Garo AB

STO:GARO

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the GARO Interim Report January to March 2020 Call. My name is Bethany, and I'll be coordinating your call today. [Operator Instructions] I will now hand over to your host, Patrik Andersson, the CEO, to begin. Patrik, please go ahead.

[Patrik Andersson, President & CEO]

Thank you very much. Hi, and welcome, everyone, to the presentation of GARO's first quarter 2020. My name is Patrik Andersson, and I'm the CEO of GARO. With me today, I have Helena Claesson, our CFO, to present the financial performance. Next slide, please. Some information about the company and our markets. GARO was founded in 1939, so we have been over 80 years in business. We develop and manufactures innovative products and turnkey solutions for the electrical installation markets. We are divided in -- we divide our business into business area Sweden, which consists of our Swedish operation; and Other markets which cover our business in Norway, Ireland, Finland, Poland and our newly established company in U.K. We have production on 3 sites, one in Gnosjö in Sweden, where we also have our head office; in Värnamo in Sweden; and the third one in Poland, Szczecin. And we are approximately about 410 people in the group. Next slide, please. Product areas. Our business consists of 4 product areas. And on this slide, you can see the different product areas' shares of the total sales for the first quarter this year. Our largest product area is Electrical distribution products, which contributes to almost half of our revenues and where we had a stable development in the first quarter 2020. Sales within E-mobility were at the same level as last year and also accounted for 23% of the total sales. Our product area, Project sales showed good development in the first quarter and accounted for 23% of the total sales in the quarter. Temporary power decreased and now constitutes for 7% of the business. Next slide, please. Operational highlights. We launched our own fast charger, named Althea, fully developed in-house and attended for the European markets. I will come back with more details on next slide. In the quarter, we also signed a frame agreement with a global player in the automotive industry regarding the supply of charging infrastructure for the European markets. We also launched and carried out an efficiency program, resulting in the reduction of personnel in 18 positions, primarily comprising white collar employees in Sweden and Poland. And on May 15, after the quarter, we signed an agreement to acquire 70% of the shares in the EV Charge Partner Sweden AB. The company performs service and support as well as commissioning of EV charging for mainly large operators of charging infrastructure and utility companies in Sweden and Poland.Next slide, please. Product development. As I mentioned before, I'm happy to say that we launched our own fast charger in the first quarter. It's fully developed in-house and attended for the European market. GARO's fast charger stands out in terms of user friendliness, reliability and durability. The design of the fast charger has the same line as the wall box and charging station to fit into the GARO range. This will give the customer a complete product solution. GARO fast charger is equipped with both CHAdeMO and CCS charging cables, meaning it can be used by all electrical cars in the markets. The chasing (sic) [ casing ] is made of environmentally friendly material, manganese. With this new product, we broaden our range of charging products and can meet the demand for fast charging, which is important when the number of pure electrical cars is growing and will do so in the coming years. As I mentioned before, we have acquired EV Charge Partner. This company performs service and support of DC charging infrastructure. Together with this fast charger, we can offer our customer a complete solution with products, service and support. In the beginning of 2020, we launched the new wallbox with 2 outlets, the Twin Box. This product makes our product range even more complete and becomes a high importance when you need to charge 2 cars at the same time. Also, this product is, of course, designed to fit into the GARO range. Next slide, please. Sustainability. This is an important area for GARO and our stakeholders. We have chosen to focus on 7 of essence Global Goals, we believe that GARO can make a difference. We have chosen the goals 7, 8, 10, 11, 12, 13 and 16. During the first quarter, GARO has focused on Sustainable Development Goal #12, responsible consumption and production with a focus on digitalization. GARO strives to be the leading edge when it comes to digital solution. For example, we increased the digital solution such as QR codes on the products to make product manuals, instruction films available digitally. This way, we minimize printed material. To reduce the energy consumption, we provide our products with software and application solution for an efficient and minimal usage of energy. We meet and train our customer remotely, which means we have done for a long time, but now we have increased this due to the COVID-19 situation. Now over to Helena. Next slide, please.

[Helena Claesson, Chief Financial Officer]

Thank you, Patrik. Let's start with some financial highlights for the first quarter of this year. Overall, we are very pleased with an outcome where we can see stable sales in the first quarter in these very challenging times. Sales amounted to SEK 248 million, and is in line with the sales of last year, mainly as a result of stable developments in most product areas, except for Temporary power in Sweden and Electrical distribution products in Norway. EBIT in the quarter amounted to almost SEK 19 million, giving us a margin of 7.6% to be compared with 11.7% in 2019. The lower operating profit was, among others, caused by negative currency effects of SEK 6.5 million, when the Swedish and the Norwegian krone was weakened against the euro, which is an important purchasing currency of GARO. We have also in the quarter seen a different product mix, giving us a slightly lower gross margin. Our expenses remained at the same level as in the latter part of 2019. Net income for the first quarter decreased to SEK 14.6 million, giving us an earning per share of SEK 1.46. Next slide, please. Now looking into net sales by product area. Electrical distribution products had a stable development in Sweden but weaker in Other markets. Project business showed good development in the first quarter. Temporary power continued to have slower sales in Sweden, but stable in Other markets, even though if it comes from lower volumes. The demand of E-mobility products was weaker than expected in the beginning of the quarter but recovered in March, and by the end of the quarter, it remained in line with the long-term trend for growth. We have seen a continued positive sales trend within E-mobility also in April and the beginning of May. Next slide, please. Now looking into the 2 segments separately, starting with GARO Sweden. Net sales amounted to SEK 164 million in the quarter, which is an increase of 1% compared to the same quarter last year. [Technical Difficulty]

