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Price: 134.3 SEK -5.12%
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Earnings Call Analysis

Summary
Q1-2024

AQ Group's Q1: Record Profit, Steady Margins, and Strategic Acquisitions

AQ Group experienced a slight decrease in Q1 net sales of 1% to SEK 2.2 billion but achieved a 15% increase in operating profit to SEK 223 million. Profit after tax reached SEK 185 million, setting a record 9.9% profit margin before tax. Earnings per share crossed SEK 10 for the first time, prompting a proposed double dividend of SEK 6.66 per share and a 5:1 share split. Organic growth fell short at -2%, but acquired growth is expected to contribute 1% in 2024. The acquisition of JIT Mech is confirmed, enhancing the company's capabilities. Despite a mixed market demand, AQ Group aims for stable margins between 6-10%, backed by process improvements and a strong balance sheet.

Earnings Call Transcript

Earnings Call Transcript
2024-Q1

from 0
J
James Ahrgren
executive

Hi. Welcome to the AQ Group [indiscernible] from quarter 1. And please mute if you are calling on the phone.

Okay. Somebody turned off my microphone. Sorry for that. I'll start again. So net sales decreased in the first quarter with 1% to SEK 2.2 billion. Operating profit increased by 15% to SEK 223 million, and the profit after financial items increased by 20% to SEK 221 million.

Profit margin before tax EBT was 9.9%, which is a record for AQ, and profit after tax was SEK 185 million. And then the cash flow was really good at SEK 244 million, and profit per share for the first time was above SEK 10 per share.

And the Board for the AGM, that will be held later today, has proposed a dividend of SEK 6.66 per share and a share split of 5: 1. So it's a double dividend that is proposed. So it's really good, I think.

And hopefully, you heard it, but the earnings per share growth for AQ has, over the last 10 years, been 15%. But if we take this rolling 12 months after Q1, it will actually lower to 14% CAGR. It's still really solid. And if we look at the earnings per share growth versus first quarter 2023, it was 17%, and compared to quarter 4 in 2023, it was 37%. So it's, I would say, really good improvement.

And in quarter 1, we had a net sales of SEK 2.2 billion, as I said, and it is a slight decrease compared to the same quarter last year. We see -- and there also we had the positive effect of 1% of currency as well. So really a volume decline of 2%, which is not that much, but it's still a decline compared to the increases that we've had previously.

We see that capacity and demand are more balanced. We are starting to catch up on our deliveries, and also, our productivity then becomes higher affecting the margin. And we have a little bit of a decreased order backlog now compared to the same period last year.

If we look at the organic growth, as I said, it was minus 2%, which is below our target of 10% growth. And we have lost some business in our battery systems factory in Bulgaria, as I communicated already in quarter 4. And then we had some lower sales in certain market segments. We can see some decreases in inductors for frequency drives, also mechanics for that and components for construction equipment vehicles.

Then the increases are mainly in -- because we are increasing in several market segments as well, and we see increases still in electrification, defense industry and railway and marine, which is positive.

Acquired growth. We have zero still. The acquisition of JIT Mech that was announced in quarter 1 will be within the AQ family from quarter 2, and we expect that it will add about 1% growth in 2024. And we'll get more to that later on in the presentation. We have a lot of prosects in the pipeline, as always, but we are very picky with what we buy. But I hope that we can close some more deals during the year. It's our target at least.

And margin-wise, it is our best margin that we have ever had in AQ, earnings before tax. We are happy with that. It is due to we have lower costs for late deliveries and quality nonconformities in the quarter.

We have implemented several process improvements to improve our delivery performance and our productivity and also our quality. We see big improvements in Finland and China in the quarter. And it has been also hard work from our purchasing departments, which have a great impact in the quarter. However, we still have some sites that we can still improve.

But as I have said previously, with AQ, you can expect a stable margin between 6% and 10%. And it is very clear that if you look on these quarters that are in the picture, you see that the margin is really in between there. We have now been several quarters where we have been above our target of 8%, but in the picture it's actually more quarters that are below. So, we are still fighting for our margins, you can say. Even though the margin in this quarter was really good.

