Garo AB

STO:GARO

Earnings Call Transcript 2022-Q1

[Operator]

Hello all, and a warm welcome to the GARO interim report from January to March 2022. My name is Lydia, and I will be your operator today. [Operator Instructions]

It's my pleasure to now hand you over to our host, Patrik Andersson, CEO. Please go ahead when you're ready.

[Patrik Andersson, executive]

Thank you, and welcome, everyone, to the presentation of GARO's first quarter 2022. My name is Patrik Andersson, and I'm the CEO of the group. With me today, I have Helena Claesson, our CFO, to present the financial performance.

Next slide, please. We start with an introduction. GARO is a company that develops and manufacture and sell innovative product and system for electrical installation, and our own brand on the European markets. Developing products that are in the forefront has always been a significant aspect of our success.

Focus is on developing user-friendly and safe products with a modern design and a long service life. The market for electrical installation material and charging infrastructure is continuing to grow, and we foresee a positive trend for GARO.

At the same time, the increased demand for products and solutions to achieve a fossil-free society, in which a growing number of players become aware of their environmental impact. This makes the sustainable aspect a crucial factor in the choice of products and service.

Next slide, please. We divide our business into 2 business areas: GARO E-mobility, which consists of product area in mobility; and GARO Electrification, which cover our product areas, electrical distribution products, project and temporary power. We have operations in Sweden, Norway, Ireland, Finland, Poland and in the U.K.

And we also sell to other European countries that we not have -- own subsidies, which is increasing business. We have, today, production on 4 sites: 2 in Gnosjö in Sweden, where we also have our head office, 1 in Värnamo in Sweden and the fourth site in Szczecin in Poland. We have, in both countries, decided during the quarter to invest for the future.

In Poland, a new production and logistics facility of approximately 15,000 square meters, a considerable increase in capacity primarily in the GARO E-mobility business, but also in the GARO Electrification. The project is planned to commence in the second quarter of 2022, and the facility is expected to be completed by summer of 2023.

GARO will also expand operations in Sweden by relocating a significant part of the operations in the GARO Electrification to new facilities in Hillerstorp, 10 kilometers from Gnosjö. The new facility in Hillerstorp is a leasing contract starting end of 2022. And the existing lease in Värnamo has been terminated and a smaller industry property in Gnosjö will be divested with assessed market value of SEK 15 million. And we are approximately 500 employees in the group.

Next slide, please. E-Mobility, our fastest-growing product area is E-Mobility, where we develop and market all types of chargers or rechargeable vehicles. We have product and turnkey solutions for different environments such as home, public, working place and along the highway. On top of this, we make the E-Mobility business even more complete.

We also offer service agreement to help the customer with yearly service and updates. We believe it's important to make it easy for the user and make it possible to charge where the people live and work. This area accounted for 38% of the total sales, up from 32% in the year earlier.

Next slide, please. In the business area, Electrification, one of the 3 product area, Electrical Distribution Products, consists of approximately 3,500 products and turnkey solutions for the electrical installation market. Example of the product is components, safety switches, meter cabinets, outlet boxes, plugs and sockets, which is product used every day in different application such new buildings, renovation, industry, e-Mobility solutions, et cetera, and contributes to 38% of the revenues.

Our product area, Project, provides complete and customer solutions for all type of power supply for apartments, villa, industry and also E-mobility solutions, accounted for 19% of the total sales. Product area, Temporary Power, with a product portfolio consisting of temporary electricity, lightning, heating and charging products used on construction sites and in events, accounted for 5% of the sales.

These products area, together with the E-mobility, offer a unique and -- make it easy for the customer. An example of this is when the customer need a charging solutions with different chargers from E-mobility. They also need power supply from Projects and safety and installation products from Electrical Distribution Products. These make it easy, simple and safe for the customer and end user.

