AQ Group AB (publ)

All right, welcome everybody to AQ Group's year-end report. On the picture we see a beautiful transformer and inductor in an enclosure that is produced by Emdex in Trutnov for a German railway customer. Beautiful products that we will produce going forward. Now let's go to some fancy numbers. First, we'd like to talk about why you should invest in Acre Group. So we have an earnings per share-taker of 14% over the past 10 years. We've made profit every quarter since the foundation in 1994. We have exposure to industrial market segments with underlying growth, meaning electrification, railway defense, medtech. And we also have a long history of acquisitions, two to four factories per year. And in 2024, we bought a lot more. We bought JITMEC, two factories, Rockford, three factories in the UK, Techroy with engineering and prototype office in the west coast of Sweden. We also signed an agreement in 2024 to buy Emdex and Mikael Riedel in Czech Republic and Germany who produced Transformers and Inductor for demanding industrial customers. We have an extremely strong balance sheet with the net cash position and we have a very nice track record of more than 30 years of profit. Some quick facts from AQ. We're 8,000 employees. We have a turnover of 8.5 billion SEK. We have seven business areas, more than 15 market segments, manufacturing now in 17 countries with 4,000 customers globally. We have made profit every quarter, as I said, for 30 years, and we have increased the earnings per share with a little bit more than 14%. every year for the last 10 years and we make acquisitions and we're part of UN Global Compact since 2012 which is our sustainability initiative. So to the fourth quarter then. Net sales decreased by 4% to 2.1 billion compared to 2.2 billion in the year previously and operating profit increased with 7% to 206 million and the profit with after financial items increased with 14 percent to 209 million which makes it gives us a profit margin in the quarter which is not eight percent which is extremely strong um we have also good profit after tax and a very nice cash flow in the quarter and this gives some earnings per share before dilution of 1.69 per share which is an increase compared to previous year, which was 1.46%. For the full year, our net sales decreased with 5%, which is way below our target. We aim to increase 15% per year. We will come back to that. Operating profit increased at 6% and EBT increased with 9%. And our profit margin before tax was 9.6%. Cash flow from operating activities was for the first time in EQ's history over 1 billion SEK, almost 1.2 billion SEK and earnings per share before dilution was 7.27 krona per share. Our equity ratio is way above our target at 67% and the board proposes a dividend of 1.60 krona per share which is an increase from 1.33 krona per share the year in 2023. Here is the nice chart with earnings per share growth I think this is important because this will drive share price increase but also make us make it possible for us to actually invest in the business going forward and we have been very successful in growing this quite a lot over the past 10 years. The net sales development is a bit disappointing, I must say. Growth was negative with 4% and organic growth was minus 9%. We'll dig deeper into that a little bit later. Currency almost zero and then we're happy to add about 5% through acquisitions. We see a decrease in demand from our market segments in trucks, construction equipment, buses, agriculture and food, and particularly in Europe. We still see strong increases in electrification, power electrification and defense. And here is the organic growth chart. um we we maybe it is so that in 2023 it was a little bit too good organic growth as well but anyhow we try to counter the headwinds that we have and we try to win new business and i will come to a little bit what we are trying to do In the recent quarter, we have won big projects from several customers. So on the two pictures on the left, we see one electrical cabinet for pantograph charging of electrical buses that we have won to one of our larger customers. This is a first order for us, and we will deliver a number of pieces to North America from our factory in Europe. We believe that this can be a big volume going forward because these electrical buses need charging and this customer is very strong in that sense. On the picture below we see a number of people from because we have won a big contract with one customer that do a high voltage direct current transfer of energy and they are producing the control or they are designing the control cabinets for that and we have won a big contract for 2025 which we believe is good. In the middle, we have three new tools of plastic parts for one of our biggest customers. This is a breakthrough because we have never delivered. There are more tools to be won, but these are the first three tools. We are very happy with that, winning new products from existing customers. On the top right is an electrical truck from Volvo. We love Volvo, they're a fantastic company and they deliver, they produce and design a lot of nice new products and we have won a lot of parts to the new Volvo electric trucks in sheet metal especially over both in 24 but also now in already now in 2025 we have won a number of new contracts for new parts. In the bottom middle is a transformer cab with an enclosure that we have designed in our design office in Germany, and we have delivered quite a lot of this in 2024. But we see a big growth of this product in 2025. Our customers sell this to data centers and it is a way to get uninterrupted power for one more second if the power for the data center is interrupted which enable other power systems