Inventory value and turnover development, I think it's very stable, and we are seeing a little bit of increased inventory in the quarter. We have several projects that's supposed to be delivered out in quarter 2. So yes, I think it looks good. Even though our target is -- of the inventory turnover is 3.5, we are 3.1, and I think we will see improvements during the quarter. We have a very dedicated team that is working on this, and we see that we have made improvements before. So we will continue with our improvement work. And it's really important for our cash flow, but also for the risk of the companies, a lot of the balance sheet is in the inventory. So we should work very hard with this. It's super important for us.

And net cash from operating activity is very solid. We usually say that we should be around EBIT, but -- and it is really close to EBIT here in the quarter, our net cash from operating activities. So we see also that our net debt is actually not a debt anymore. It's that we have money in the bank, more money in the bank than we have debt, so it's really stable and good. And -- but you should know that in quarter 2, now we plan to pay a dividend of about SEK 122 million and also do the payment for JIT Mech, SEK 40 million. So then we will be about 0.

But this is a really strong balance sheet, and I see that we have a lot of dry powder to invest in growth with our current customers, but also to buy other companies, I mean, to acquire them. So that's a really good situation to be in with.

Quality and delivery precision, we have been looking at the delivery precision, and we see that it is getting better and better. It is still very far from our target, but we are happy with the improvement that we are doing. We still have a number of companies that we focus very a lot on to -- that they should get back on track.

I really believe that we will have mainly 2 companies left after Q2 that still are struggling, but we are working hard to improve all our companies to reach our target of 98%. And it is, I think, super important also for our customers is that we are improving, and it is happy to see that it's going in the right direction.

Some examples on future growth then. I want to show you a little bit about our newly acquired company. We -- as announced earlier this week, we were approved by the authorities as well, so now we can go ahead and acquire JIT Mech as planned. And JIT Mech is a supplier of big welded and machined components for demanding industrial customers. And when I say big, it's quite big components that they are doing, and it is new for AQ. We don't have really a workshop that do these type of big, big products.

They are -- it's low volume, high mix. Customers are in electrification, defense industry and agriculture automation. And customers are in the north of Sweden, JIT Mech has very high technical competence, and they work extremely closely with the customers, R&D to develop this product that they produce.

I would say that they have well and -- good and well-maintained equipment machines with factories in Robertsfors and Örnsköldsvik, where Robertsfors make, I would say, medium-sized parts, and Örnsköldsvik make really big parts. And there are about 75 employees, had a net sales of SEK 130 million with profitability, in line with JIT group. And it is a cash out for SEK 40 million at closing for AQ. And as I said, they will be included in our group after Q2.

And it -- you can say -- when going to this factory, this is the type of products that you'll see, that you see on this photo. And it is really -- you really fall in love with the people and the products that they produce because they are super difficult to make these type of parts. And the people are dedicated and really passionate about what they are doing.

You can see also on the customers there that there are a lot of customers here that are similar to what the AQ Group have today. But here, we add something more. And I think together with JIT Mech, we can come with some financial firepower and invest more in these people up here in the north of Sweden, and then we will grow this company a lot. So this is a really exciting opportunity for us, and we're very happy with this acquisition.

And they are doing crazy things. You see this yellow part here on my -- on the bottom. It is a contact for connecting underwater sea cable. And you can imagine how difficult, that is a 6-meter long connection welded part, which is for one of the customers. And yes, it is really cool products that they do and super nice and smart people are out there, dedicated, always fine. So very happy with this acquisition. So our acquisition team have done a lot of good things.

So now I try to -- today also to speak a little bit about electrification. Electrification can be so many things, but some of these things we have shown before, but we -- on the top left, we call it Project [indiscernible] or hot dog stand if you're in U.K. because it looks like a hot dog stand, but it is a big cabinet for inverter for solar power and wind power. And it is a new product that we will start to deliver in Q2 and from our factory in Örnsköldsvik, and it's a lot of welding, painting. It is really cool product, and it will go to Germany. In the end, the customer is there.

On the top right, we have a nice battery system or a battery module, I would say, that we are now working with several customers to sell. We bought the IP really cheaply for like SEK 1 million from a Gothenburg-based company that went bankrupt.

And we see a good potential in selling this product to several of our existing customers, so this is really nice. And we have met several, and it's a big interest in fact. So we think that it is really fun.

In the mid, there is also batteries, and that is enclosures for batteries for data centers, where we are -- have the first order now for those red enclosures there, but we are also offering wire harnesses and copper busbars to this customer. It's also in Germany.