Next slide, please. If we go further on with product development, we regarded challenges as a new opportunities, and we are driven by curiosity to try new approaches. Developing products and solutions for a sustainable future is a self-evident focus for us. We are to always maintain a high rate of development when it comes to smart products to meet current and future needs.

The same trend today is increasing demand for safety from various players in the markets, in parallel with the regulations becoming stricter with regard to all type of electrical products. GARO welcomes this development regarding safety and certification. With the help of innovative product development, our products are adapted based on the unique national recruitment and regulations to the European markets.

Material choice, functionality and energy efficiency are 3 key words, in addition to sustainability, that permeate our strategy for product development. With strong product development encompassing all of our product areas, we are creating unique opportunities to develop sustainable products that satisfy the markets.

Next slide, please. Operational highlights, and we start with growth and profitability. Sales development during the first quarter was strong in both business areas despite difficulties regarding supply of components. GARO's broad product portfolio, service and support make the company a rather unique, and the positive development within all product areas shows that we have a significant synergies between the 2 business areas: E-Mobility and Electrification.

The good sales development during the start of the year also contributed to a good improvement in profitability despite recruitment within sales and increased marketing. GARO E-Mobility had a sales growth of 56% in the quarter, driven by wall boxes and charging stations, and this had to be more if we had access to components.

Demand across the whole product range was good, but primarily within AC charges. We see a positive development in almost all our markets, notable is the U.K. and Finland, while in Norway was weaker due to increased market maturity.

We also contributed to see a strong sales through contract customer in Europe and the group external exports doubling sales. Driving factors for the E-Mobility business is, of course, increasing number of rechargeable cars in Europe, and this makes a high demand within charging infrastructures in all such homework in places and along the highway.

And after -- events after the quarter that GARO has signed and frame agreement with a global vehicle manufacturer regarding charging infrastructure for the European markets. The first delivery are expected during the third quarter of 2022, and orders will be placed on an ongoing basis. And the agreement does not guarantee any volumes.

Electrification growth amounted to 20% during the quarter, with a strong trend in Electrical Distribution Products and Project business. New construction and renovation sector remained favorable during the quarter, which has driven sales in all product groups.

During the quarter, we also saw a strong sales of car heaters in Sweden and in Finland. The Project business area trended positively, mainly in Sweden and in the U.K., and the Temporary Power remained on constant levels and at the same quarter last year.

Next slide, please. Outlook for the second quarter 2022. The challenging situation regarding supply of components continued in the first quarter and became worse towards the end of the period, mainly affecting the business area in mobility. We also see long lead times for new hybrid and electrical vehicles on the market. This may affect installations of new wall box in the short term. Therefore, we estimate that the E-mobility sales in quarter 2 will be in line with the same period last year.

And now over to Helena for the financial performance. Next slide, please.

[Helena Claesson, executive]

Thank you, Patrik. I would like to start with a financial summary of the first quarter. We have had good quarter with a net sales of almost SEK 382 million, giving us a growth of 31% compared to the same quarter 2021. The growth came entirely through organic growth seen in 3 out of 4 of our product group, that is Electrical Distribution Products, Projects and E-mobility. Also, the growth has been achieved despite the challenges regarding sourcing materials and components, as Patrik just mentioned.

Operating margin for the quarter came in at 17.5%, giving us an EBIT of SEK 67 million and is a significant improvement compared to the same period last year. Scale effects from higher volumes, the positive product mix and a good cost control in general are the main explanations for this. Our balance sheet is strong, with a net cash of SEK 1.7 million compared to net debt of SEK 6.6 million in the same quarter last year.

Next slide, please. And now let's look into the 2 new business areas separately, and we start with GARO E-Mobility. Net sales increased by 56%, all driven by organic growth, giving us a sales amounted to SEK 146 million compared to SEK 94 million in the same quarter last year.