to be able to kick in so that they don't interrupt the power to the data center. We believe that this product will be increasing a lot in volume in 2025 and we also will produce half of the volume in our new factory in Trutnov because we are lacking capacity in our factory in Hungary. On the bottom right is a bus from a company called New Flyer who deliver buses to and in North America. We have won a wire harness contract which in a way will replace a little bit of the lost volume when Nova Bus closed its factory in Plattsburgh last year. So this is a good new contract for us with a new customer. So we're happy and we believe we are already now one contract for our Canadian factory, our US factory, but also we believe that we will start deliveries from our Mexican factory soon. These are some new customer wins. Despite these, we are not able to counter the decrease in volume that some of our customers have seen in 24. But we believe in 25 will be a good year. Acquired growth, we're starting to get closer to our target. And I believe in quarter one, we will, if you just calculate, we will be above our target in acquired growth, which is good. We have managed to seal a lot of nice deals. and I will speak particularly about some of them. This is just a summary of all the deals we made in 2024. We made four deals adding roughly 900 million SEK in sales on an annualized basis and we paid about 300 billion SEK for that. We still have a good pipeline with companies that are interesting but we're not really close to doing any deals in the first quarter I would say. If we go into a little bit about Emdex and Mikael Riedel that we signed an agreement just before Christmas and now at the end of January we managed to close this deal because we got the approval from German competition authorities to go ahead So they're the number one company in Germany to design and manufacture custom drive transformers and inductors for industrial drives, railway, robots, electrical automation. There is a big design office in Weyer, Germany, design and sales, I should say, with about 30 sales and design engineers. and the manufacturing in Trutnov in Czech Republic is a modern factory with good equipment and a lot of capacity that we can now utilize because we have sales people all over the world that can sell this capacity so we're very happy to get this factory they are very good also you can see on the bottom right that they have been the Siemens supplier of the year two years in a row and that is because they have very good delivery performance and quality so it will be a great asset in the AQ portfolio going forward and the people seem very engaged we have met them now and they are very hungry for new business so it will be fun and this will increase our net sales together with Mikael Riedel in Ilsofen which is also beautiful a small transformer factory and will increase our net sales with about 50 million euro in 2025. and we will by this acquisition become then of course number one in Germany because we were maybe number two or three before but now together with these two companies we will be the biggest supplier of this dry type transformers in Germany which is fun this is also just to show a little bit on the development in our inductive components segment and the difference with this segment compared to many of the other AQ segments is we have a lot of design content here The map shows our design offices where they're located. So in every product we sell here, we also do the design. even though we don't own the product in many cases. So for instance let's say Siemens come to us they want to have a design they will give us a specification then we will do the design for them do a type test and then if it's qualified then we will start the delivery. Once that is done it's very seldom that a product gets changed because if you pass the design and the testing it's very hard to change. We see an extremely good CAGR in this business segment and we will continue to try to grow this business area going forward. And as you can see on the map, we are quite weak in both US and in Asia, despite that we have three factories in Asia and only one now in the US. So there's good ample opportunity to continue to grow with these demanding industrial customers. We're very happy with this acquisition. On the margin then, is it sustainable or not? I don't know but I think we have been able to show that we are very quick in adapting our costs based on our demands. And we will continue to do that going forward as well. I believe our cost control is good and we have an asset like manufacturing, so it's quite easy for us to scale up and down and doesn't cost that much. We have, despite our really good margin in quarter four, still have opportunities to improve operationally in a few of our companies, and we will do that in 2025. MDEX acquisition we can say that the factory in Trudnod combined with the design center in Veje was not very profitable because they were unutilizing the factory there so we will make sure that we fill up that volume but also we will implement the aq culture of cost consciousness in this company and it will improve the margin sequentially over the year but we believe still that the margin will if we if we don't succeed in changing anything then it would be a diluted margin because of this acquisition with 0.5 percentage points. Inventory and turnover development it is not so easy to increase the inventory turnover in a declining when you have declining volumes but still We are on a decent level at three even though our target is 3.5. We see a lot of good possibilities to improve this going forward and we still have our project to improve and we are learning by by the month really and several of the