AQ Group AB (publ), Third quarter, 2016

Third quarter, July – September 2016
In brief

• Continued growth in sales and results, mainly driven by acquisitions
• Net sales increased by 10 % to SEK 723 million (655)
• Operating profit (EBIT) increased by 36 % to SEK 53 million (39)
• Profit after financial items (EBT) increased by 20 % to SEK 53 million (44)
• Cash flow from operating activities increased by 20 % to SEK 67 million (56)
• Equity ratio 64 % (62)
• Earnings per share after tax increased by 32 % to SEK 2.58 (1.95)

Nine months, January – September 2016 In brief

• Net sales increased by 12 % to SEK 2 385 million (2 129)
• Operating profit (EBIT) increased by 51 % to SEK 222 million (147)
• Profit after financial items (EBT) increased by 40 % to SEK 220 million (157)
• Cash flow from operating activities increased by 81 % to SEK 235 million (130)
• Equity ratio 64 % (62)
• Earnings per share after tax increased by 45 % to SEK 10.22 (7.03)

Group overview, key figures

(See attached pdf-file)

A word from the CEO

Market

The third quarter was our 88th consecutive quarter with profit!

For AQ, which lives on production, the vacation period in July/August always shows a weaker result with lower margin. The outcome this quarter is better than the corresponding quarter in 2015, but we are not completely satisfied. It is a quarter with significantly lower margin than the first and second quarter. I have previously communicated that we have had an unusual number of projects with good operating margin during the first half of the year. In parallel we have been negatively affected by a few customers who are challenged by lower sales.

As always, our focus is to adapt to our customers’ requirements and real demand. It’s a strategy we will continue to follow, to be fast movers and adaptable no matter of market conditions.

Our improvement in results compared to the third quarter 2015 can mainly be attributed to the acquisition of Anton Kft in Hungary, and AQ Enclosure Systems AB and AQ Wiring Systems in Mexico having turned last year’s losses to profit.

Quality and delivery precision continues on a stable and high level, but with two exceptions.

Acquisitions

Gerdins Industrial System AB was acquired on October 3. It is our biggest acquisition so far when it comes to turnover. AQ and Gerdins have similar values and are managed by people who like production and technology. Integration has already started and continues according to plan. The parent company Gerdins Industrial System (Gerdins) will not have any operations and the subsidiaries of Gerdins are already being integrated to AQ’s existing business areas.

The acquisition brings a number of new exciting customers in industries such as defence, forestry and agriculture in Sweden and Germany. In the areas of marketing, purchasing and IT there are ongoing actions. We will see savings within purchasing with the support of AQ’s global purchasing organisation. Gerdins has a well-functioning sales organisation, which will help us to increase organic growth overall.

AQ is well positioned for new acquisitions, after the acquisition of Gerdins, both from a financial and management view.

Organisation

Our organisation is built on entrepreneurship and entrepreneurship is a foundation of our core values.

During the last years it has become harder to find personnel in several countries in Eastern Europe where we have factories. Going forward we will increase our efforts to find solutions in automation. We have also started to use labour from Ukraine in some of our factories. AQ Plast AB’s transfer of production to Anderstorp from Vadstena is completed. The cost of the transfer has been higher than planned, mainly due to disturbances in the start-up in Anderstorp.

The work to switch stock exchange from AktieTorget to Nasdaq Stockholm main market continues and

is planned to be completed during 2016. We have during 2016 implemented a number of formal improvements of our internal process. The Board has during the third quarter set up an audit committee and a remuneration committee.

Investments

The investment in a ED paint shop in AQ Electric Bulgaria continues.

ED Electro Discharge is a surface treatment, which in many cases is a requirement in the automotive industry. The plan is to be able to offer automotive customers in Central and Eastern Europe sheet metal processing including surface treatment during 2017. The biggest investments in machinery during the quarter is additional metal-cutting machines in AQ Anton Kft. in Hungary and a fibre laser machine in AQ Holmbergs in China.

Outlook

In the short term some of our customers in telecom and railway are challenged by decreasing sales.

Our companies in Eastern Europe have good growth and profits overall. We have intensified our work with more regional customers to the Swedish plants and thereby get a higher growth. In the area of sales, we will benefit from the capacity and competence in Gerdins.

We have currently a big challenge in a couple of our Swedish plants to ensure quality and efficiency when volumes are starting to increase. This applies to a large quantity of tool based sheet metal and plastics components for a commercial truck customer.

