AQ Group AB

STO:AQ

Earnings Call Transcript

[James Ahrgren, executive]

Okay. It's 9:00. Welcome to AQ Group Quarter 1 Investor Presentation for 2025. I'm James Ahrgren, and with me, I have Christina Hegg here behind as well to answer your questions on our quarterly report.

First of all, I'd like to say, as I usually do, why we think an investment in AQ Group is a good idea. We have grown earnings per share 14% over the past 10 years. We have made profit every quarter since the foundation in 1994. We're exposed to industrial market segments with underlying growth, such as electrification, railway, defense and med-tech. We have a long history of acquisitions. We buy 2 to 4 factories per year. So far this year, we have 2 factories and 1 engineering office in Germany and Czech Republic. And we have a strong balance sheet with a net cash position. And we like to grow profit per share every year.

Some quick facts about AQ Group. We have 8,000 employees, about SEK 8.6 billion in turnover, 7 business areas, 15 market segments, manufacturing in 17 countries with 4,000 customers globally. As I said, we made profit every quarter for 30 years. We have grown earnings per share with 14% on average the last 10 years. And we make acquisitions every year almost and we are listed -- we are part of this UN Global Compact since 2012.

To the first quarter then. Our net sales increased 3% to [ SEK 2.3 billion roughly ]. It is lower than our goal of growing net sales with 15%. Operating profit EBIT decreased a little bit with 4% to SEK 215 million, and profit after financial items decreased with 7% to SEK 205 million. Our profit margin before tax was 8.9%, which is above our target of 8%. Profit after tax was SEK 166 million and cash flow from operating activities was SEK 244 million and earnings per share before dilution was SEK 1.81 versus SEK 2.01 last year. Proposed dividend from the Board is SEK 1.60 per share. We will see what the AGM will say today. And it is an increased dividend of 20% versus the same -- versus last year.

Some slides showing our earnings per share growth and also our dividend per share. We have a target to grow our top line 15% per year, and we have a target on our profit. That should give an earnings per share increase every year of [Technical Difficulty]. Dividend per share, as I said, was increased from last year with 20%. And this is our sales development. We grew about 3%, which was due to our acquisitions mostly. We -- organically, we decreased our sales with about 5%. We see the same as we have done for a couple of quarters now that it's quite low demand or low demand. It's lower than it was in 2024 from our market segments in construction equipment, trucks, buses, agriculture, food, especially in Europe. But it was a little bit better at the end of the quarter. It started quite weak and then it became better.

Still, we see high volumes in electrification, railway and defense. We believe that these 3 market segments will continue to be good, and we believe that they will continue to increase as well. The organic growth doesn't look so fancy anymore with only huge growth, but maybe it was a little bit too high in '23, '24. I don't know, but it is still below our target, and we are trying to activate our sales force and be more active and win new accounts and win new products and projects with existing customers. But we are really fighting hard with the low demand in the trucks, buses and construction equipment, even though it improved in the latter stages of the quarter 1. We have won a new contract from a major electrification customer for transformers and inductors for medium voltage data centers for EUR 10 million that will start -- we have delivered these products for some time, but now we have a minimum volume for the next 3 years.

We believe it will be bigger, but this is the minimum quantity that they guarantee that we will get. So that is good news. Some recent new customer project wins that we have had. We -- if we start on the top left, this is a drone from an -- Eastern European drone, we can say, surveillance drone that we do wire harnesses for in one of our factories. Then on the top -- in the middle, it's a radar system from Poland, where we also do electric mechanical parts and wire harnesses from. These are organic wins and does not come through acquisitions. Then we're proud our nice and biggest customer, Volvo Group. They launched their new electrical articulated haulers at Bauma in quarter 1, and we are delivering the wire harnesses for these trucks, and we are very proud of that because they will save a lot of CO2 in the building sites and mining sites where they operate.

In the bottom left, we see an enclosure for a train in Australia, and it is fascinating, but it's a huge enclosure and our good people at -- in Kodara in Estonia have used friction stir welding and make this very difficult aluminum enclosures for a customer in Australia, very far away. And then in the middle, we see this part of this medium voltage UPS for data centers, where we deliver half of that product that you see on the picture from our factory in Hungary. And the last picture is a nice train where we deliver the enclosures that you see on the top, including inductive components from our newly acquired factory in Trutnov, Germany. This is for Austrian train that will be in operation soon. And it's a very nice product. We will see a little bit more later maybe pictures of those.