companies who have gone through our program have actually improved their inventory turnover but then again we add new companies that maybe have a great inventory turnover to our portfolio so then we need to teach them as well. So it is a ongoing struggle but I think we show in our cash flow that we have a good turnover of our inventory. So we come to the cash and the cash flow is really on a very good level. I would say we are continuing to generate cash from the profits that we make, but also from turning the inventory in our factories. And this gives that we have a fantastic, I would say we have the best financial position of all the contract manufacturers in the north and Europe that are stock listed and that I know about. This gives us, of course, opportunity to buy companies, but also to give a good dividend and also to invest together with our customers when they need increased capacity in some market. So I think as a shareholder in IQ, I'm very proud to have a net cash position. gives stability for the future and who knows what will happen next year with everything that goes on so then it's good to have some cash to be able to do funny things. Regarding investments we are going to move one of our factories in Tallinn They have grown a lot. This is EQ TrafoTech Estonia. They have grown a lot over the years since we took them over in 2019. And now we found an opportunity with actually a Swedish rental partner that they will build a factory for us and we will move there and it will actually not impact our costs at all but we will get more space and be able to build a more optimized flow in that factory. This is a very well-run company. The gentleman on the picture, Terro, he is the managing director there. And he is an extremely good operations guy and running this company in a very efficient way. So it will be great for him to be able to set up his dream factory now. And we believe that we will be able to get more volume out of this factory without increasing the costs going forward. It is a nice project and it is of course the building the red and gray building in the back that is going to be our new factory building there in Tallinn and this will be up and running in quarter three with full speed and we don't expect any extraordinary costs or adjustments or so because of this. We have bought a new mass sack 15 kilowatts it's actually a used machine but it's almost no running hours. We bought it for 10 million. This will enable us to grow in and insource some of our sheet metal that we are buying externally in northern Europe and also enable us to cut thicker material for defense customers that we have a lot. This will also reduce the energy consumption compared to our old CO2 laser machine that we will put into retirement. This machine will be up and running in quarter one this year and it will be a good boost to us but primarily to our customers because we have been lacking a little bit capacity in this area so it will be great. have also invested in 2024 quite a lot in renewable energy we will continue to invest even more this is a requirement from several of our customers that we reduce our co2 footprint and we are continually doing that and the focus is of course to reduce the co2 where the energy mix in the country is not great. So on the picture you can see an installation that we have in India. The middle picture and the right picture is from one of our factories in Bulgaria. Of course, in these countries where they have dirty energy, the energy is also more expensive. So the payback for these installations is very short. All of these installations are a mix of own installations where we own the equipment and in some cases where we just buy the energy. So in the Indian case for instance we buy the energy from the supplier for five years and then we own the equipment. In the Bulgarian site we have bought the equipment. It depends on which business case is best and where we can reduce cost the most. All of these installations that we will do and that we have done have a return of investment of less than five years. So it makes sense to do that. But also, of course, we reduce our CO2 consumption, which is great. And the customers love that. Quality and delivery precision. I see a small spelling mistake there. It should be January to December, but on time delivery has improved quite significantly compared to 2020. three however we are not satisfied and you can say also that we have added some companies that maybe didn't have enough capacity and we're lacking a little bit cash so we are investing in them it is rockford eatmec but also in transformer solutions inductives hungary we're investing in order to increase our capacity in order to meet our customers demand on the quality level i think we're extremely good and of course we have We are not perfect, but we can still improve, but we are on a very high level. And that is super important for our customers. I believe that our on time delivery will continue to increase next year and this year in 2025. And we are. really working hard to make it better and one example of that is our Mexican factory that is now 100% on time with the deliveries which they have struggled for a while. But we still have companies that need to improve this and we have customers, most of our customers are happy with our performance but we still need to be better because we want to exceed our customers expectations when it comes to delivering on time. And then we get back to why you should invest in a group. You can read it by yourself. I know your time is precious and there's a lot of things that you want to do. So let's get into the questions instead. If you want to ask a question, then please raise your hand and then we will try to unmute you.