[Operator]

Please stand by, ladies and gentlemen. The line has dropped. I'm just reconnecting them.

[Patrik Andersson, President & CEO]

I'm back, and we will repeat the effect of the COVID-19. The COVID-19 virus and the given restriction to prevent the spread of the virus had a fairly limited impact on the sales in Sweden but more so in Norway and Ireland and in U.K., where the authorities took more restrictive measures than in Sweden. The impact on sales in Other markets was relatively small if the business activities fell sharply towards the end of the period. The sharp depreciation of the Swedish krona and Norwegian krone to the euro related led to a significant exchange rate losses as a lot of purchases are priced in euro. Possible effects in quarter 2. In the second quarter, up until today, we see a stable demand in Sweden, while pending in Other markets. Our factories in Sweden and Poland are running at good speed. Of course, the longer the situation with the restriction proceed, the higher impact on the group sales and earnings. Next slide, please. Development opportunities. Our strategy remains the same. The main driver of the growth will be organic growth. Our successful product development has been and will be the key of today's growth. On top of this, we are always looking for potential acquisitions where we can add even new additional products, product areas or companies with an edge. An example of this is the acquisition of EV Charge Partner Sweden AB, which announced last week on May 15, to strengthen our offer in the E-mobility business. Another example is when we acquired WEB-EL in 2007, bringing new and additional electronic and software knowledge to the company. We are also looking at new geographic markets, with a focus mainly on the northern parts in Europe. Next slide, please. Outlook in quarter 2. The COVID-19 virus had so far relative limited effect on GARO's demand in Sweden. The risk for the group going forward is lower demand in the markets where the COVID-19 virus causes restrictions on the economic activities, which has been the case, for example, in Norway, Ireland and in the U.K. The longer this situation continues, it will gradually affect the group sales and results in the second quarter. As of today, the demand in Sweden remains stable while the development in Other markets is declining. At the same time, we have good speed in production both in Poland and Sweden. Outlooks on long-term. Looking beyond the COVID-19 virus, our assessment of the core market conditions has not changed. However, great uncertainty prevails due to the COVID-19's long-term consequences on the economy. The market for E-mobility is growing structurally, and we see a continued strong trend with further expansion of the charging infrastructure in all markets. Demand for construction-related production in Sweden, combined with the important renovation sector, is expected to remain stable. However, housing construction is expected to slow, in line with reduced number of construction starts. The trend in Other markets aside from COVID-19 is expected to be similar. All in all, GARO has a positive view of long-term market condition, mainly driven by growth in E-mobility. Thank you. And now we are ready for questions.

[Operator]

[Operator Instructions] We have a question from Kenneth Toll from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

So you mentioned in the report that the E-mobility sales were -- was it stronger towards the end of the quarter in Sweden and then sort of weaker in the beginning? Do you believe that E-mobility sales have picked up and will be stronger also in Q2? Or is that a natural swing, so to say?

[Patrik Andersson, President & CEO]

Yes. We think the E-mobility will be stronger in quarter 2. Of course, in the markets has effect of COVID-19, of course, is slower, but the demand in the quarter 2, we think, looks better. So it was a slow start in the beginning of the quarter.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And in -- you also said that you signed these frame agreements, 2 of them last year and 1 in the beginning of this year. Have you started to ship any chargers on those frame agreements? Or do you believe that is more ahead of you, so to say?

[Patrik Andersson, President & CEO]

We have started to ship some small shipments, but we're just in the beginning of this framework. But we have started in a slow way in the first quarter, yes.

[Kenneth Toll Johansson, Financial Analyst]

Okay. Great. And then on the currency situation, you said also that towards the end of the quarter, it looks better. So you do not -- if the current rates prevail for the rest of Q2, we should not see such a bad FX hit on earnings. Is that correct?

[Helena Claesson, Chief Financial Officer]

Yes. I think a lot of it was taking in the first quarter. A lot of the currency effect, so to say, was taking in the first quarter since that's when we had the bigger drop, so to say.

[Patrik Andersson, President & CEO]

Yes. So we hope for a more stable currency, but everything can happen with this situation. But we think it looks more stable from outside, yes.

[Kenneth Toll Johansson, Financial Analyst]

Okay. Great. And then finally, you also did a restructuring program and some 18 employees left the group. The cost for this, had that been taken? And when will we see the savings affecting the P&L?