So acquired growth, you see those -- that nice product that we were talking about. But acquired growth, we reached our target, which is 5% per year. We are above with 8%. And this newest acquisition, the turnover is only 2 months in the quarter. So it should be a little bit even higher acquired growth in quarter 2, I believe. But we are happy that we reached our target in this area, and it compensates a little bit for the negative organic growth, of course.

A little bit update regarding mdexx and Riedel. Turnover for February, March has been okay, not overwhelming or underwhelming. It has been as we thought. We are working on a carve-out of the IT systems from the owners, and we believe it will be ready in quarter 3 with the implementation of the ERP system that we use in AQ Monitor instead of SAP. It will save some money for us. Riedel margin is above AQ target, which is good. So that factory is working. We just continue to run really. And then the mdexx margin is below 0%, meaning it's losing money currently. We will, in quarter 2, refinance the factoring that we have been using to improve the margin in both these 2 companies, have a significant impact.

Then our Trutnov factory will be an important part in this new data center product that I talked about. We lack capacity in Hungary, so we need to do some of the parts in Trutnov factory. So -- but we still need to sell more, and we are working on that. And I believe that we will be able to fill this factory up quite quickly. And then the integration of the design office for these inductive components together with our Paderborn site will be completed by end of 2025. So we are happy with our progress and integration. We're working hard to implement our core values and the AQ way of working, and we really believe that this will have a big -- will be a big contributing factor to our profits going forward.

The margins then. Margins have been quite stable. I think we have good cost control. We now have 9 consecutive quarters above our earnings before tax target of 8%. It's really good, I think. We still have opportunities to improve in several of our factories and production sites, which are not according to where we want them to be. And then as we write in the report, mdexx dilutes the margin with about 0.5% for the whole group. And we believe it will improve sequentially starting from Q2 with this refinancing that we hope we will get it above the [ 0% ], and then we will continue to improve it during the year to reach eventually the EBT margin target of the AQ Group. We really like the people. It's very, very well organized, and it will be a good acquisition, I'm sure.

Inventory and inventory turnover development, our target is 3.5 turns. Currently, we are at 2.9 turns. We have added, of course, a lot of inventory with the new companies that we acquired and the COGS material share is not calculated completely. But on the other hand, we also have a bonus when the currency goes down, then the inventory turnover as the mathematics will be improved. So we still have a lot of work to do here and our companies can be much better. We have a focused project that we have been running for some time and it gives effect, we believe. We have now currently a big focus on one of our -- our sites in Bulgaria, our site in Canada, our site in U.K., both of our sites in India and still our site in Mexico, even though they have improved a lot during the last year.

Cash flow is really important, I believe. And I think the operating cash flow is really good in the quarter. We have paid the mdexx and Riedel acquisitions in the quarter, but still we have a net cash position, which is really nice when there is a little bit political turmoil in the markets and so on to be really strong then and be able to maybe make some good deals as well. And we have -- we announced that we will do some investment in our factory in the U.S., our transformer factory there, and we believe that, that will be a good investment. Also a little bit cheaper now when the dollar is weak. So good for us.

Some comments on tariffs. I know they will -- I thought there would be questions. I took one picture from our annual report. And I look back actually, we have had the same writings on our goals and strategy since, I believe, 2014. So our overall goals, then we write. Our goal is to be close to our customers geographically in order to offer products with the best total cost and at the same time, with low environmental impact. And in the strategy part, I've underlined it here to be close to our customer production units around the world. This means, I mean, we try to deliver local for local, and we have done it since 1994. This is to avoid transportation costs and tariffs, but also to cooperate better with our customers.

We see it as really important for our customers to be close by because by being close by, we can also reduce their inventory levels, which is very important for our customers because they also like to have good cash flow, just like we do. So we like to buy local, we like to produce local and we like to sell local. Then of course, we have a little bit of export to U.S., but it is -- it will not affect anything big. And the tariffs need to be huge in order for it to force us to move. But on the other hand, if our customers like us to move our factories, then we would be happy to do so. But still, I haven't gotten any question to move our factories to U.S. Can get some more questions on that later maybe.

Quality and delivery precision. Our on-time delivery has improved with 1% versus the same quarter last year. It is still way below our target, but it is moving in the right direction. We still have customers that are not happy, but most of our customers are happy with our delivery performance and our quality. That is important. However, we have capacity constraints in AQ Wiring Systems Rockford, in JIT Mech, in Transformer Solutions U.S., where we invest now and in Inductives Hungary. That's also why we buy the Trutnov factory because we need more capacity in Europe for inductive components. And we have still challenges to deliver on time as we want in India, even though maybe the customer requirements in India are a little bit lower than in the rest of the world.

