Garo AB

STO:GARO

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to today's GARO Interim Report First Quarter of 2023 Conference Call. My name is Harry, and I'll be coordinating the call today.

[Operator Instructions]

It is now my pleasure to hand over to Patrik Andersson to begin. Patrik, please go ahead, when you're ready.

[Patrik Andersson, executive]

Thank you, and welcome, everyone, to the Presentation of the GARO Quarter 1 Report 2023.

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. We start with an introduction. GARO is a company founded in 1939 that develops and manufactures and sell innovative products and systems for electrical installation and the own brand on the European markets. Developing products that are at 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 long service life.

The market demand for product and solutions to achieve fossil-free society, in which a growing number of players become aware of the environmental impact. This makes the sustainable aspect, a crucial factor in the choice of product and service.

Next slide, please. We have 2 business areas: GARO E-mobility, which consists of our product area E-mobility; and the GARO Electrification, which include product areas Electrical Distribution products, Projects and Temporary power.

We have operations in Sweden, Norway, Ireland, Finland, Poland and in the U.K. And we also sell in other European countries where we don't have own subsidies, and we have started to establish operations in the German market, which we have previously reached through retailers, but we would now like to see higher market footprint. We have production facilities in Gnosjö and in Hillerstorp in Sweden and Szczecin in Poland, and we are approximately 550 employees in the Group.

Next slide, please. In the product area E-mobility, we develop and market all type of chargers for rechargeable vehicles. We have product and turnkey solutions for destination chargers for all various places, at home, at public places, workplaces and along the highway. To make the E-mobility business even more complete, we also offer service agreements to help our customers with yearly service or updates.

We believe it's important to make it easy for all users and make it possible to charge where people live and work. This area accounted for 33% of the total sales in the quarter.

Next slide, please. In business area GARO Electrification, the largest product area is Electrical Distribution products, consisting of approximately 3,500 products and turnkey solutions for the electrical installation markets. Example of product are components, safety switches, meter cabinets, outlet boxes and plug and sockets, which are products used every day in different applications, such in new buildings, renovations, marina and camping sites and E-mobility solutions, and contributed for 40% of the Group sales in the quarter.

Our product area project provides complete customized solution for all type for power supply for apartment, villa industry, E-mobility solutions accounted for 22% of the 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 sales.

These 4 product areas make GARO's offer unique and easy for the customer. An example of this is when the customer needs a charging solution with different chargers for E-mobility, they will also need power supply for projects and safety and installation products from Electrical Distribution products. This make it easy, simple and safe for the customer and end users.

Now over to Helena for some financial updates. Next slide, please.

[Helena Claesson, executive]

Thank you, Patrik. And I would like to start by looking at the Financial Summary for the First Quarter. Net sales amounted to SEK 370 million, giving us a negative growth of 3% compared to the same quarter last year. While GARO Electrification continued to show growth, 5% compared to last year, this was more than offset by weaker sales within GARO E-mobility that dropped 17% in sales.

Operating profit for the quarter came in at SEK 28 million compared to SEK 67 million for the same quarter last year. The lower profitability in the quarter is a result of lower sales volume in combination with a weaker gross profit and higher operational costs. During the quarter, GARO has concentrated the operations within GARO Electrification to one site in Hillerstorp. And the move has negatively affected the results with SEK 3.1 million as a one-off cost. Operating margins for the quarter came in at 7.5% compared to 17.5% last year.

Next slide, please. And now looking into the 2 business areas separately, starting with GARO E-mobility. Net sales amounted to SEK 122 million, which was substantially lower than in the same quarter last year, giving a negative growth of 17%. The lower sales is to a large extent explained by the challenges of sourcing materials, especially in the beginning of the quarter. This has, again, negatively affected our productions and limited our possibilities for delivery.

However, the situation improved in the end of the quarter, and we have managed to lower our order backlog a little bit, even if it's still high. When doing a comparison with the same quarter last year, it is noticeable for us that the market has increasingly shifted to connected products also for home usage. This, in turn, has led the GARO sales of certain non-connectable home chargers to fall behind.

