AQ Group AB, Quarter 2, 2016

Second quarter, April – June 2016

In brief

• Once again the best quarterly result in the history of the group
• Net sales increased by 13 % to SEK 860 million (759)
• Operating profit (EBIT) increased by 64 % to SEK 92 million (56)
• Profit after financial items (EBT) increased by 60 % to 91 MSEK (57)
• Cash flow from operating activities increased by 31 % to SEK 76 million (58)
• Equity ratio 60 % (61)
• Earnings per share after tax increased by 60 % to 4.18 SEK (2.61)

Six months, January – June 2016

In brief

• Net sales increased by 13 % to SEK 1 661 million (1 474)
• Operating profit (EBIT) increased by 56 % to SEK 169 million (108)
• Profit after financial items (EBT) increased by 48 % to SEK 167 million (113)
• Cash flow from operating activities increased by 127 % to SEK 168 million (74)
• Equity ratio 60 % (61)
• Earnings per share after tax increased by 50 % to SEK 7.64 (5.08)

Group overview, key figures

A word from the CEO

Market

We founded AQ 22 years ago and since then our strategy has been to follow our customers in their development and change. We haven’t during the years put a lot of effort to wonder about macroeconomics and analysis of markets in the future, instead AQ’s focus has always been to adapt to customers’ requirements and real demands.
It’s a strategy we will continue to follow, to be fast movers and adaptable no matter of market conditions.

Second quarter of 2016 is yet another a good quarter regarding results, the best quarter in the history of AQ. However, I want to emphasize that during the first half of the year we have finished an unusual number of project with good operating margin. Roughly speaking the improvement of the results can be attributed to the acquisition of Anton Kft. (Hungary), and that AQ Enclosure Systems AB and AQ Wiring Systems in Mexico have turned last year’s losses to profit. The price pressure in our market continues to be hard and is expected to increase rather than decrease.

We will review our financial goals during the latter part of 2016. 

In a joint project with a customer in Finland we have bought and moved injection moulding machines to our factory AQ Plastronic in Bulgaria. This has been successful both for our customer and for AQ.

AQ Plastronic is in an expansion phase and is now a nice factory, which we believe a lot in.

Quality and delivery precision continues at a stable and high level within the group.

Acquisitions

Our acquisition in November of 2015 of Anton Kft. in Hungary is developing according to plan. Our focus is to increase capacity through investments in more efficient machinery. The large global customers value the company and its high technical knowledge. Therefore, they demand more capacity in production and project management.

Anton Johanssons Rostfria Verkstad, current AQ M-Tech AB, is in a restructuring process and we are planning to merge the company with AQ Elteknik AB in Uppsala during autumn of 2016. They will merge also in location. Our offering with knowledge in both mechanics and electrics has been received well with the “med tech” companies in Uppsala.

AQ is well positioned for new acquisitions both financially (with an equity ratio of 60%) and regarding management capacity.

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.

AQ Plast AB’s transfer of production to Anderstorp from Vadstena continues and is planned to be completed during 2016.

Our electric cabinet operations in Surahammar is now completely moved to Västerås. There is an increased focus to capture new business in AQ Elautomatik AB both in Västerås, Lund and Örnsköldsvik.

The work to switch stock exchange from AktieTorget to Nasdaq Stockholm main market continues and is planned to be completed during autumn of 2016.

Our efforts to reduce inventory continues.  Our competence in logistics and usage of our ERP systems is gradually increasing within the group.  Improvements of our routines to identify risk of obsolescence continues and should lead to less unexpected impairment of our inventory.

Investments

The largest growth investments during 2016 have been in metal-cutting machines in AQ Anton Kft. (Hungary) and in a wiring machine in AQ Wiring Systems (Lithuania). We have also done some smaller investments in our company in India. 

We continue to invest in automation in AQ Holmbergs in China to reduce the need for manual labour to meet the increased cost of salaries in China.

The large injection moulding machine of 1 500 tonnes that was acquired for about EUR 1 million in Anderstorp is forecasted to have a very good utilization rate in 2017.

Outlook

Our companies in Eastern Europe have good growth and profits. The Swedish companies have a harder time to generate growth. In the Swedish operations, AQ Enclosure Systems AB, which made a loss in 2015 have turned the business to profit. Our company in India is growing but is hasn’t reached profitability yet.  Our operations in China sees a lower activity with our customers e.g. within the mining industry but it is still delivering results in parity with 2015. Our company in Mexico is developing positively and has turned the loss in 2015 to a profit in the first half of 2016.

My feeling is that we are gaining market share from our competitors in several areas and also are entering new markets.

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

Second quarter

Net sales for the second quarter was SEK 860 million (759), an increase of SEK 101 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. last year. Sales in Poland, Bulgaria and Sweden have increased compared to the same period last year.

The total growth in the quarter was 13.3 %, of which organic growth 6.2 %, growth through acquisitions 9.1 % and a currency effect -2.0 %. The currency effect of -2 % corresponds to about SEK 15 million and is mainly with the currencies CNY, PLN and MXN.

Operating margin (EBIT) in the second quarter was SEK 92 million (56), an increase of SEK 36 million.

