see it start to grow again, which is really nice. We have a target to double the earnings per share every 5 years. We have done it now from 2021 now to 2026, but we want to double it again now until 2031. Net sales in the quarter was pretty much in line with what we saw in Q2, but it's much higher than Q3 2025. Normally, for AQ, since we have a big European footprint, there is what we call in Sweden, industrial holiday, where our customers and our factories closed down, reducing the net sales. In this quarter, we have seen that our Chinese and American factories are running on full speed, which compensate for this industrial vacation in the European companies. So it's really good to get hopefully, we can get a more balanced output over the full year now instead. Acquired -- organic growth in the quarter was 17% roughly and acquired growth around 2%. The acquired growth is below the target. We'll get into that later. We have some sales growth and the investment activities ongoing. So inductive components for electrification, including data centers grew 60% compared to the same quarter in 2025. It is a massive growth there. We are assisted by the acquisition of, which was a half full factory. Now we are also buying Norlake to increase the capacity further to continue this fantastic momentum that we have in this area. We have also done very fun new prototypes for a new solid-state transformer for a data center application, for a leading electrification customer. This product, our customer believes a lot in. They will start to sell it, maybe '27, '28. We don't know when the full volumes come, but if the projections are like they believe it is, then we get into a new really nice product, which uses more power electronics to do the switch from medium voltage to 800 volts is inside the data center, which is really I think the technology going forward. We also see increased momentum in power grid projects in quarter 3, but I think it will be even better in quarter 4. To sum it up, I mean, all our business areas and market segments basically grew compared to the same quarter last year. But of course, the main growth is in data centers, power grid electrification and defense. Another fun thing is that we have won a new wire harness contract and some sheet metal parts as well for a new EV truck customer in Europe, and it is not a substantial volume, but we are happy to see that we're also growing in these business segments. So the organic growth for the year is way above our target. On the other hand, we have been a little bit below in the start of the year. So for the full 9 months, we are in line with the target. I think I have commented already on what is growing, so we can stop it there. Regarding acquired growth, then we have acquired Time 24 in quarter 2. We -- the integration work is ongoing. We have recruited a new operations person from our sister company, AQ Rockford, we are recruiting a new finance person. We are doing -- we are adding management capabilities there to improve the performance. It is not too bad. We have done much worse turnaround than Time 24. But we need to get up to speed with the deliveries. That is our key because then we will double the sales there, and we will also start to make good money as well. Gumboda acquisition already mentioned and Norlake I will get into on the next slide as well. So let's not mention it here. And the integration and turnaround of mdexx, I consider now complete that we are in line with AQ margins, and it is growing very rapidly. We are filling it up with new business. and also increasing sales with the old customers. So we're very happy with the team there. We can do even better and even more, but they have done an amazing job. So it's fun to see that they are now into full swing. Some things more about Norlake. So we acquired this company in -- on the 21st of September. I told you a little bit about the story. We didn't pay so much. I mean this is not a share deal. We bought certain assets and including real estate as well in Cleveland. You can see on the picture that it's a normal dry type and transformer factory, can do low voltage to medium voltage products. All the equipment is in place. So it's basically just to start to fill it up with the existing customers that have a big demand but also to get enough people there to be able to produce that demand. This is a normal -- it's a typical AQ opportunity there. This where we can go in with capital and knowledge and expertise, and really make this company beautiful again. So it's a really fun opportunity for our Managing Director in the U.S. Dan Day who is an excellent person and has done fantastically well with our Transformer Solutions site in Virginia. Now he gets some more capacities to sell. So he's super excited, I can say. Then we can also utilize our design and sales team in Roanoke and also the experience we have from our fantastic team in Virginia. I mean they are key in making Norlake successful. So it will be fun to see these 2 now sisters to grow up together and become even better. And it's very similar to the opportunity we had with mdexx, where they have very nice customers in Norlake. -- they were undercapitalized and maybe we saw a lot of improvements that could be done. So we will try to do the same. Let's see if we can be successful also this time. And as a comment also, this acquisition had no real impact in Q3 results. I mean it's in the balance sheet, but there was basically no sales, no external sales from this company after the acquisition on the 21st of September. So acquired growth is still a little bit low even though we have bought some companies, of course, Norlake figures doesn't come in here. I hope that we can get maybe up to 5% in quarter 4, but let's see if we can make it happen. We have also lost some opportunities in the quarter. It's always hard to agree they should like us, we should like them prices should match. So we maybe lost some opportunities in the quarter also, but we have a pipeline. We continue to work, and we will continue to do acquisition also next year. I'm not too worried about that. We can find good investment opportunities in the market. That is for sure. Regarding margin development, we have now a margin -- EBITDA margin in quarter 3 of 10%, which is really nice. It is in line with our target. I think our cost control remains very good. We have good sales and capacity utilization in U.S. and China, who compensate for the normal down, as I said, in Europe in the third quarter, but we have also several factories which have a potential for improvement, which you saw on the lowlight slide that I presented earlier. Also, remember, we -- this journey that we're on to deliver more technology content into our customer. I mean more difficult parts should bring more and better margins. And I think we are seeing it, and we will hopefully continue to see it going forward. Regarding inventory value and turnover development, I mean this is calculated on a rolling 12 months backwards. And when we grow very rapidly, normally, this goes down. So not too disappointed with 2.9 actually. And the cash flow in the quarter is quite good despite we grow despite the fact that we are growing at a really rapid pace. So I think we have plenty of cash to follow our customers and to continue to grow with them and invest in equipment, machines, people and new companies as well. And cash flow and net debt, I mean, we don't have a debt. So we have a net cash position, and we don't need to have that. We just need to find more opportunities to invest in. And I think we have a good organic growth momentum now where we will continue to invest in our current operations, which is costing a little bit money in capital expenditure. I think we've done most of it. But -- we will do a bit more, of course. But then in working capital, it really sucks cash from us. The cost basically the same as when we do acquisitions. So we will also try to see if we can make some more acquisitions, maybe end of this year or beginning of next year. Again, then why to invest in AQ Group. I went through it, I think most of you know us. So I will not go through it again. And then I leave for Q&A.