If we can. Hopefully we can. I can. OK.

Now, Carl, you can unmute yourself now.

Yes, can you hear me? Good morning. I have a couple of questions. Maybe regarding the demand outlook, I mean, minus 9% organic growth in the quarter. I read it's mostly driven by like truck, buses, construction equipment mainly. Are you getting any signs of better demand in those areas or do you expect them to continue to be weaker in the near term?

I think that It is very hard to predict the future. And I tried to do that in the past and have not been so successful in that. So I would avoid from giving forward looking statements. I know that, for instance, that Volvo announced today that they will increase their production in Belgium, which is, of course, good. And this will have some impact on us. But I would refrain from giving any comments. forward-looking statement like that. So I think we are doing a lot of sales work. We are taking orders. I believe that we will get back to organic growth, but when that will happen, it's very hard for me to predict. Sorry.

But it sounds quite stable then near term, so to say, in those segments, so to say, tough segments.

It is not that we see any, we don't see any major changes mean further increase so but but but i wouldn't say either that we see that now it's going up again crazily so so so um i i would be yeah it is it feels quite stable and we try to win new business and grow anyway but yeah it's not not not any rocket growth yeah i see not the aq rocket uh another question there on the german business uh that you're now uh

taken over and you have I think you own it for almost two weeks now so still early days but I'm just wondering if you could give us some more information I mean on the profitability in terms of like the I think you said five percent EBITDA margin approximately for the both of the businesses but how is that on an EBIT level or yeah do they have a similar kind of P&L as you have with depreciation or how how is that looking yeah question for Christina I'm not sure

I think we should be straightforward. Emdex and Veja are not making profit. We will need to do a lot of activities together with them. As I said, we need to implement the core values of being cost-efficient with everything we do. But also, they have an underutilized factory in Trutnow. We will focus on selling more to that. We have already orders that we believe will fit there perfectly. Now I get into details, but they are using exactly the same impregnation system, funnily enough, as we are doing in Hungary and in one of our factories in Shanghai, which makes it quite easy to actually produce products in both places. So we have been lacking capacity there, so we believe we can fill it up. But we also need to look on the cost structure of this business and make sure that we are getting the productivity that we want out of the whole business. On the real side, I think they're doing maybe not a great margin, but I mean, they're still profitable and I think that business will run okay, but we still want to implement our ERP systems and increase the inventory turnover and do a lot of activities in order to increase the return of invested capital, really. So there's a lot of work for us to do with these cases, and it's good that we have some more work to do. We like that.

And also they have been in cash, of course. So the financial situation has been hard. So we will look into that as well.

Yeah, exactly. We will improve that for sure. We will reduce the cost of capital in that sense.

So similar to EGITMEC maybe and Rockford, I guess. Yes. And actually, I have a question on the EGITMEC acquisition, because now I just looked through the report and their contribution on sales and earnings, and it looked like they had a quite weak or a little bit lower margin maybe than I would have expected for 2024. Is there anything we should be aware of there?

No, but I think in general, when we get family-owned businesses into AQE, there is almost always some things that can be improved. And I think here in terms of inventory management, there is some things that maybe we can help these companies with and become better. So we see it also in the delivery performance. So I think it is a very nice acquisition and they will continue to grow for several years now with the customers they have. And manufacturing wise, technology and the people are fantastic. So it would be a great acquisition going forward. But it is, as you say, maybe we found some something that was not perfect in the inventory in the end. But I think it is normal. I mean, yeah, so I'm not too worried about it.

Yeah, that's fair. Last, just one final one on the segment. I mean, it's the second quarter in a row, I think, where you have like some around 20 million in positive unallocated costs. So just curious, about those figures and what it is?

I would say it's unallocated costs, managing the different reportings from the companies and so on. So it's mainly related to normal year-end adjustments and other corrections at group level.

Okay, so it's nothing extraordinary.

Not at all extraordinary. Normal costs, but we have difficulties in allocating them. We do not allocate them to each of the segments. So they are unallocated, but normal running costs.