And on the bottom left, there is also a kind of a battery. It's a rack for super capacity that we are doing for one of our customers here in Sweden, but we -- they have won their first projects now, and we believe that we will start to deliver those racks by the end of the year, but there will be a lot of these type of racks. So it's really fun.

And then on the bottom, we have a battery for an electrical bike, and it is the Bosch electric bike, and we are doing the complex parts, the end parts there. You can see both ends, and we have won now 3 more projects from them from our factory in Hungary, and it's plastic injection molding in this case. So lot of batteries, storage in this picture here, but in different forms, so to speak, what we do.

If we go to the next slide, we have -- and this is an accident actually, but almost all the trains here are red and white. It is funny. But these are projects that are ongoing at the moment where we have a lot of content, both electrical cabinets, drive controls and inductive components. So it's [ SJ-250 ] on the top left. It's a Traxx locomotive on the bottom left. It's an Italian train on the bottom right for Hitachi Rail and then it's -- on the top, it is Deutsche Bahn German train where we deliver a lot of sheet metal boxes, electrical cabinets and, hopefully, also the driver desk. It's a lot of new products and fun stuff.

And then the last slide for today is that we have secured a lot of orders in China for electrical cabinets for Ro-Ro ships. It is existing customer to us that build this. In these kind of ships, you can lower and higher the seal -- the floor, and the electrical automation for that, we are delivering, the electrical cabinets from our plant in China. You can see Höegh Autoliners there. They're delivering at lot, of course, and then, you need this kind of roll on, roll off technology.

And on the right, you see the nice, beautiful Wasaline hybrid ship, which lowers the carbon emissions from this ferry line in Finland by 50% by using batteries in the propulsion, and we have delivered both the big transformers for this ship, but also the inductive components for the drive units for the armed forces, so it's really nice. You can watch films of this on the armed forces at website. It is really a nice ship, and it is good also for the environment. We believe that we will grow in this year quite a lot in the shipping business -- in our shipping business, marine business.

And that was the last one. So why to invest in AQ Group? I think we will continue to try to increase earnings per share with 15%, like we have done over the past 10 years. You can see also that we are increasing the profit per share also in quarter 1, and we have been very stable and showed profit every quarter since the foundation in 1994.

You can say that it shows that we have good control of our company, and yes, we are very fast to act when things happen up and down. And then we have exposure to this underlying growth segments and companies that I have told you about just now. And we will continue to acquire factories, and that will be fun. And then we have an extremely strong balance sheet as well, so it's really a low-risk investment.

And then we move on to maybe the most exciting part, the questions. So if you raise your hand, then we will try to answer your question.

J
James Ahrgren
executive

Karl, please go ahead.

K
Karl Norén
analyst

And congrats on a strong margin in the quarter. So I'm just wondering a little bit on the margin side here since it was surprisingly strong. If you could talk a little bit about how sustainable you think the margin is given, yes, lower sales? And how much is maybe driven by mix that some of your maybe larger customers with lower margins are decreasing more, so to say?

J
James Ahrgren
executive

No. But I mean it's a lot of factors affecting the margin, of course. But I think that we tried to say it in the quarter. We have screwed up less in the quarter, which improves our margin. So we have been delivering on time with better quality. And then we get also higher productivity when we have control of our production process in the shop floor. It's really easy to lose 1% of the margin by not doing the right things in the factory.

So I think that is good. But of course, there are different margins in different segments and -- as well. But I think in general, it's more a productivity thing this quarter. And I think, as I've said before, we promise to be between 6% and 10% because that's what we have done over the long term. And then, we are, of course, trying to move ourselves upwards so that we can have a stability between 8% and 10%, but we want to prove that. So it may be not answer your question, but we will, of course, try to keep this margin. Because I think the more there is in a way also that we're trying to shift to do more difficult parts all the time, I mean get more demanding customers that have more demanding parts. And then I think we add more value, and then, we should be able to have a higher margin in the long term. But it's a long journey, so.

K
Karl Norén
analyst

Yes. There's no like one-offs in the quarter impacting the margin positively, it seems.

J
James Ahrgren
executive

No. There are no one-offs in the quarter. Then we would have said so.