[Patrik Andersson, President & CEO]

The cost for that will come in next quarter, and we will see the effect in Q3 and Q4, yes.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And will it be a significant cost? And will you take it as an extraordinary cost, you believe?

[Helena Claesson, Chief Financial Officer]

There will be -- some of it will be taken as an extraordinary cost since some of the staff affected, they will go on garden leave. But the majority will become -- will, so to say, run currently.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And do you have an estimate roughly how much cost it could be?

[Patrik Andersson, President & CEO]

No, we have no number attached at this stage.

[Operator]

Our next question comes from Oskar Vikström from ABG.

[Oskar Vikström, Analyst]

My first question is also related a bit to E-mobility. I think you're mentioning there that March in Sweden was quite staggering, 46% growth. Is that year-over-year? And is it also the sort of levels that you've seen in April, May? Or how should we view that?

[Patrik Andersson, President & CEO]

If I understand your question right, you mean whether we have had a slow start in January, February and better in March. And then your question was, is it the same trend in April or May, if I understand it?

[Oskar Vikström, Analyst]

Yes.

[Patrik Andersson, President & CEO]

And if that's the question, yes, the trend is better in April and May. Yes. But of course, as I said to Kenneth before, the markets that was affected of the COVID-19 situation is, of course, slower, but we see better trend in the demand in Sweden for E-mobility. Yes.

[Oskar Vikström, Analyst]

Okay. And just to confirm, so the 46% growth that you're mentioning, that's from March last year. So year-on-year.

[Patrik Andersson, President & CEO]

Yes.

[Oskar Vikström, Analyst]

Yes. Okay. And in terms of Norway, you're mentioning, so there, you're doing more DC chargers, and it's a bit of a different sort of sales process. How has that developed so far in April and May? And how should we look at the Norwegian segment in terms of E-mobility?

[Patrik Andersson, President & CEO]

The Norwegian segment, of course, has been a bit affected of the COVID-19 situation, a bit slower in the market. But we have a quite good business on the DC segment during March, and then we can also see the demand for quarter 2 and quarter 3 looks quite good for the DC sector. So we are quite optimistic for the DC charger for Norway.

[Oskar Vikström, Analyst]

And who is the typical customer here? Is that sort of government? Or...

[Patrik Andersson, President & CEO]

No, it's mostly utility companies.

[Oskar Vikström, Analyst]

Utility companies, okay.

[Patrik Andersson, President & CEO]

Yes.

[Oskar Vikström, Analyst]

Okay. And then I was just a bit curious, you're mentioning the negative product mix impacting the gross margin. That sort of mix, is that something that has stayed with you for -- so far in Q2? Or has that changed a bit?

[Patrik Andersson, President & CEO]

We can see some changes. We have uncertain product mix to begin the quarter 1. We can see both on the Project business, and we have had a quite warm winter, so to say, in the quarter 1, so we have, for example, not sell so many car heaters, so to say. So we have a bit another product mix, what we are used to. But we think that will be better in the second quarter, yes.

[Oskar Vikström, Analyst]

Okay. And just sort of a final question. You mentioned also that you have tied up a bit more working capital this quarter. Could you just comment a bit on why that is? And how you view that progressing over the year?

[Helena Claesson, Chief Financial Officer]

We will stay within the same limits or same need as for 2000 -- as we had for 2019 over time, so to say. But by the end of December, we had -- if you look in the balance report, we had some debt that were paid off in Q1, that effect and also a little bit higher stock inventory. So it's nothing unusual.

[Operator]

We have a -- looks like a follow-up question from Kenneth Toll again.

[Kenneth Toll Johansson, Financial Analyst]

Yes, I was just thinking more about inventories. One question is, have you sort of added more inventory of components in order to safeguard your business if there are logistic problems? Or have you seen that your customers may sort of build up inventories? Or -- yes, have you seen anything like that?

[Helena Claesson, Chief Financial Officer]

We keep an eye on our inventory level at all times. But now due to the COVID-19 situation we have, so to say, given ourselves some grace period here to have a little bit higher, perhaps, to make sure that we have components enough to keep production up and running.

[Kenneth Toll Johansson, Financial Analyst]

And your distributors and so on, do you believe they have ordered extra from you? Or...

[Patrik Andersson, President & CEO]

No, we can't say that. They keep the inventory, what we can see, about the same level.

[Kenneth Toll Johansson, Financial Analyst]

And you haven't had any problems in the quarter with getting some components or so on.

[Patrik Andersson, President & CEO]

No. We have kept a very good level on all components, maybe some single components, but nothing big at all. So we have -- our supply team has done a great work to have components on -- for our production sites at this time.

[Operator]

We have no further questions at the moment. [Operator Instructions] I think we have no further questions.

[Patrik Andersson, President & CEO]

Perfect. Thank you, everyone.

[Helena Claesson, Chief Financial Officer]

Thank you.

[Operator]

Thank you for joining the call, ladies and gentlemen. You may disconnect your line.