I come back to why we think you should invest in AQ Group, but I have said it already, so you know it. I will not go into it anymore.

And now we come to questions. Please raise your hand and we will [Technical Difficulty] and then you can ask questions. Albin, maybe you can start.

[Albin Nordmark, analyst]

Yes. So firstly, you mentioned good demand from the electrification, defense and railways end markets in the quarter. Can you comment on the demand split here between Europe and the U.S., please?

[James Ahrgren, executive]

I mean I would say like this. In the U.S., we have currently 2 factories. We have 1 factory that does transformers, the demand is really strong. We have 1 factory that does wire harnesses and electrical cabinets. And they are -- one of the main customers is buses. So that is not so strong in the U.S. at all. So on the other hand, I would say in Europe, I think for power grid electrification and transmission, the demand is very, very strong, very strong. And also for railway, I think all the railway manufacturers in Europe are completely fully booked. So that is a good demand side to be in, I would say, and supply side as well from our perspective.

And in the defense in Europe, I mean, it is -- I would say the constraint here is not that we cannot deliver to our customers. It's rather that our customers need a lot of work in order to ramp up to deliver all the orders that they have received. So I mean, it looks -- Europe looks good, I think, in those 3 market segments. But then on the truck and bus and yellow machines, demands are weak, I would say, in both places really, I would say. I mean we don't have so much truck, I would say, in U.S. I would say we have almost 0 truck in U.S. So it is mostly in Europe. And it's -- I mean, it's okay, but it's not as good as it was in '23.

[Albin Nordmark, analyst]

Okay. So just one last question here. I note some changes in the personnel during the quarter with, I think, you're 80 people less sequentially despite the last acquisition. So can you comment on this change as I think it was quite a large change in Lithuania, for example?

[James Ahrgren, executive]

Yes. I mean we are constantly adapting our people, the amount of people we have based on the demand, but also, of course, we are continuously, as I also write in the report, we need to improve always our productivity. And when you improve the productivity, then you should have less people, I think, in general. So I think it's a mix of improved productivity, but also maybe in some senses -- yes. I mean, Germany was not great, I think. But I would say -- we can say like this that we have a lot of people also in the wire harness business area. And yes, volumes are not great in those segments because they are a lot in the vehicles side. Good question. Karl, maybe.

[Karl Norén, analyst]

Yes. Questions from my side as well. I mean, firstly, on the Easter impact, I mean, now Easter was in Q2 instead of Q1. Would you say you have a positive impact on your operations from that or...

[James Ahrgren, executive]

Yes. You could say like that, that it should have a positive impact. There is a few more working days in all the Christian countries, so for sure. On the other hand, the Christmas was not great this year. It was quite a long holiday to say. So -- and as I said, January was really poor. But for sure, Easter has some impact because 1 or 2 days have a big impact on the amount of product we can deliver out.

[Karl Norén, analyst]

Yes. Yes. Okay, clear. And on the acquisitions you made in Germany late last year or early this, I mean, do you have any targets in terms of profitability for the full year, where you expect them to end?

[James Ahrgren, executive]

Yes. We, of course, have targets, but I mean...

[Karl Norén, analyst]

External targets.

[James Ahrgren, executive]

No, but I think like this, it is better to deliver than to comment. So I mean, we -- the team in mdexx, especially because Riedel is doing really well, I would say. It is running very, very nicely. So we don't have to do that much actually in that. But for mdexx, we have a very dedicated team. They are doing their best to fill the factory and to reduce costs where they can. And I think we are supporting them. I think this financing will really improve the profitability because they had really expensive financing before, and we have much better financing through [ SEB ]. So we are happy with that. But I don't like to promise anything, but...

[Karl Norén, analyst]

Wish you expect improvement from Q2 and onwards, you say in the report, so I guess we'll -- we can stay there, and I understand. Yes, that's good. And then just on demand. I mean, tariffs, I think you're quite well positioned there. But I guess the overall cautious in the market is around that people will order less or that we enter a recession in the U.S. I mean you don't really seem to see any signs of that your customers in the U.S. are ordering less or slower activity?

[James Ahrgren, executive]

I mean it doesn't go so fast for us. And I can say like this, that this transformer factory, I mean, it is big projects. They deliver big transformers for projects that have been -- I mean, that have been made for a long time. I mean it is transformers for New York City Metro and these kind of things. They will not [ do ] those kind of projects quickly. But on the demand side going forward, I mean, that I cannot see. It's impossible to see how that will happen. But we don't see any changes in our customers' plans and so on, but who knows how much...