The increase can partly be explained by the acquisition of Anton Kft. and partly by an unusual number of projects with good operating margin. 

Goodwill and intangible assets have increased during the second quarter with SEK 6 million. The increase is due to the acquisition of Magnetica in Italy and Serbia and some currency effects.

Investments in material assets in the quarter in the group was SEK 45 million (19). Investments were made in grinding machines in Hungary and in injection moulding machines in Sweden and Bulgaria. Investments via acquisitions were SEK 6.7 million and consist mainly of intangible assets.

Interest bearing debts of the group are SEK 195 million (138) and cash and cash equivalents amount to SEK 117 million (151), which means that the group has a net debt of SEK 78 million. In the same period last year, the group had net cash of SEK 13 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 76 million (58). The positive cash flow from operating activities has been used for investments in fixed assets, to reduce interest bearing debts and for dividends to shareholders.

Equity at the end of the period was SEK 1 291 million (1 111) for the group.

First six months

Net sales for the first six months was SEK 1 661 million (1 474), an increase of SEK 187 million compared to the same period previous year. The largest part of the increase in turnover is due to the acquisition of Anton Kft. last year. Sales in Poland, Bulgaria and Sweden have increased compared to the same period last year.

In the first six months the total growth was 12.7 %, of which organic growth 5.0 %, growth through acquisitions 9.4 % and a currency effect of -1.7 %. The currency effect of -1.7 % corresponds to about SEK 24 million and is mainly with the currencies CNY, PLN and MXN, but also INR and EUR.

Operating margin (EBIT) in the first six months was SEK 169 million (108), an increase of SEK 61 million. The increase can partly be explained by the acquisition of Anton Kft. and partly by an unusual number of projects with good operating margin. 

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 7 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 of the group in the first six months were SEK 63 million (29). Investments during the first six months 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 195 million (281 at year end) and cash and cash equivalents amount to SEK 117 million (136 at year end), which means that the group has a net debt of SEK 78 million (145 at year end). This means that the interest bearing debts have decreased with SEK 86 million and cash and cash equivalents have decreased with SEK 19 million since the start of the year. Net debt has decreased with SEK 67 million compared to end of 2015.

Cash flow from operating activities were SEK 168 million (74). The increase is due to AQ’s good result and to improved working capital compared to the same period in the previous year.

Equity at the end of the period was SEK 1 291 million (1 111) for the group.

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

Significant events during the first six months

First quarter

AQ Group AB (publ) has on March 15 2016 submitted 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 has 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 is to have the operations in Vadstena closed during 2016.

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

In our factory in India we have started deliveries of complex aluminium enclosures to a train manufacturer. The enclosures are welded in our new FSW (Friction Stir Welding) equipment.

We have 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 continues to develop positively and shows a positive result.

Significant events after the end of the period

There are no significant events after the end of the period.

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. In addition to factors mentioned the real outcome can be affected by political events, economic cycles, currency rates, interest rates, competing products and their pricing, product development, commercial and technical difficulties, delivery problems and large credit losses to customers.

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 needs must always be considered.

                                                                 Goal              Jan-Jun 2016

Product quality                                            100 %            99,6 %          

Delivery precision                                          98 %            95,4 %

Equity ratio                                                 >40 %               60 %

Profit margin (EBT)                                          8 %            10,2 %

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.

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                                               

Interim report Q3, 2016                               October 20, 2016 at 8:30 AM

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

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

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 July 21, 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 Board of Directors and the Chief Executive Officer certify 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, July 21, 2016

Claes Mellgren,
CEO

P-O Andersson
Chairman

Ulf Gundemark   
Boardmember                  

Gunilla Spongh     
Boardmember                             

Patrik Nolåker      
Boardmember                

Hidayet Tercan     
Boardmember                

Review report

To the Board of Directors of AQ Group AB (publ)

Corp. id. 556281-8830

Introduction

We have reviewed the summary interim financial information (interim report) of AQ Group AB (publ) as of 30 June 2016 and the six-month period then ended. The Board of Directors and the Managing Director are responsible for the preparation and presentation of this interim report in accordance with IAS 34 and the Annual Accounts Act. Our responsibility is to express a conclusion on this interim report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and other generally accepted auditing practices and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the interim report is not prepared, in all material respects, for the Group in accordance with IAS 34 and the Annual Accounts Act, and for the Parent Company in accordance with the Annual Accounts Act.

Västerås July 21, 2016

Helena Arvidsson Älgne

Authorized Public Accountant

Financial reports, summary

Summary income statement for the Group

Statement of comprehensive income for the Group

Summary balance sheet for the group

Statement of changes in Equity for the Group

All shares, 18 034 058 pcs, are A-shares with equal voting rights.

Summary cash flow statement for the Group

Parent company development

Parent company

The parent company, AQ Group AB, focuses primarily on managing and developing the Group. As in previous years, the parent company's turnover consists almost exclusively of the sale of administrative services to subsidiaries. There are no purchases of any substance from subsidiaries.

For the second quarter net sales was SEK 13.2 million (14.2) and operating profit (EBIT) was SEK 4.5 million (2.4). Net financial items were SEK 12 million (0) of which SEK 10 million are dividends from subsidiaries.