Yeah, I see. That's good and all for me. Thank you and nice report.

Thank you.

Thank you, Carl. So who will be next? Maybe we go to Forbes then. Let's unmute him.

Great, thank you. And good morning. So also, question here on demand because well generally this reporting season we've seen pretty good order intakes from some of your customers like Volvo both on the bus and construction equipment side ABB some mining companies also reporting really good order intake but it doesn't seem like you're sharing that like picture right now but could you maybe discuss when

you could start seeing some of those orders trickle down to you then um yeah no but it is tricky with order intake because uh i mean our customers when they get an order they are going to plan their production they're going to let's say their order intake is increasing now then then they will plan their production they will ramp it up they will place it in which of the factories that should be placed, and then eventually they will release order to us. So, of course, those orders should trickle down to us eventually. When it will come, it depends a lot on the different customers that you mentioned. So therefore, I'm reluctant to say that now it will go up there in that quarter and so on. But of course, if our customers receive a lot of order, if we are doing a good job and they like to place the order with us, then also our sales would increase eventually.

Okay, thank you. I have two more questions. One more on growth then. Could you discuss a bit how big defence is now as a share of total sales and what you're seeing there in terms of growth for next year, for 2025?

I would say like this, that it should be above five percent for 2024 and i believe that so hard to calculate because in in for forward i mean backward is easy because then you calculate actual numbers forward it's more difficult to say the share but i strongly believe that we will continue to increase sales in the defense segment in 25. i would be very surprised if if that would not happen

Okay, good. And then a final one from me. Looking at the margin, it's so strong and despite the negative organic growth here. So are there any mixed questions we should be considering here that is boosting the margin? Any help from you that would be helpful?

Yeah, maybe. I mean, it's... It can be a little bit product mix, of course, but I would say also that we have been very, we are being boosted a little bit by the fact that we have reduced a lot of people the last year and the people you reduce first are the ones that are rented or not on a permanent contract and of course the best people we try to keep in the businesses. I would say a large part of this is that we really are able to the people that we have are high more productive that gives a big boost I would say and then I mean we are trying also to move into doing more design work for our customers and we believe that that should give us better margin going forward and I tried to write a little bit about it in the report. Adding more design should make our customer more competitive because we will design in a way that is easier to manufacture for us and hopefully our idea is that with that our customers will become more profitable but also we will become more profitable because that we are doing designs that are adapted to our manufacturing. We have added a lot of engineers in 2024, both recruited and through acquisitions, and we believe that should be good going forward. Last one is also that in 2023, we had a lot of delivery issues, especially in the fourth quarter. Now we are delivering much more on time and in a better pace, even though it's just two percentage points, it's actually a lot in days and weeks. So we get more satisfied customers, but also we are getting a little bit more profit because it's easier to plan the production at the moment than it was. So there are many things that will affect the margin. Then you can say also, I mean, I have mentioned in this presentation as well, that we like this inductive component space because there is a lot of design engineers. We have doctors designing these kinds of products and we are very good at this for the market segments that we are in. And that should also be boosting a little bit the margin, I would say.

All right. That's great. Thank you.

and then we have maybe a question from albin yes thank you can you hear me yes all right perfect uh thank you for taking my questions just to continue there on forbes last question uh i think i saw a slide where inductive components was roughly the same uh 2024 as 2023 is that correct and If so, have you even, with no increase there, increased the margins for inductive components?

I would say, I mean, we don't really report like that, but I would say like this, that the chart there is a little bit hard to, it is actually an increase in the inductive components business area in 24 versus 23. So they have actually, we have actually grown that segment organically, I would say, in 24. And as I said, I mean, we deliver, it is, if you design, and we can go back to the first picture that I had. If you design these kinds of things, I'm trying to see if I can go back. You saw it, but we move back in time. If you design this kind of components, I mean, here we have designed the enclosure, the inductor, which is closest, the transformers that are sitting behind, and then we assemble it into a system. This one will be sitting either underneath or on top of a train, and then it will be cooled by fans and air that is flowing from the train. And if you design it wrong, it will burn, and then the train will stop. So these kinds of components, they are very hard to do, both on design and manufacturing. And we can do it now globally in AQ, even though we have the biggest footprint in Europe. And this should have a positive impact, we believe, on our margin, compared to when we just delivered a simple bracket. I mean, this is a testament to our, that we want to do more difficult things for our customers, because then we believe we add more value

Yeah, that's clear. And also you mentioned good defense demand several times. And I think I lost the sound when you answered one of the previous questions. So roughly, is it possible to say how much you expect the defense demand to grow in 2025? And also, how is the margin mix for the defense and market compared to the group as a whole?