[Karl Norén, analyst]

Yes. I mean in Europe, I mean, now we saw your -- one of your customers or large customers, Volvo reported here this morning. I think they had quite good order intake in Europe. Are you seeing that, that is -- I mean you mentioned that March was better, but are you seeing any general trend improvement, you would say, in Europe generally?

[James Ahrgren, executive]

I think like this, that like we said in quarter 4, I think that we -- based on the plans that we see from those type of customers, the Volvo and Scania and MAN and there we believe that there will be some organic growth for the full year still. As I said, those plans, I mean, they -- their orders to us are normally placed on the day before or the same day, then we only have forecasts, and they can change them tomorrow. So it is what it is. But we believe that it looks okay in Europe, we think.

[Karl Norén, analyst]

Yes. That's good. That's not what we thought 1 quarter ago. So that's nice.

[James Ahrgren, executive]

[ Forbes ]?

[Unknown Analyst]

Yes. Yes, just a couple of questions from my side. Defense, how much is that of sales now? You said 5% last year, but how does it look now in Q1? And what are you expecting for the coming quarters?

[James Ahrgren, executive]

It is -- I can say like this that it is around 5%. It is maybe a little bit over or a little bit under, but it is still around 5%. Maybe it is 6%, maybe it is 4%, but it is around 5%, I can say. Going forward, it's very hard to predict because it's a percentage of sales. If the truck and bus and those start to pull volumes again, then of course, the percentage will drop, but still the volumes will increase. I still believe defense will grow in absolute terms for us this year, and then we see where it ends up on a percentage term. We see, for instance, that there is big orders for CV90 in Sweden, and we deliver a lot of parts to those machines. So both the wire harnesses, the [ tons of ] sheet metal. It's -- I don't know if it's the armor, so to speak, and other stuff.

So -- but those -- when will those machines be produced? Who knows. It will be '25 or '26, and it depends on our customer if they can ramp up, as I said before. So let's see where it ends up. But we believe that the defense will increase for us. And we think it's a good segment to be in. It's very high demanding and we -- yes, we like those type of customers.

[Unknown Analyst]

All right. And then on the profitability target, you have the 8% target there, and you've been above that for 9 quarters now. So how should we think about that one going forward now, especially with demand in some of your key segments like trucks, construction equipment, perhaps coming back now to better levels throughout the year? It looks quite good from my point of view here.

[James Ahrgren, executive]

I mean the target -- I mean, we -- based on the law in Sweden, the shareholder law, we should try to make as much money as we can, and we will always try to do that. Then we have a target of 8% because we have seen during the years in AQ that it can fluctuate a little bit. But I don't see anything right now that would say that, yes, our margins will go down. I don't see it. But on the other hand, I don't see that they will increase a lot either. So -- but maybe my Board will change that target someday, but I mean, we will try to make as much money as possible for our shareholders and create as much value for our customers as we can.

[Unknown Analyst]

Excellent. One more question on M&A, what you're seeing there for -- in the near term? And then if you could just give a small breakup of your exposure to construction equipment and trucks, how much is that in Europe because it's mainly a European operation, right?

[James Ahrgren, executive]

Yes. We deliver also to -- in construction equipment, we deliver also to Americas. But let's see now the first question regarding M&A, I mean, we are always looking at companies, and we are making offers and we try to agree with companies. But it is very hard to say when we agree on a price level that we think is okay. We like to buy cheap and a seller like to have a high price. So it takes time to get agreements. But I would say my M&A team and myself, we are working very hard to add more businesses to us. But we have to respect also that we added a lot of companies last year, and we need to implement the core values and integrate them in our IT environment and so on. So it's also a lot of work. So -- but we will -- I hope we will make acquisitions this year. Let's put it like that. That would be fun, and we like to do that, and we are working hard to achieve that.

On the segment, I would say like this that things that are on the road, I mean, the asphalt paved road, it's about 20% of our turnover. Then vehicles that are off-road, construction equipment, mining equipment, agriculture equipment, logistic equipment, these kind of things is also around 20%. And then mainly -- I mean, you know that our biggest share of business is in Europe. So I mean, it is a substantial part of our business, the construction equipment, I would say. It's an important part. And we really like them as customer, those type of customers. Sorry for not getting more into detail than that, but...

[Unknown Analyst]

Sounds good.

[James Ahrgren, executive]

See if we have some more questions or we are done maybe. It seems there are no more questions. So thank you so much for attending our call. Yes, and if you have other questions after the call, then reach out to me and Christina. We will try to be transparent and answer the questions that you have. And with that, I wish you a big nice day, and we go back to work. Thank you. Bye-bye.

[Christina Hegg, executive]

Thank you.