Our company in Mexico is developing positively and has turned the loss in 2015 to a profit in 2016. We believe in growth for 2017 and the company is also delivering better value to the customers than earlier.

Our company in India is growing and has an all-time-high in sales, but is not delivering customer value at an acceptable level and is not yet profitable. An action plan has been launched.

The company in Thailand has, to our joy, after less than a year after it was started shown profit the last two months.

Our operations in China sees a lower activity with some our customers within the telecom and mining

industries but it is still delivering results in parity with 2015. 

My feeling is that we are gaining market shares in several areas and are also entering new markets. However, one shall be aware of the fact that AQ lives in a world with global competition with subsequent price pressure. During the fourth quarter the Board will review AQ’s financial goals.

With strong relations to world leading customers and engaged employees I am looking positively at the

future with continued growth with stable result level. An important part of this is our core values and

our efforts to be a reliable supplier to demanding industrial customers

Claes Mellgren

CEO

Group’s financial position and results

Third quarter

Net sales for the third quarter was SEK 723 million (655), an increase of SEK 68 million compared

to the same period in the previous year. The largest part of the increase in turnover is due to the

acquisition of Anton Kft. in Hungary last year. In addition, sales in Poland, Mexico and Italy have increased compared to the same period last year.

The total growth in the quarter was 10.5 %, of which organic growth 2.1 %, growth through acquisitions

9.4 % and a currency effect -1.0 %. The currency effect of -1 % corresponds to about SEK 7 million

and is mainly with the currencies CNY, MXN and PLN.

Operating margin (EBIT) in the third quarter was SEK 53 million (39), an increase of SEK 14 million.

The increase can mainly be explained by the acquisition of Anton Kft. in Hungary and AQ Enclosure Systems AB and AQ Wiring Systems in Mexico having turned last year’s losses to profit.

Goodwill and other intangible assets have increased during the third quarter with SEK 5 million compared to June 30, 2016, an increase due to currency effects. If goodwill in the third quarter of 2016 is compared with the third quarter in 2015, it has increased by SEK 52.8 million. The increase is due to the acquisitions of Anton Kft. in Hungary and of Magnetica in Italy and Serbia and some currency effects.

Investments in material assets in the quarter in the group was SEK 25 million (16). Investments were

made in metal-cutting machines in AQ Anton Kft. in Hungary and in a fibre-laser machine in AQ Holmbergs in China.

Interest bearing debts of the group are SEK 151 million (127) and cash and cash equivalents amount

to SEK 119 million (166), which means that the group has a net debt of SEK 32 million. In the same

period last year, the group had net cash of SEK 39 million. The change is due to a loan in conjunction

with the acquisition of Anton Kft. in the fourth quarter of 2015.

Cash flow from operating activities was SEK 67 million (56). The positive cash flow from operating

activities has been used for investments in fixed assets and to reduce interest bearing debts.

Equity at the end of the period was SEK 1 367 million (1 156) for the group.

First nine months

Net sales for the first nine months was SEK 2 385 million (2 129), an increase of SEK 256 million compared to the same period previous year. The largest part of the increase in turnover is due to the acquisition of Anton Kft. in Hungary last year. The sales in Sweden and Poland have also increased.

In the first nine months the total growth was 12.0 %, of which organic growth 4.1 %, growth through

acquisitions 9.4 % and a currency effect of -1.5 %. The currency effect of -1.5 % corresponds to about

SEK 31 million and is mainly with the currencies CNY, PLN and MXN, but also INR.

Operating margin (EBIT) in the period was SEK 222 million (147), an increase of SEK 75 million.

The increase can mainly be explained by the acquisition of Anton Kft. in Hungary and AQ Enclosure Systems AB and AQ Wiring Systems in Mexico having turned last year’s losses to profit.

In conjunction with the liquidation of our Norwegian subsidiary AQ Wiring Systems AS, accumulated

translation differences have had a negative effect on the result. These costs amount to SEK 6.7 million

and are included in the item other operating costs.

Goodwill and other intangible assets have increased with SEK 12 million since the start of the year. The

increase is due to the acquisition of Magnetica in Italy and Serbia and some currency effects.

The investments in material assets of the group in the first nine months were SEK 88 million (44). Investments during the period have been made in metal-cutting machines in Hungary and in injection moulding machines in Sweden and Bulgaria.

