AQ Group AB (publ), interim report January - September, 2021

Third quarter, July-September 2021 in brief

• Strong demand but limitations in supply of materials and components
• Net sales increased by 18.2% to SEK 1,306 million (1,104)
• Operating profit (EBIT) decreased by 3.5% to SEK 94 million (97)
• Profit after financial items (EBT) decreased by 2.5% to SEK 91 million (93)
• Profit margin before tax (EBT %) was 6.9% (8.4)
• Cash flow from operating activities decreased by 28.5% to SEK 99 million (139)
• Earnings per share after tax decreased by 4.3% to SEK 4.12 (4.30)

Nine months, January-September 2021 in brief

• Net sales increased by 11.5% to SEK 3,974 million (3,563)
• Operating profit (EBIT) increased by 20.6% to SEK 333 million (276)
• Profit after financial items (EBT) increased by 28.1% to SEK 331 million (258)
• Profit margin before tax (EBT %) was 8.3% (7.2)
• Cash flow from operating activities decreased by 23.0% to SEK 343 million (445)
• Earnings per share after tax increased by 24.7% to SEK 15.23 (12.21)
• Equity ratio was 55% (56)

A word from the CEO

We have strong demand, but we have difficulties to deliver. I really don’t need to say more. Just like last quarter, customers want to buy everything we can produce. We are primarily limited by the availability of components for wiring systems and electrical cabinets, but it is also difficult to find labor in some of our markets. I am impressed by our employees, who despite this turbulent situation, succeed in making our customers happy in most cases. My view is that we take market shares and that we are a little better at delivering than our competitors. Our operating margin decreases somewhat compared with the previous quarter due to component shortages that cause disruptions to our production in combination with the fact that we have some lag in the transfer of raw material price changes to our customers.

Third quarter
Our factories are running at high speed, but productivity is declining when we don’t get components on time. During the quarter, some customers temporarily closed their factories because they didn’t receive material from other suppliers, which has a negative effect on us. Net sales are still at an ok level, which could, however, be higher if we were not limited by the supply of materials and components. We have a growth of 18% where 10% is organic growth and 8% attributable to the acquisition from Schaffner. During the quarter, we worked intensively to pass on raw material price increases to our customers. We have come a long way but are not ready. The price changes for raw materials that are governed by agreements with our customers often have a lag of three to six months. This affects our operating margin which was 7.2% in the quarter.

The disruptions we had in the quarter affect the delivery precision to our customers, which in the quarter is 90% compared with the target of 98%. We work together with our customers to minimize disruptions in their production. During the quarter, we made several investments in increased capacity, including expanding production areas in Mexico and Bulgaria, purchasing additional machine capacity in several of our factories to increase our delivery capacity to our customers. Our work to improve our wiring systems unit in Mexico continues, we continue to have problems and we are disrupting our customers.

Customers
Being able to deliver good quality on time to our customers is our highest priority. Therefore, we have increased our inventory, especially of critical components, to minimize disruption to our customers. We also put a lot of time and effort into working with our suppliers to shorten lead times, reduce transport times and getting material.

At the same time as our existing customers have strong demand, we have many interesting new customer projects. We have several fun projects in energy storage both from large established industrial companies and start-ups, where we help our customers with the design and production of their solutions. We also have exciting projects with supercapacitors that are needed to balance the uneven supply of electricity from solar and wind power as well as water-cooled transformers to high-voltage vehicle chargers.

During the quarter, our factory in Lithuania signed a new agreement with the delivery of wiring systems for truck cabins to a well-known European customer. It is an important project that fits perfectly into our new factory in Lithuania, which will be ready in early 2022. This means additional sales of approximately SEK 135 million per year, with full volumes in 2023.

We also see that several of our customers are starting to think like us, that it is best to manufacture products close to their customers. This means that several customers are moving existing products from Asia to Europe and the USA. It is positive for us and for the environment.

The only of our customer segments that have not yet recovered from the pandemic, are trains, buses and ships. We now see that volumes for trains and buses are returning, but that the products we deliver to ships will not recover until 2022.

Acquisitions
Our M&A team works continuously to identify potential acquisitions that fit in AQ. At the beginning of the third quarter, the three new factories that we acquired from the Schaffner Group are now part of AQ. The acquired units in Hungary and the USA have high utilization and make a positive contribution. The factory in China and the sales office in Germany have challenges in terms of utilization and profitability. Overall, these units complement AQ's business area inductive components in a very good way, both in terms of technology and geographical coverage. As a result, we have a technically strong sales organization in Germany, the USA, Italy, Sweden, Finland, China, India and Brazil. As well as fine manufacturing units in Hungary, Bulgaria, Estonia, China, India, Finland, USA and Brazil. We believe that this acquisition will contribute to AQ's long-term ambition to be a global leader in the design and production of inductive components in our niches such as rail vehicles and electrification. Our inductive components are necessary for the conversion that is now taking place to electric vehicles powered by green renewable electricity. The acquisition contributes to about 8% growth in our net sales on an annual basis. The closing of the acquisition took place according to plan on July 1 this year.

Covid-19
The pandemic had little effect on AQ during the quarter. But demand for products for trains, buses and ships has not yet recovered. We will continue with the measures we have introduced and are prepared to do so for a longer period. All our production units are up and running and we work closely with our customers to minimize the effects of the pandemic.

Environment and work environment
AQ has management systems for the environment at all our manufacturing units. These contain concrete goals, metrics and activities to reduce our environmental impact. One requirement is that there must be local targets for reducing CO2 emissions at each unit. We also try to encourage our customers to buy locally from our factories in each geographic market to reduce long-distance transports.

Cash flow and balance sheet
Our balance sheet is strong. We have low debt. On the other hand, we see that our cash flow is affected by our growth, ie. that our inventory and our accounts receivable increased during the quarter. Our strong balance sheet allows us to focus on our customers and continue to invest and grow with them. Our strong financial position and an equity ratio of 55% means that we have the freedom to act when our M&A team finds attractive acquisition opportunities.

Employees and core values
What makes AQ successful is that we have fantastic employees who work in accordance with our core values. We have no patents or complicated contracts. It should be simple to work with AQ. We want our customers to want to buy from us not because they have to. Our ambition is that we thereby will continue to grow our sales and our profit.

Quite simply: We shall continue to grow, make money, and have fun.

James Ahrgren
CEO

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This disclosure contains information that AQ Group is obliged to make public pursuant to the EU Market Abuse Regulation (EU nr 596/2014) and the Swedish Securities Markets Act (2007:528). The information was submitted for publication, through James Ahrgren, on 21-10-2021 08:00 CET.