We had particularly strong sales growth in the United Kingdom and in Finland. Sweden also showed good sales to wholesalers where the end customers is workplaces, private homes, property and real estate owners. More and more wholesalers are choosing to offer GARO's products in the standard range, which enables fast deliveries and high availability.

Contract customers, such as energy companies and players in the automotive industry established in Europe, continued to develop well during the quarter, and several deliveries were made under existing framework agreements. And in this category, we could see a sales growth of more than 100%.

During the quarter, we have continued to invest in the market of U.K. as well as in resources for service and support. EBIT amounted to SEK 31 million, and operating margins in the quarter came in at 20.9% compared to the same quarter last year.

Next slide, please. And then we continue to look into the business area, GARO Electrification. Net sales increased by 20% driven by organic growth and amounted to SEK 235 million compared to SEK 197 million in the same quarter last year. High demand was seen in a lot of product areas driven by new constructions, renovations and energy efficiency, together with expansion of the charging infrastructure.

The sales within the product area, Electrical Distribution Products, varied depending on product group. For example, we see good sales of car heaters in Sweden and in Finland, where GARO has a leading position in the Nordic region. Project sales was up with 30%, where we have had good demand for customized power stations, cable cabinets and switch gears.

Also, in U.K. and Ireland, the sales within the Project is driven by the charging infrastructure, given good sales growth. Sales within Temporary Power remained on similar levels as for the same quarter last year. EBIT increased to SEK 36 million, and margins came in at 15.3%, slightly better than the same quarter last year.

Next slide, please. Cash flow from operating activities amounted to SEK 12.2 million in Q1 compared to SEK 16.6 million in the same quarter last year. This was explained by a higher need of working capital, mainly due to higher inventory value of components and higher accounts receivable, a result of tactical material purchases where we are securing the need for electrical components going forward.

In the quarter, we have had investments of almost SEK 70 million, of which SEK 8 million were related to product development. We have a strong balance sheet with a net cash position for March amounting to SEK 1.7 million. We have an equity asset ratio of 62.3% and available liquidity, including overdraft facilities, of more than SEK 170 million.

And now back to you, Patrik.

[Patrik Andersson, executive]

Next slide, please. Thank you, Helena. Strong growth and development opportunities. And here, our strategy remains the same. The main driver of growth will be organic growth, and our successful product development has been and will continue to be a key to this growth.

On top of this, we are always looking for potential acquisitions where we can add either new additional products, product areas or companies with an edge. An example of this is the acquisition of EV Charge Partner to strengthen our E-mobility business. We are also looking at new geographical markets with a focus mainly on the North part of Europe. GARO's vision is to become the leading brand on the chosen markets.

Next slide, please. Outlook in the short term. As I mentioned before, we foresee challenges in the -- meeting demand in the GARO E-mobility area -- business area. On long term, we assessed the core market condition have essentially not changed. The market for charging infrastructure is growing structurally with rising number of rechargeable vehicles. And we see a continued strong trend, with further expansion of the charging infrastructure in all markets.

Demand for construction-related products, combined with important renovation and energy efficiency sector, is expected to remain at a good level. So all in all, we have a positive view on the long-term market condition, mainly driven by growth in charging infrastructure.

And thank you for listening, and we are now ready for questions.

[Operator]

[Operator Instructions] Our first question today comes from Olof Cederholm of ABG.

[Olof Cederholm, analyst]

A fantastic quarter, very strong growth in all of the businesses. If I maybe can start with Electrification, which was particularly strong, I think. How is -- how should we think about that sales momentum going forward? Is there a risk that this will -- the momentum will slow down a little bit? As I understand, a part of the strong Q1 came from car heaters, which may not be there in Q2. How should we think about that business?

[Patrik Andersson, executive]

I think you're in the right way here. Of course, we had good sales in -- with car heaters during the quarter, but we can see a good demand for Electrification, as we mentioned, with construction and renovation sector, but maybe not on that level that we had in the quarter 1. But we see good business for Electrification, so we think it will increase, but not on that level as quarter 1.