Interest bearing debts of the group are SEK 151 million (281 at the start of the year) and cash and cash equivalents

amount to SEK 119 million (136 at the start of the year), which means that the group has a net debt of SEK 32 million (145 at the start of the year). This means that the interest bearing debts have decreased with SEK 130 million and cash and cash equivalents have decreased with SEK 17 million since the start of the year. Thus, net debt has decreased with SEK 113 million compared to end of 2015.

Cash flow from operating activities were SEK 235 million (130). The increase is due to AQ’s good result.

Equity at the end of the period was SEK 1 367 million (1 156) for the group.

Result development for the respective segments, please see note 2.

Significant events during the first nine months

First quarter

AQ Group AB (publ) submitted on March 15, 2016 a preliminary application for admission to trading

of its shares on Nasdaq Stockholm’s main market. The shares of the company have been traded on

AktieTorget since 2001. Under the condition that Nasdaq Stockholm approves the application, the

intention is to begin trading of the company’s shares on Nasdaq Stockholm during the latter part of the

year. In conjunction with the application, Glen Nilsson was employed responsible for IR.

AQ Plast AB decided to close down the manufacturing site in Vadstena. The background to the

change is to improve the competitiveness of AQ Plast AB by having fewer production sites. Production

will be moved from Vadstena to Anderstorp and Västerås. As a consequence of the change a notice of

redundancy was given for all 32 employees in Vadstena. The plan was to have the operations in Vadstena

closed during 2016.

Our operations in Mexico was developing positively and was approaching break-even.

In our factory in India we started deliveries of complex aluminium enclosures to a train

manufacturer. The enclosures are welded in our new FSW (Friction Stir Welding) equipment.

We received permit for our investment in ED (Electro Discharge) painting equipment in AQ Electric

in Radomir. AQ will have the first ED facility in Bulgaria. It’s an investment of about EUR 1 million. ED

is a surface treatment method used in the automotive industry.

Second quarter

AQ Italy S.r.l acquired Magnetica S.r.l. and its subsidiary Magnetica Technology D.o.o. The companies

design and manufacture electromagnetic components and power supplies and have operations in Italy

and Serbia. Our operations in Mexico continued to develop positively and showed a positive result.

Third quarter

On September 21, AQ signed an agreement with Gerdins Holding AB to acquire 100% of the shares of Gerdins Industrial System AB with the subsidiaries Gerdins Components Västerås AB, Elektroprim AB, Plåxan AB, Gerdins Components AB, Gerdins Cable Systems AB, Gerdins Cable Systems Sp. z.o.o and Gerdins Nordkomponent AB.

AQ Plast AB’s transfer of production to Anderstorp from Vadstena was ready.

Significant events after the end of the period

AQ Group AB has on October 3, 2016, after approval from the Swedish Competition Authority, completed the deal with Gerdins Holding AB to acquire 100% of the shares of Gerdins Industrial System AB with the subsidiaries Gerdins Components Västerås AB, Elektroprim AB, Plåxan AB, Gerdins Components AB, Gerdins Cable Systems AB, Gerdins Cable Systems Sp. z.o.o and Gerdins Nordkomponent AB. The purchase price consists of SEK 81.5 million in cash plus 260 000 shares of AQ Group and an earnout which can be expected to be about SEK 12 million, based on 50% of profit after tax for 2016.

Gerdins Industrial System AB is a prominent supplier of components and systems for demanding industrial customers. The company has net sales of about SEK 430 million and employs about 450 people. It has operations in Mjällom, Västerås and Sollefteå in Sweden and in Starogard/Gdanski in Poland.

The purpose of the acquisition is to extend AQ’s customer base, to broaden our offering in sheet metal processing and to obtain reinforcement in manufacturing of wiring systems.

The acquisition was partly financed with a bank loan of SEK 30 million. Gerdins Industrial System AB has a net debt of SEK 9 million and an equity ratio of 49%. The Polish subsidiary Gerdins Cable Systems Sp. z.o.o owns real estate with about 2 300 square meters of production area. 

The total purchase price is valued at SEK 144.7 million.  The company has done a preliminary acquisition analysis which shows an overvalue on consolidation of about SEK 51 million divided into customer relations of SEK 30 million, goodwill SEK 27 million and a deferred tax debt of SEK 6 million. AQ is estimating the acquired immaterial assets to be about SEK 30 million and concerns customer relations. Depreciation is expected to be ten years. The estimated goodwill of SEK 27 million includes synergy effects of more efficient production processes and the technical competence of the personnel. No part of the goodwill is expected to be tax deductible.  