[Operator Instructions] Okay, we start with Jonny then. And if you unmute yourself, maybe if you can.

Yes, James and Christina, I hope you can hear me.

Yes.

I just want to start a little bit with the very strong organic growth, which is obviously very good to see. I just want to break down a little bit further and starting with data center. I know you talked about this a lot, but could you say something how much data center was of the quarter roughly, would you say?

We don't go out with that number. I think I said, like if you look at what I said on the sales growth slide, I said we grew 60% in inductive components year-over-year, that is data center growth, I can say. But then, of course, we don't only do data center in that. But we are growing there and in power grids, but the majority of that is data center.

Okay. Okay. That's good. And then just to -- I know you also talked about this, but we talked about all the stuff that is growing. That sounds very promising. But I just want to clarify a little bit like are there any sort of -- any effect of positive timing effect that could sort of benefit this? Or is this an accurate picture of what you see of assess this underlying demand for you right now, would you say? And also, is there any sort of pricing -- material pricing effect in this quarter?

I wouldn't -- it's maybe a little, small pricing effect. I wouldn't say it's in line with inflation, I would say. So I wouldn't say that it's a pricing effect. And it is a true picture, I would say. And I think we hope that we can deliver and continue to deliver like this. So we see this is the true demand that we see now.

That sounds promising. Do you expect more pricing effect going forward in coming quarters? Or is this sort of...

No, I don't think so. I think we will be pretty much in line with inflation, I would assume.

Okay. Okay. Just one final one from my side, and that is on the component side. I feel like you're still -- you can correct me if I'm wrong, but I feel like you're still quite confident in your supply chain in the near term, is that correct? And also...

Yes.

What do you -- yes, okay, that's good. And what do you hear from sort of your customers? Do they see any sort of bottlenecks in their end markets that could impact deliveries? Or is it something that we should think about?

Not that I have heard so far this quarter. So we would have to get back on that. But we don't really see any of our customers slowing down because of lack of components at the moment anyway. Thank you so much, Jonny. Maybe we'll take Albin from -- Albin Nordmark?

Yes. It's very good reports, of course, but if we try to find some negatives here, gross margin, looking at that 50% down 3 percentage points here year-over-year and also sequentially. So can you try to help us here break it down? And is anything we should think about? Yes, any color there would be helpful.