AQ Group Q4 2024 slides: Profit margins expand despite sales decline

Introduction & Market Context

AQ Group AB (STO:AQ) reported its fourth quarter and full-year 2024 results on February 13, 2025, showcasing improved profitability despite challenging market conditions in several segments. The company’s stock has shown resilience, trading at SEK 160.70 as of May 8, 2025, up 0.44% for the day and well above its 52-week low of SEK 114.80.

The industrial component manufacturer highlighted its 30-year track record of consistent quarterly profits since its 1994 founding, maintaining its reputation for reliability in a volatile market environment. While facing headwinds in traditional sectors like construction equipment and commercial vehicles, AQ Group continues to benefit from strong demand in electrification, railway, and defense segments.

Quarterly Performance Highlights

AQ Group’s fourth quarter 2024 results revealed a mixed performance, with declining sales but improved profitability. Net sales decreased by 4% to SEK 2,126 million compared to SEK 2,221 million in Q4 2023, with organic growth declining by 9%.

Despite the sales challenges, the company delivered impressive profit growth:

• Operating profit (EBIT) increased by 7% to SEK 206 million (193)
• Profit after financial items (EBT) increased by 14% to SEK 209 million (182)
• Profit margin before tax (EBT %) improved to 9.8% (8.2)
• Earnings per share before dilution rose to SEK 1.69 (1.46)

As shown in the following quarterly performance summary:

The full-year 2024 results followed a similar pattern, with net sales decreasing by 5% to SEK 8,554 million while profitability metrics improved across the board:

This performance reflects AQ Group’s ability to enhance operational efficiency and focus on higher-margin business segments despite challenging market conditions. The board has proposed a dividend increase to SEK 1.60 per share, up from SEK 1.33 in the previous year, signaling confidence in the company’s financial position.

Strategic Initiatives

AQ Group’s acquisition strategy has been a key driver of growth, partially offsetting organic sales decline. In 2024, the company completed several strategic acquisitions that expanded its manufacturing footprint and technical capabilities:

• JIT Mech (May 2): Two factories in Sweden adding SEK 200 million in annual sales
• Rockford (July 10): Three factories in the UK adding £14 million in annual sales
• TechROi (October 31): Two design offices in Sweden adding SEK 50 million in annual sales
• mdexx and Michael Riedel (January 31, 2025): Factories in Czech Republic and Germany adding €45 million in annual sales

The company’s M&A activity in 2024 is summarized in the following slide:

These acquisitions align with AQ Group’s strategy of adding 2-4 factories annually, with a particular focus on electrification, medical technology, and defense sectors in Europe and the Americas. The acquired businesses are expected to contribute approximately SEK 900 million in annual net sales with an average EBT margin of around 8%.

The acquisition of mdexx and Michael Riedel is particularly strategic, strengthening AQ Group’s position in inductive components:

This acquisition has positioned AQ Group as a leading manufacturer of custom dry-type transformers and inductors, with applications in industrial drives, metro and electrical locomotives, industrial robots, and medical imaging equipment. The business has strong relationships with Siemens (ETR:SIEGn) and its legacy companies, having received the "Best in class award" from Siemens two consecutive years.

Detailed Financial Analysis

AQ Group has maintained a strong track record of earnings growth, with a 14% compound annual growth rate (CAGR) in earnings per share over the past decade. This consistent performance is illustrated in the following EPS growth chart:

The company’s profitability has remained well above its target range, with the EBT margin reaching 9.8% in Q4 2024 and 9.6% for the full year, compared to the goal of 8±2%. This margin expansion comes despite challenges in organic growth and is attributed to effective cost control and operational improvements.

Cash flow performance has been particularly strong, with net cash from operating activities reaching SEK 288 million in Q4 and SEK 1,197 million for the full year 2024. This robust cash generation has maintained the company’s net cash position at SEK 284 million even after multiple acquisitions, providing financial flexibility for future growth initiatives.

However, inventory management remains an area for improvement. The company’s inventory turnover stands at 3 turns per year, below the target of 3.5 turns. Management acknowledged this challenge, noting that "Improvement actions are ongoing and prioritized, but we do not see enough results. Not good."

Forward-Looking Statements

Looking ahead, AQ Group is maintaining its long-term goals of over 15% annual growth and an EBT margin exceeding 8%. While organic growth has been challenging (-7% for full-year 2024), the company expects improvements in several areas:

1. Continued strength in electrification, railway, and defense sectors

2. New orders in buses and HVDC (High-Voltage Direct Current) systems

3. Operational improvements at underperforming production sites

4. Further acquisitions, with a "good pipeline of targets" identified

The company is also investing in sustainability and cost reduction initiatives, including solar power installations across its global operations:

These investments are expected to deliver both environmental benefits and cost savings, with a return on investment of less than 5 years. The company plans to expand its solar power capacity from 842 kWp to 2,080 kWp in 2025, focusing on countries with high CO2 energy mix.

Additionally, AQ Group is investing in a new transformer factory in Tallinn, Estonia, which will provide 3,000m² of additional space to facilitate growth, improve productivity, and reduce energy consumption. The facility is expected to be operational by Q3 2025.

Competitive Industry Position

AQ Group maintains a diversified presence across multiple industrial segments, with particular strength in growth areas like electrification, railway, and defense. The company’s global manufacturing footprint spans 17 countries, serving over 4,000 customers worldwide.

The recent acquisition of mdexx and Michael Riedel has significantly strengthened AQ Group’s position in inductive components, a business that has shown impressive 30% CAGR growth:

While the company faces challenges in traditional sectors like construction equipment, trucks, and buses, its strategic focus on high-growth segments positions it well for future expansion. The company’s commitment to quality (99.61% quality rate) and delivery precision (93% on-time delivery) supports its market positioning, though management acknowledges the need for improvement to reach its 98% on-time delivery goal.

Based on the Q1 2025 earnings report released after this presentation, AQ Group has shown signs of recovery with net sales increasing by 3% to SEK 3 billion, suggesting that the negative sales trend from 2024 may be reversing. However, challenges remain, as Q1 2025 EPS of SEK 1.81 missed analyst expectations of SEK 1.83.

The company’s investment case remains compelling, with 30 years of consistent profitability, exposure to growing industrial segments, and a strong balance sheet supporting both organic growth and acquisitions:

With its continued focus on operational efficiency and strategic acquisitions in high-growth sectors, AQ Group appears well-positioned to navigate market challenges while delivering long-term shareholder value.

Full presentation:

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