Summary income statement for the Parent company

Net financial items for the first six months of 2016 was SEK 14.1 million (1.7), of which SEK 10 million are dividends from subsidiaries and SEK 2.8 million is a profit from liquidation of the Norwegian subsidiary, AQ Wiring Systems AS. The parent company has received a repayment of purchase price of SEK 2 million for a company that was liquidated.

In “other external expenses” there are costs included for the planned listing on Nasdaq Stockholm.

Summary balance sheet for the Parent company

The increase in financial fixed assets and interest bearing debts are due to the acquisition of Anton Kft.

Notes

Note 1. The drawing up of the interim report

The summary interim report has been prepared in accordance with the Swedish Annual Accounts Act as well as IFRS, applying IAS 34, Interim Financial Reporting. The interim report for the parent company has been prepared in accordance with Swedish Annual Accounts Act, chapter 9 Interim report. For the group and the parent company the accounting and valuation principles applied are the same as used in the latest annual report.

The total sum in tables and calculations do not always sum up of the parts due to rounding differences. The objective is that every interim row shall conform with the original source resulting in rounding differences.

AS of July 3, 2016 ESMAs (European Securities And Markets Authority) “Guidelines – Alternative performance measures” are applied. In accordance with these guidelines information about financial numbers have been added that are not defined by IFRS.

Note 2. Segment reporting

The Group operates in two business segments: Component, which produces transformers, wiring systems, mechanical components, punched sheet metal and injection-moulded thermoplastics and

System, which produces systems, power and automation solutions and assembles complete machines in close collaboration with the customers.

For the segment Component the total net sales for the second quarter was SEK 723 million (589), of which SEK 659 million (537) is external sales. The increase is due to the acquisition of AQ Anton Kft. and many new business deals.

For the segment System the totals net sales for the second quarter SEK 242 million (241), of which SEK 201 million (217) is external sales.

Operating margin (EBIT) was in the second quarter SEK 64 million (48) for Component, which was SEK 16 million better than the same period last year. The reason for the results improvement of Component is mainly due to the acquisition of Anton Kft. Operating margin (EBIT) for System was SEK 21 million (16).

Lower personnel costs in AQ Enclosure Systems AB due to reductions in force, have influenced EBIT positively both for System and Component.

In the column ”Unallocated and eliminations” there are items which have not been allocated to the two segments, mainly real estate companies, parent company and group eliminations.

Note 3. Personnel

Number of employees (full time yearly equivalents) in the Group per country:

Note 4. Acquisitions

AQs strategy is to grow in all its business areas.

Acquisitions during the last 6 months:

Date              Acquisition                          Annual turnover, MSEK*    Number of employees*

April 27, 2016  Magnetica Srl.                                              14                                        19 Italy

                          Magnetica Technology D.o.o                       5                                        17 Serbia

*Annual turnover and number of employees at time of acquisition

On April 27, 2016 AQ Italy Srl acquired 100 % of the shares in the private company Magnetica S.r.l with its subsidiary in Serbia, Magnetica Technology D.o.o. The price was EUR 100, and in conjunction with the acquisition AQ Italy S.r.l. capitalized Magnetica S.r.l with EUR 500 thousand. The companies design and manufacture electromagnetic components and power suppliers.

During the period May and June the two acquired companies contributed with SEK 3.3 million to the group’s sales and SEK -50 thousand to the group’s profit after tax. If the acquisition had taken place on January 1, management is estimating that the group’s turnover would have been SEK 10 million higher and the result SEK 300 thousand lower for the six months ending on June 30, 2016.

The acquisition was made to obtain excellent competence in design of power supplies and small inductive components and also to obtain their interesting customers. The acquisition is expected to be a good complement to AQ’s business within inductive components.

Effects of acquisitions first six months of 2016 (preliminary acquisition analysis)

The acquired company’s net assets at time of acquisition:

The acquired intangible assets are customer relations and patents. In the goodwill value there are synergy effects in the form of more efficient production processes and the technical competence of the employees. The goodwill is not expected to be tax deductible. No expenses related to the acquisition have materialised.

This is a preliminary analysis and a deeper analysis of assets and debts is ongoing.

There have been no divestments of companies during the period.

Note 5. Financial instruments

Financial instruments that are shown in the balance sheet include on the assets side mainly cash or cash equivalents, receivables from customers and other receivables. On the liabilities side they consist mainly of payables to suppliers, other payable and credit debts.

Real value is not separately shown as it is our assessment that the values shown are an acceptable estimation of the real value because of the short terms.

Real value of assets is established from market prices. The Group is only in exceptional cases using derivatives to reduce currency risks. As per June 30 the market value of the derivatives was SEK - 1.4 million (0) valued according to level 2.

Note 6. Events after end of the reporting period

Information about events after the end of the reporting period are presented on page 7.

Note 7. Calculation of key figures and definitions

AQ believes that the key figures presented is giving the reader relevant information, even in the cases where they are not defined according to IFRS. As the group historically have acquired companies, organic growth is used to show the part of growth that is not due to acquisitions.