K
Karl Norén
analyst

Yes, yes. That's great. And then I'm just wondering a little bit on the sales situation. On the demand side, what are you seeing right now? I mean, are you seeing that sales are continuing to weaken? Or is it that's quite stable levels right now, you would say?

J
James Ahrgren
executive

It's a very big mix between the different market segments. I think that it is easy for you to read in our customers' report. We can say that, I mean, construction equipment for Volvo is not good at the moment. It is clear, I think. I think buses are quite good for Volvo. The trucks are quite stable, I would say. I mean, that is a big part.

And then talent is quite low. So I think that's -- and then if you listen to ABB and look at them, they are still increasing the sales in quarter 1. And they are, of course, our second biggest customer. And then we have Hitachi, which is growing like they should grow 5x, I think, over the coming 3 years. Also, I think there are a lot of growth potential there, but it's mostly down to us to be able to catch the new business and work with our customers.

And we win new things and increase our market share. So we are still not big enough to just say that, yes, it's market up and down. It is down to us to win new business really. So we have to run and fight with the competitors and be good at what we do.

K
Karl Norén
analyst

Yes. I guess on the pricing side, is it possible to quantify how much price contributed to your organic growth in Q1?

J
James Ahrgren
executive

It is a little bit tricky. I think we still have some spillover at some customers, but I would say it is quite flat in the quarter compared to same quarter last year. So we're not decreasing, not increasing. So it is volume 2% down, I would say. That is what you read in the report.

K
Karl Norén
analyst

Okay. And then just the last one from my side on receivables, was up quite a bit year-over-year, I noticed in the balance sheet, despite lower net sales. Is it a specific reason for this or...

J
James Ahrgren
executive

I think that we are learning from our customers that it is -- we need to work on our -- sorry, receivables, you said. No, but we are working hard to get them. It is different payment terms with different customers, I would say. So I think that is the main reason, so it is a little bit up, that is correct.

Johan, please.

J
Johan Dahl
analyst

James, a question on the order book. You talked about lower order book year-on-year. If you were to sort of adjust for that energy storage business that is not in the books, I guess, is it still down? And approximately by how much would you say?

J
James Ahrgren
executive

But I would say that it is -- as I tried to explain in Karl's question, I think some of the -- some of our customers have lower sales and some are increasing, so -- but if you adjust for that, the lost customer, I think it is 2%, exactly. So then we are quite flat versus last year.

But it's more going back to normal after having 2 years where all our market segments, all our geographies except China, and we won a lot of new projects, made us grow with 30% in -- or 27%, I think, it was in '22 and then quite a lot in last year. It's not the same now. So some things are down, some things are really strong. It's more back to normal, I would say.

J
Johan Dahl
analyst

Got you. And just since as many of your clients, they sort of -- the way they place orders have pretty much normalized. Would you say the visibility has decreased for you guys compared to 1 year ago?

J
James Ahrgren
executive

I would say yes. We still have the forecast and so on, but the orders for the big projects are not placed as far ahead as they were a year ago.

J
Johan Dahl
analyst

Okay. Just a final one on the margins. It just seems as if delivery precision is extremely important for your margins, just looking the year-on-year progression and still a significant opportunity to continue to improve on delivery precision. I'm just curious why you're not more optimistic on margins in that sense, as there seems to be significant improvement potential here.

J
James Ahrgren
executive

But it is always hard with statistics because we see that the delivery performance is improving in percentage, but I would say the delivery performance is improving more if we count the days that we are late. So as you say, there is a big improvement potential there to both improve the inventory turnover, but also to, I mean, even get more happy customers, if I say like that, by improving the delivery precision more.

Okay. Sindre?

S
Sindre Sørbye
analyst

Congrats with good results and a fantastic profitability. Just touching up on actually the same topics as Karl and Johan did, but also listening to peers, which most of them has alluded to decreasing demand and also less visibility as you do, but they're all pointing to destocking among customers, partly as opposed to, let's say, real underlying demand. And what's your take on that situation? Is it more a demand issue? Or is it more like just kind of inventory correction?

J
James Ahrgren
executive

I would say it's not -- we are delivering a little bit to where they can be. Let's say, for small motor drives, there can be a destocking effect in a way. But I mean, there is no stock of trucks or buses or construction equipment, really. There is no destocking effects there. It is demand-driven. And the same with the trains and ships, there is no stock of that either. So I think the customer products that we have is not what our -- what you would carry in stock. So I don't believe it is a destocking effect in our case at least.