No, but I think it is maybe a little bit higher. I mean, the demands in the defense industry are really, really high on traceability of materials and And security, I mean, both IT and physical security in the factories need to be really on the top level. And of course, this should give a bit higher price, I would believe. and on in in terms of how fast it will grow it is a little bit tricky i would say because the the if you compare to truck for instance truck factory they are extremely easy to see the demand because they plan so well and they are so they have a fantastic ecosystem to plan that the fence has been in europe i mean it has been almost nothing for the last 10 years And they started to produce now and recruiting a lot of new people. they need to build the whole ecosystem again, almost. So it is a lot of disruptions in the production and in the factories and they lack capacity, they don't have space and so on. So it's going back and forth. It's very hard to predict how much will it be in 2025. As I said, I believe it will grow in 2025 in absolute numbers compared to 2024, because our customers have won a lot of new orders where we will deliver the parts to. Then if they are able to produce those in the first or last quarter of 2025, I don't really know. But I still believe that the defense segment will grow for us. And we think it's fun and good. And I think we're quite good at it as well.

Yeah, that makes sense and very clear. So just two more here. So for one of the new customer wins, you mentioned that you deliver to electrical buses from Europe to North America. Should we translate that to the US?

No, no, sorry, sorry. For that electrical bus, if I said it was from Europe, I didn't mean that. The win is for our North American plants will deliver wire harnesses to North American customers. It is a New York, a US-based, or they are based in I think it's Canadian, but they have a lot of factories in US. And we have won several new items for them, both from our factory in Canada and US. And we're working to get also orders for our factory in Mexico.

All right. Thank you. And then can you just remind and guide us of the impact of Pillar 2 here for 2025 and forward?

As we write, we have significant business in currently low-tax countries. it will impact. However, we see already impact this year if you compare average tax rate this year compared to previous years. So, based on not giving forward-looking estimates on where we are doing the profits for 2025, we cannot provide more guidance, but on overall level, we think we have quite high average tax rate already 2024. It might increase somewhat next year, but that is totally dependent on where the profits are going to be generated. So we do not expect any super major impact because we already see a much higher average tax costs already this year.

All right, thank you. That's clear. And that's all for me. Thank you.

Thank you. Carl has some more questions I see.

Yeah, so much questions. It's so much fun here with AQ. So I have one question regarding, I mean, I think it was in Q3 where you mentioned that you got some larger orders, I guess, from an inverter company for mechanical enclosures in your plant in Bulgaria. But you didn't mention it here. And I think you were quite optimistic about it back then. So if you could give us an update on the plants there and what's going on would be interesting.

No, but it is in full swing now in quarter one. So we are serial deliveries and our factory in Bulgaria is very busy making these enclosures for this customer in Germany. So it should generate a growth in 25. Okay. And that will help already in Q1, but it was no sales in Q4? There was some sales in Q4, but it will be more in Q1.

Okay. That's good. And then I have a question regarding your exposure to, how do you say, nuclear power. Is that anything where you see increased demand or where you see any activity?

Yeah, I mean, we are delivering electromechanical relays for one of our customers that sell them. But we don't really see any If you would build a new nuclear power plant, you would not use that technology. So currently, I don't see any major demand, at least from any of our factories for that. We deliver some electrical cabinets for Westinghouse. So maybe a little bit, but it's not significant anyway. Okay. Good. That's all for me. Thank you. Thank you.

Any more questions?

Okay, then me and Kristina, we would like to thank you so much for listening and see you hopefully for the quarter one report if we don't see you before. Okay, thank you all. Have a good day. Bye bye.