[Olof Cederholm, analyst]

Yes. And are there any component issues in that business for you?

[Patrik Andersson, executive]

Of course, we have some shortage, but not so big problem that we have with electrical components, as we mentioned, for the E-mobility business. But of course, some components here and there, but overall, quite good supply in Electrification.

[Olof Cederholm, analyst]

And excellent. And if I may ask about cost inflation. You're able to deliver pretty good margins. I would assume that there is cost inflation going on in your business. Have you seen a material effect from that? Or do you expect this to increase going forward?

[Patrik Andersson, executive]

Of course, we have seen higher cost of material. And as we mentioned in the report, we have had good discussion with our suppliers, but we have also increased our prices to customers. And of course, that will continue during the year. We assume that the price level is going up.

But I think we have a good model in the company, and we can handle that in a good way. And I think we show that during the quarter and also during 2020. But of course, we will handle this during the rest of the quarter 2022, also with increasing prices. So -- but we have a good model in the company for handling that.

[Olof Cederholm, analyst]

Yes. And if I just -- my last question before I return to the queue. I have more questions after that as well, but I'll let other people in.

But first, on the E-mobility side, how did you safeguard against rising costs there? Because I would assume that the lead times are longer now. So if I order a GARO charger, when will I get it? And how do you make sure that you get a good margin on that whenever I get it, so to speak?

[Patrik Andersson, executive]

Of course, we have longer lead time. As you said, we had some shortage of some components. And also which type of charge you are buying, you have different lead time, of course. And to save the margin, if you have -- if we have, so to call, a bigger projects, we have that on offer, and the offer is we can increase the prices during time. And we have some price windows to our wholesalers and so on.

So I think we could handle that quite good. As I said, we have a good model. But of course, we can lose some money in some business. But overall, I think, as I said, we have a good model in the company to handle the prices.

[Operator]

The next question comes from Kenneth Toll of Carnegie.

[Kenneth Johansson, analyst]

I was thinking about the outlook for EBIT margins. They were very, very strong compared to my estimates, at least, in Q2 -- Q1. And when we move into Q2, you will not have the same -- probably not have the same growth -- sales growth that you had -- year-over-year that you had in Q1. But you have also added employees, yes, to drive growth. So should we expect a much lower EBIT margin in Q2?

[Patrik Andersson, executive]

Yes. I think you should expect a lower margin, as you said. This is, as we mentioned, a short term. We see some problem with supply components. And long term, as we mentioned, we think this market for the E-mobility business will be good.

And we are building in an organization, and we are making investment in capacity. So of course, we will see a bit lower margin in short term. But we -- this company is looking at long term, and we have to build organization, capacity, new products. But of course, on short term, we will have a lower margin. That's correct.

[Kenneth Johansson, analyst]

Yes. And I mean, speaking about that, the EBIT margin in E-mobility is very high, especially when we compare to some other players in that area. So are you -- there is always a trade-off between sales growth and EBIT margin in the short term.

But now when you have such high EBIT margins in E-mobility, are you becoming even more aggressive to grow that? Or do you think that you haven't focused on growth enough, if I put it that way?

[Patrik Andersson, executive]

I think we focus on growth. As we mentioned in the report, we are increasing in export sales. We are increasing in our subsidy in U.K. So I think we're increasing the organization and have focused on that, of course.

But we have also focused on the margin. And we think it's important, as we have mentioned before, to have this broad range, not to have just one wall box or one station. Our broad range, we think, is very good for the margin on long term. So I think we have a focus on both growth and, of course, margin, which is important for our company.

[Kenneth Johansson, analyst]

Great. And then the last question, the component shortages, I understand that it's hard to know what kind of component shortage you will have in 3 months or so, but could you elaborate a little bit the shortages you have?

Are they related to imports from China, so the lockdown situation in China is affecting your suppliers in Europe? Or could you elaborate a little bit on the causes for the shortages, please?