S
Sindre Sørbye
analyst

Okay. Great. Just on capacity utilization. I mean this is -- I believe this is the first quarter with negative organic growth since -- at least since 2020. Should we be worried about capacity utilization in any of your factories and then leading to underabsorption of costs?

J
James Ahrgren
executive

We are the first in decreasing our costs. If the volumes would turn down, then we are quick to adapt to new situations. And we have a flexible cost base. So I think we showed it in 2020, when the volumes were quite low that we were really good at adapting our cost base. So I don't -- you never know what happens, but I'm confident that we will be very quick and resilient in that case.

And then, of course, we have some capacity now to sell as well because we have invested quite a lot during '22 and '23, so that's a good situation to be in as well because there is still a lot of companies that I've tried to show that want to buy significant volumes of parts and that they are searching for suppliers, so -- I didn't even mention the Defense segment. Why? Because I have done it now in a number of quarters in a row, but I mean it is growing that crazy.

So I think there are opportunities where we can fill our factories with more difficult products within especially then electrification, defense, and like these kind of things.

S
Sindre Sørbye
analyst

So final from me on M&A. During the past 6 months, you've been, let's say, quite forward leaning about closing acquisitions before end of second quarter and now you did JIT Mech acquisition. And it -- I mean, it looks very interesting, but at the same time, as you have grown rapidly, it's only like 1% of the turnover. So is that the one you have had in mind? Or should we expect to see more acquisitions in the near future?

J
James Ahrgren
executive

I mean, my team here, we are working very hard to close more deals. That's what I can say. But then again, it's very hard to promise if we were able to close them or not. I mean we want to make good deals for ourselves because we don't want to be sitting with it afterwards. So we cannot be too stressed that, okay, we need to grow in quarter 2 or something. We need to buy nice companies that we will want to have in AQ for 20 years more and that will continue to grow.

So I think we have opportunities, and we are finding opportunities, and we are trying to make deals. So that's all I want to say. But yes, for sure, I want to -- I have said that I will eat my heart if we are not SEK 10 billion turnover in 2024 with a 10% EBT margin, this is internal target. And let's see if I get it, it has happened on my wall or not, but I will try my best not to. That's what I can say.

S
Sindre Sørbye
analyst

Okay. Of course, that was my final, final. The 15% growth target, which you clearly expressed like at least no more than 3 to 6 months ago, how does that look now in light of, let's say, recent market deceleration.

J
James Ahrgren
executive

No. But of course, it will be super tough for us to do it. And I think I have expressed it before as well, but we will fight and do everything we can to reach the target.

S
Sindre Sørbye
analyst

Great. Keep on fighting, James.

J
James Ahrgren
executive

Any more questions? Very good questions today.

K
Karl Norén
analyst

Karl Norén, may I ask a question regarding China?

J
James Ahrgren
executive

Yes.

K
Karl Norén
analyst

You were quite positive about -- or quite positive, but you said that you expect China to turn around during 2024 last time we met. Are you seeing improvements in China or...

J
James Ahrgren
executive

Yes. The team in China have done a fantastic job in adapting the cost base, working with the customers. And I think China looks much better, in much better shape. It is really fun to see, but we expect also that we will start to grow in China again. So that is still on the cards. But operational-wise, it looks really good, I think, with good leads there. So it's about...

K
Karl Norén
analyst

And then just a question. I know it's hard for you to answer this maybe. But on the electrification side, you mentioned you have several growth projects, et cetera. Is it possible to say what electrification -- your electrification offering, how much it grew here in Q1?

J
James Ahrgren
executive

No. I can't say it, actually, so sorry about that, but it is...

K
Karl Norén
analyst

It's growing...

J
James Ahrgren
executive

Yes, it is really growing. So that is really -- that is a very good segment to be in. And then I would say, especially this power -- in the Power Grids segment, it's really -- there is a lot of business to be won, and it will continue to grow as well. So we are very positive in that regard. So I think that -- yes, that should be there. Yes.

Any more questions? So with that, I can only say that the AQ is celebrating 30 years this year, and we have our Annual General Meeting today, and it will be a pleasure.

I will hope I will meet several of you there. So yes, wish you a great day. Thank you. Bye-bye.

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