AQ Group AB

STO:AQ

Earnings Call Transcript 2023-Q1

[James Ahrgren, executive]

Welcome to AQ Group Investor Presentation for Quarter 1 '23, and next slide.

So first quarter, January to March, we have a really good start of the year, which resulted in very strong growth and improved margin and very good cash flow. Net sales increased by almost 37% to SEK 2.2 billion. Operating profit, EBIT, increased with 72% to SEK 194 million. Profit after financial items increased with 58% to SEK 184 million, and profit margin was 8.2%, which is above our target. Cash flow was excellent in the quarter from operating activities, which was SEK 225 million, and earnings per share after tax and dilution increased by 70% to a record SEK 8.58 per share. So a very good quarter. I think you all agree.

Earnings per share growth, if we look at rolling 12 months, we increased it now with 15.8% versus 2022 full year. So we continue this trend that we have in the last 10 years, with roughly 17% on average growth in earnings per share. We're very proud of that. And we would like to continue with that, as you can see on my AQ rocket.

Our net sales rose quite fast because we are taking new projects from new customers in building new factories and increasing our output. If we look at same quarter last year, then the growth is huge, but there we have some currency and also some price increases in that. But if you look sequentially, we are growing with 14%, which I believe is extremely strong. And we're starting now to deliver out from this newly invested factories that we have built.

Despite that, we still have several big projects that we could not deliver in the quarter that are moved down to quarter 2. So -- and it is due to capacity ramp-up issues and a little bit lower productivity in new projects.

But we have started serial deliver through this big truck project that we have talked about for a long time in Lithuania. We've also started to deliver out battery systems from our factory in -- our new factory in Pernik, Bulgaria. We believe that these volumes will increase going into quarter 2 as well. And the sales increase mainly related to electrification, as I said before, including industry storage of energy and components for the defense industry and systems for medtech are also growing very strongly. Very bright picture but also bright future, I believe.

Organic growth is super high, but it's a little bit tricky when you compare quarter versus quarter because quarter 1 2021 was maybe not the best. And we have, as said right here, about 10% price increase in these numbers as well and, again, increases made in electrification, storage of energy, components of defense industry and systems for medtech, but also the vehicle side is going very strong. Everything is growing. So it's very nice to be a contract manufacturer at the moment and nice being AQ.

Acquisitions, we have not done anything. While I can comment a little bit about the Schaffner acquisition, which is the last acquisitions we did in 2022, they are now running at EBT and [indiscernible] very strong growth mainly due to mining, railway and UPS projects in U.S., EU and China. So this is developing according to plan, and we are starting to reap the benefits of that extra capacity that we acquired. We're happy with that.

EBT margin, we -- a little bit above our target, and it is nice to see that we are finally catching up. I must say that in the previous quarters have been a bit disappointing. So it's nice to see that we are now above our target. And of course, we strive higher, but we are more best and believe that this is a sustainable level. And the reason for the improvement in the quarter is that we have managed to improve our loss makers. So some subsidiaries have shown a loss for a couple of quarters and that we have managed to eliminate those losses by improving the performance of a couple of factories.

But still, we need to work smarter with higher productivity to reach our full potential, as I see it. It's nice to see that we still have some work to do.

Cash flow is -- last quarter, was getting back to normal. This quarter is really, really good. And we see that our program for increasing inventory turnover is effective even though we can do more with the low-performing companies in this regard. And also, of course, the turnover is catching up to our inventory levels. That gives a really good cash flow in the quarter. So we're very happy with the cash flow, and it also, of course, improves our financial position.

The inventory turnover is starting to become like a smiling mouse. It's the black line here. So we were going down quite a lot, and now it's starting to pick up. And we -- I really believe that we will be very close or a little bit above 3 at the end of the year in, meaning -- but I'm not sure if we will decrease the inventory that much really. It is -- it will catch up by increased sales. But we have dedicated resources put in place to educate and work together with our low performance in this area to improve their cash flow and inventory turnover. Okay. Happy with what we are doing, but maybe not happy with the results yet in this area.

Some investments in increased capacity. We are -- in the quarter, we have invested SEK 48 million in new equipment that is machines. We are also -- we have also signed an agreement of an extension of our cable harness factory in Lodz, Poland, which will increase the space with 5,500 square meter. This is rented factory area. You can see it on the picture on the top left. This will be finished in September 2023. This will enable us to grow 30% in this factory, like EUR 20 million. Our customers in this factory are producing forklift, agricultural equipment, drivetrains for boats, et cetera. We see a strong growth here.