[Patrik Andersson, executive]

Yes. The shortage is related to electronic components. So of course, some of them is related to China. Some of them is related to Europe and so on. So they come from different places, for these PCB boards.

So yes, of course, China is some reason. But of course, other reasons also, and it's quite hard to predict because it's a lot of components on these PCB boards. And we have different PCB boards also. So it's many things affecting the shortage at this stage, and it's very hard to predict and explain all the components. But China and Europe, of course, is some of the reasons, yes.

[Kenneth Johansson, analyst]

Yes. And then if I may throw in the last one. What CapEx levels are you looking for in the investment that you're doing in Sweden and also in Poland? And are most of them going to be spent in 2023?

[Helena Claesson, executive]

When it comes to the new facilities in Poland, we communicated those CapEx, I believe, in -- earlier, and it's somewhere about SEK 90 million. And I would say, maybe 1/3 or something will be used -- or yes, during 2022, since we are forecasting to have that property in place during Q2 2023. But otherwise, CapEx-wise, I would say that we will be more or less on the same levels as we have been the last 2, 3 years, where we are investing in product development and product. Yes.

[Kenneth Johansson, analyst]

Okay. Yes. Very good. And plus the Swedish expansion, it's not that CapEx heavy.

[Helena Claesson, executive]

No. The Swedish is a rented facility. And yes, we need more, sort of, say, workplaces. But it's not machine -- heavy in expense for the machinery or test equipment or similar. It's more or less basic workplace.

[Operator]

And we also have Olof registered again for follow-up questions.

[Olof Cederholm, analyst]

Yes. I have a few follow-ups then. Can you talk a little bit about your DC and fast charging business? How is this developing?

[Patrik Andersson, executive]

It's developed. Of course, it's going well, but on low levels, so to say. We can see that the infrastructure building today is mostly AC chargers because you install AC chargers at your home, working places and also at public charging, shopping malls and that things. And they are starting to build more and more, this station.

But we think that most of the sales today and in the future will be AC chargers because that cars have a very long range today. But of course, we are also selling our DC charger, 24 kilowatts and 50 kilowatts, because we want to have some DC in combination with the AC chargers. So we are selling them, but on low levels at this stage.

[Olof Cederholm, analyst]

Yes. And some of the competitors on the DC side are really moving fast towards more bigger charging stations with more kilowatts than you have. Are you going to follow them? Or will you be -- will you continue to work in your sort of area of that DC market?

[Patrik Andersson, executive]

We will focus more on what we call destination charging, and that is up to around 50 kilowatts. But we can also offer bigger chargers, but we will have the main focus, AC and DC, maybe up to 50 or 150 kilowatts. But we could offer bigger also, but the main focus will be there.

[Olof Cederholm, analyst]

Very good. And just following on Kenneth's questions about the components situation. I understand this is super difficult, but is there -- are there any signs from your supply chain that the situation would improve again in Q3? Or is it just no visibility whatsoever?

[Patrik Andersson, executive]

It's -- I would say it's no visibility. It's very, very hard to predict at this stage, so I can't say anything on that. We have to make the work we are doing every day to make the supply better and better and find components and redesign and do the work we have done for 2 years now and continue with that. That has been successful, but we can't predict anything about quarter 3. Sorry for that.

[Olof Cederholm, analyst]

Understood. I think you're not alone in that situation.

[Patrik Andersson, executive]

No.

[Olof Cederholm, analyst]

But I still had to ask. I still have to ask.

[Patrik Andersson, executive]

Of course. Of course. Of course.

[Operator]

[Operator Instructions] We have no further questions in the queue, so I'll hand back to Patrik Andersson for any final remarks.

[Patrik Andersson, executive]

Thank you, everyone, for listening, and have a nice evening. Goodbye.

[Operator]

This concludes today's call. Thank you for joining. You may now disconnect your lines.