Goals

The goal of the group is continued profitable growth. The Board of directors are not giving any forecast

for turnover or profit. Statements in this report can be perceived as forward looking and the real

outcome can be significantly different.

The board of directors of AQ Group has set goals for the group. The goals mean that the group is

managed towards good profit, high quality and delivery precision with strong growth and a healthy

financial risk level. The dividend policy is to have dividends corresponding to about 25 % of profit after

tax over a business cycle. However, the Group’s financial consolidation must always be

considered.

                                                                 Goal              Jan-Sep 2016

Product quality                                            100 %            99.6 %          

Delivery precision                                          98 %            94.5 %

Equity ratio                                                 >40 %               64 %

Profit margin before tax (EBT %)                     8 %                 9 %

Transactions with related parties

The parent company has a related party relationship with its subsidiaries. There are some sales activities

concerning goods between the operating group companies. The parent company is charging a

management fee to the subsidiaries. All invoicing is according to market level prices and results in claims

and debts between the companies which are settled regularly. There are some long term loans between

the parent company and a few subsidiaries. These loans are given with market level interest rates. Most

companies in the group are part of cash pool in the parent company. The companies are charged/given

interest rates at market level.

During 2016 AQ Group AB has paid SEK 40.6 million in dividends to its shareholders. There have been

no other transactions between AQ and closely related parties which significantly affected the position

or result of the company. There are no loans to members of the board of directors nor to anyone in

leading positions.

At the annual general meeting on April 21, 2016 it was decided that a yearly fee of SEK 120 000 shall

be paid to the members of the board of directors and a fee of SEK 300 000 to the chairman of the

board. There are no other remunerations to the board of directors. There is no remuneration paid after

a board assignment is completed.

People in management positions are paid a fixed salary and a variable element calculated in % of the

group’s profit maximized to one-year salary. There are no other benefits in addition to pension benefits

for work performed via the employment contract. In individual cases and where there is special

justification, the Board shall have the option of deviating from the above guidelines.

Risks and uncertainties

AQ is a global company with operations in twelve countries. Within the group there are a number of

risks and uncertainties of both operational and financial characteristics, which were described in the

annual report of 2015. No additional significant risks have been identified since the annual report of

2015 was published. In addition to the commented factors the real outcome can be affected by for example political events, business cycle effects, currency and interest rates, competing products and their pricing, product development, commercial and technical difficulties, delivery problems and large credit losses at our customers.

The risks that are most evident in a shorter perspective are risks related to interest rates and currency.

The exposure to risks related to interest rates are low and relates to the group’s financing with credit

institutions and are currently with floating interest, connected to the base interest of the bank which is

connected to the interest rate of Sweden’s central bank.

Transactions and assets and debts in foreign currency are managed centrally within AQ in order to

create balance in the respective currency thereby achieving highest possible levelling effect within the

group in order to minimize currency differences.

AQ is not buying any direct raw material, but only intermediate goods for further production such as

sheet metal of steel and aluminium, cables, insulated wire etc. The risk is minimized through customer

agreements with price clauses.

The group’s credit risks are mainly connected to receivables from customers.

The parent company is indirectly affected by the same risks and uncertainties.

Future reporting dates                                               

Year-end report                                          February 23, 2017 at 8:30 AM

Interim report Q1, 2017                              April 27, 2017 at 8:30 AM

Annual General Meeting 2017                                            April 27, 2017

Financial information

The information of this interim report shall be made public according to the Securities Market Act of

Sweden. AQ Group AB (publ) is listed on AktieTorget.

The information was made public on October 20, 2016 at 8.30 AM.

This report has been briefly reviewed by the company’s financial auditors.

Further information about AQ Group AB can be given by:

CEO, Claes Mellgren, telephone +46 70-592 83 38, claes.mellgren@aqg.se or via

CFO, Mia Tomczak, telephone +46 70-833 00 80, mia.tomczak@aqg.se

Financial reports and press releases are published in Swedish and English. If there are discrepancies

between the two, the Swedish version shall prevail. They are available at www.aqg.se

Certification

The Chief Executive Officer certifies that the interim report gives a true and fair overview of the Group's and the parent company's operations, financial position and results and describes material risks and uncertainties facing the parent company and the companies that form part of the Group.

Västerås, October 20, 2016

Claes Mellgren, 

CEO