We have also invested in new punching capacity in Sweden, Finland and Estonia. This is a punching machine there on the left -- bottom left picture. We have an inauguration with a lot of our customers, investors. What these machines do is they punch holes in sheet metal, and we get -- when we buy new machines, we get better productivity but also reduce energy consumption and higher capacity. So it is good. But we haven't been able to get hold. It has been quite long lead times on these machines. So now we have got 3 in place lately. So that's good. Then we can grow our business more. And in this particular factories where we have bought these ones is a lot about electrification, drives for electrical motors, railway and machinery equipment-producing sectors.

The net debt is decreasing since our cash flow is good. That is nice because, of course, interest rates are becoming higher and higher. So we like that. But on a total, we have a very low net debt, and we have good cash flow generation. So we're not actually worried about the debt, but it's good to see that the trend is going in the right direction.

Regarding our on-time delivery, it has improved a little bit at the end of March. But we are still struggling. And now I would say that material shortage situation is back to normal, meaning that we always -- like we have always had. We are struggling, sometimes, to find material, but it's not a general topic anymore. Now it's more about finding people, production space, getting productivity up so that we can deliver according to our customers' demand. So we are working very hard to improve in this area, meaning getting more capacity so we can deliver out more on time to our customers. It's a big focus area for us to improve. It's 92%. So it's still much better than it was in quarter 4 last year.

Some projects for future growth then. This is normally the exciting bit. So we are still working with our battery energy storage project. And you can see, on the top right, our facility in Bulgaria, where we are producing these big batteries. You can see, if you look, that there's some people in the picture, how big these batteries are and how big these factories. We are ramping up now, and we are trying to deliver out as much as possible because there's a huge demand for this. And it will be a huge demand if we're going to manage this energy transition that we are going through. If we are going to have as much renewable in our system and replace coal and oil, then we need a lot of battery and balancing power of different clients, and batteries are one of them.

Second picture there, you can see on the top of this GE wind mill, there is a cooling -- some orange cooling mechanism. And we are delivering, from our factory in Estonia, aluminum frame for cooling of the generator in the wind turbine. And this has been growing now for last year, but it will continue to grow also this year. It is a nice -- very nice project that we think is fun.

And this one I had also last quarter, growing very strongly is inductors for mechanical enclosures for motor drives, the top left picture, different types of drives that we deliver. Drives are used to control the motors. If you have an electrical car, for instance and you push the gas pad, then what is happening is that the drive is increasing the frequency in the motor so it runs faster. And these kind of drives can be used in all type of equipment. If you have an efficient drive, you can reduce energy consumption of a motor with 40%. There's a lot of investments going on in factories and buildings for running fans and pumps and whatever it is to run with this kind of equipment.

Then there is a big demand for ships at the moment, and we are delivering power transformers and auxiliary transformers for ships from our factory in Finland, and order books are full. We are having some struggles to deliver out everything we want from this factory, but we have [ reached ] order backlog here for 2023 and 2024, which is nice.

And then defense industry, we are trying to grow here as much as we can. There's a huge growth in this market to build more vehicles for defense market, and we see a strong growth in wiring harnesses in Sweden and Poland, and we have also got a certificate in our factory in Poland to produce military equipment for the Polish army. This -- actually, this -- in March. We are also working with sheet metal fabrication in Sweden, Estonia and other factories. We try to spread this business area. And we have, in the quarter, set up a number of -- we have had engineering offices, but now we have grown. So we have set up an engineering office in Sofia, Bulgaria; one in Östersund; one in Västerås; and one in Trollhättan to complement our existing office in Torslanda to help, in this case, mainly Swedish defense customers with design engineering of mechanical and electrical parts to speed up the development of their many big projects. So it's really fun, and hopefully, that will also result in production later on. It's good to be varied from the start and being able to support them with good design for manufacturing.

Then we -- since we have some time, I will show a little film now. Let's see how it works. But this is from our factory in Lithuania, our newly built factory. I talked about it at several quarterly report. It's 5 minutes long. It is a lot of drone flying inside the factory, but let's see how it works. We'll try.

[Presentation]

[James Ahrgren, executive]

Now I have some problems. I think we get the picture. It simply never ends. We have 1 minute more of flyby of assembly space where we are assembling [indiscernible], but I think I will skip the rest.

It is an amazing factory. So I thought that you as investors should know what you're investing in and by doing what. As a famous person in Sweden said, "What do you get for the money?" This is what you get. And it is not easy to -- for our customers to replace, I can say.