During the quarter, according to our plans, we have started to make deliveries of our new charger GARO Entity, which will also improve our access to components going forward. The EBIT amounted to SEK 6.6 million, mainly explained by the lower sales volume, but also to some extent due to changed customer and product mix. In the quarter, we have established our sales office in Germany, a huge market within E-mobility. Germany is also a market with very high quality and safety requirements, which suits GARO's product range very well.

Next slide, please.

[Patrik Andersson, executive]

In November, we launched a new product program and platform for destination charging with smart services. The product range are built on a whole new platform and encompasses services for use at home, in houses, apartments, commercial facilities as well in public places. Sales of GARO Entity Pro started during the end of the quarter in Sweden and in the U.K., and we intend to start the sales to the other markets in the second quarter.

Our ambition is always to offer our customers the most safe product and solution within electrical vehicle pro charging. The new product range and service will make a big difference for installers and users in several ways. New technology is being introduced and in the development of product, high focus has been on safety standards and future services to make it easy for all stakeholders. We will start sales of GARO Entity Compact during the second half of 2023. These products are made for use at home. Next slide, please.

[Helena Claesson, executive]

And now let's look into the business area, GARO Electrification. Net sales increased by 5% and amounted to SEK 248 million compared to SEK 235 million last year. We have seen a stable market during the quarter, but in Sweden, we are noticing a weaker construction market ahead, and the demand for new construction of residentials has decreased significantly. Within Electrical Distribution products, we saw good sales of standard components and power stations. These products are used in new production as well as in the renovation and energy efficiency of properties. Sales of car heaters was lower compared to the last year, mainly explained by a mild winter. Project sales continue to grow. In Sweden and in Ireland, sales was driven by new construction, renovation and energy efficiency of properties.

In the U.K., growth is driven mainly by the buildup of the charging infrastructure. EBIT amounted to SEK 21 million and margins came in at 8.5% lower than the 15.3% in the same quarter last year. The lower profitability in the quarter is the result of lower gross profit and higher operational costs. Also, the profitability has been negatively affected by SEK 3 million as a one-off cost due to the move to Hillerstorp. Next slide, please.

[Patrik Andersson, executive]

During the quarter, GARO has concentrated in the operations within GARO Electrification to one site in Hillerstorp, 10 kilometers from our headquarter in Gnosjö. This provides possibility for growth and improved efficiency in production over time. Our strong growth within Project business is, to some extent, a result of increased production capacity in Poland, where we have made room for expansion with the business area. Short lead time to customers are essential for sales within projects. We have said it before and we'll say it again, our business model with 2 business areas, completing each other is one of our core strengths.

A good example of this is GARO Entity Heat, which will be launched in May during the exhibition Elfack in Sweden. This is our new car heater built on the same platform as the new charger GARO Entity. Next slide, please. On this slide, you can see our new production and logistics facility in Szczecin in Poland, which will be completed in summer 2023. The facility space is 15,000 square meters and will facilitate our considerable increase in capacity, primarily E-mobility products, but also products within Electrification. The total investments amount of approximately SEK 100 million. Next slide, please.

[Helena Claesson, executive]

Cash flow from operating activities amounted to negative SEK 47 million in the quarter compared to positive SEK 12 million in the same quarter last year. This is a result of lower operating profit and a high net working capital. The reason for the continued high working capital is high inventory value and high customer receivables, having higher invoicing at the end of the quarter.

We have had investments of SEK 51 million, of which SEK 10 million were related to product development. GARO continues to invest in our new facility in Poland, where we are taking up the credit facility of similar size. The production facility will be ready during the second quarter and production scheduled to be up and running as from July, as Patrik just mentioned.