Do we have any questions? Feel free to unmute in that case. David, please unmute and ask your question.

[David Fremle, analyst]

James, congratulations on a great quarter. I was just wondering about the cash flow going forward in the full year of '23. We saw some easing up in the working capital part. Should we expect this trend to continue during the year? Or are you seeing some other maybe indicators that working capital should be bit higher, lower?

[James Ahrgren, executive]

No. I think that it is extremely good this quarter. But I think if you take quarter 4, quarter 1, this is what the level we should be at because we will -- of course, since we believe that we can continue to take market share and continue to grow. So we will continue to grow the accounts receivables, but I believe that our inventory level is already at the pace where we shouldn't need to increase it more. So we should have a good cash flow in the year, and our target is to have the same cash flow as our EBT really. That's our target.

[David Fremle, analyst]

Okay. Yes. So a target of 1:1 ratio there?

[James Ahrgren, executive]

Thank you. Any other questions? Sindre?

[Sindre Sørbye, analyst]

Yes, James. Congrats with a very, very strong report. James, it seems like you still are running a little short on deliveries in the sense that you -- maybe you said that you were not able to fulfill all your orders in the first quarter and then you will have, let's say, a positive spillover with regards to second quarter. But on a more critical note, do you see any signs that some customers are starting to catch up in the sense that they have now filled up their inventories and might see slowing demand? So I guess you know what I'm asking about because if there has been a kind of restocking among customers, is there any, let's say, risk that, that situation will stabilize and might reverse, let's say, into the second half?

[James Ahrgren, executive]

No, I don't think so. I mean we are delivering to industrial customers that deliver big industrial systems mainly. So we're not really -- there is not really any stocking up in our business, I would say. A truck is delivered when we delivered the harnesses you saw. When we delivered the harness, it is consumed after 2 days in our customer side, and we have a delivery window of [ 15 ] minutes. So they have no stock, I can say, of these parts at all because it's a unique harness for every single vehicle.

And if we look at this electrification products, they are more for industrial use, not so much for home use. So I would say that there is not a huge amount of stock there either. Order books are still full. And I was speaking to Swedish newspaper this morning that, I mean, recession looks very far away from our point of view. So we aim to beat this quarter. Again, I mean we want to beat the record every quarter, so to speak, in terms of turnover. And now of course, profit should follow also.

[Sindre Sørbye, analyst]

Excellent. And it seems like, I mean, even though we had a very strong profit margin, I want especially take into the account that you have had large price increases because sometimes, I mean, you would expect margins to slip a little when you increase prices. So I mean barring seasonality effects, shouldn't it look even better when you're entering the second quarter?

[James Ahrgren, executive]

Yes. We can -- yes, it's hard to look into the future, of course, but I can say like this that in quarter 1, there was a lot of working days, and the working days are good for us. In quarter 2, it's a little bit less working days, and that means that if we're going to maybe deliver out everything, we need to work a little bit more weekend overtime, and that hurts us a little bit, I would say.

On the other hand, if we can get out everything that we want, we believe that it will still look very good going forward. So we -- I mean that is really our focus: increased capacity, increased productivity, get the goods out to customer on time. Yes.

[Sindre Sørbye, analyst]

Final question from my side. It appears that you've been successfully or at least partly successfully at turning around your businesses in Mexico and China. You write something about that in the report. But is it so that, let's say, our -- and also Schaffner, you said was -- had no good profitability. But is it so that, let's say, those businesses are already at or close to the group margins? Or do we might see positive -- let's say, a still positive tailwind from those businesses?

[James Ahrgren, executive]

The -- and I tried to explain this, but normally, we have always some companies to work on the way we can improve. So we still have companies that are not at our target in terms of margin. But what I can say is that they are not contributing negatively now, which is a good -- really, really good improvement. And that is what brings our margin up almost 1.1% in this quarter compared to, let's say, an average of last year.

Any more questions?

[Johan Dahl, analyst]

James, it's Johan here at Danske Bank. Will this be recorded that we'd see in afterwards?

[James Ahrgren, executive]

Yes, yes. We -- you can see it in this Quartr app, and we will also upload it on our website. And the presentation is also available on the presentation side. So it is recorded.

Any other questions? Otherwise, I think we close the call. And I mean we have also an Annual General Meeting today. It will be fun to meet a lot of shareholders here in Västerås. And yes, it will be a great day. So I wish you all a fantastic spring and then hope to see you on the quarter 2 investment call as well in July. Thanks, guys. Have a good day.