Our net debt position amounted to SEK 246 million compared to a net cash position of SEK 2 million last year. As of now, GARO is using a large part of its credit facilities, financing the ramp-up of the production of GARO Entity. Our net debt position, excluding the effects of IFRS that is the lease contracts amounted to SEK 172 million compared to a net cash position of SEK 38 million last year. Net debt to EBITDA amounted to SEK 1.62 million, which is still a sign of a strong balance sheet. We have an equity asset ratio of 50.8% and available liquidity, including overdraft facilities, of SEK 97 million. Next slide, please.

[Patrik Andersson, executive]

GARO's outlook, and if we start with the short term, the lack of electronic components in the GARO E-mobility business area has impacted our production and delivery capacity in the beginning of the quarter. The situation improved at the end of the quarter, and we will also reach planned production level of GARO Entity Pro by the summer, which also helped the production and delivery capacity as such.

On long term, housing production in Sweden has decreased considerably and is expected to be weak in 2023. Demand for commercial and public real estate is expected to remain good and also renovation activities and investment into energy efficiency and electrification, in general, are expected to remain on a good levels.

Regarding the market for charging infrastructure is growing structurally with a rising number of rechargeable vehicles, and we see a continued strong trend with further expansion of the charging infrastructure in the European markets.

Next slide, please. Thank you for listening, everyone, and me and Helena are ready for questions.

[Operator]

[Operator Instructions]

And our first question of the day is from the line of Johan Skoglund of DNB Markets.

[Johan Skoglund, analyst]

I'm happy to see that the E-mobility profitability has turned around. So a question about the product mix here. Could you comment on what is going on?

[Patrik Andersson, executive]

In the E-mobility?

[Johan Skoglund, analyst]

Yes, if I interpreted you correct.

[Patrik Andersson, executive]

Yes, we haven't -- while we didn't have growth. It is, as we mentioned, we have had some lack of components in the beginning of the quarter. Then in the end of the quarter, we got all the components, and we increased the deliveries, both in charging stations and also GARO Entity. So we don't have increased due to lack of components, therefore, negative.

[Johan Skoglund, analyst]

Okay. So a follow-up question on E-mobility. Could you please elaborate a bit about the European expansion? I hear the U.K. is coming along, but how are the rest of the countries, any update that you could provide?

[Patrik Andersson, executive]

Yes. We have now, as we mentioned, start our operation in Germany. We have a new company, and we are now hiring people for the German market to expand the German market for '24 and '25. So that is, of course, a long-term investment. And then we are doing business, as we have done before with utility companies and car manufacturer and other retailers in other countries.

So of course, the European market is really interesting, especially now when we also could deliver the GARO Entity, together with our charging station where we have a good offer for the market. So -- and then of course, we are also invested in our -- U.K., with a new location during last year, and we have invested in organization. So both U.K., Germany and other European market is very interesting for GARO.

[Johan Skoglund, analyst]

Well, that's really good to hear. So are there many necessary adjustments you need to make to enter the new countries? Or would you say that those are mainly in place?

[Patrik Andersson, executive]

It depends which country we are talking about. As we have done, now both in U.K. and Germany, we are starting from greenfields, so to say, with the company and then employ people. And of course, it costs some money, but it's quite -- not so big investment. So it depends on market, which market it is and how we will enter into the market. So it's quite hard to answer that question. It depends on the markets.

[Operator]

[Operator Instructions]

And our next question is from the line of Kenneth Toll of Carnegie.

[Kenneth Johansson, analyst]

So I was a little bit curious about the margin development in Electrification. It was down quite a bit. And even if you add back the costs for moving production, it was still down a bit, although sales grew some 5%. So is it due to product mix or end market mix? Or what happened, please?

[Patrik Andersson, executive]

Of course, it is some product mix, but we have also some -- few product areas that we haven't increased the price, the much we need to. So we have some adjustments to do with price, but the most is product mix, in combination with some prices. Yes.

[Kenneth Johansson, analyst]

Okay. So -- okay. And how do you see it going forward? Do you think you will manage to increase prices? And will the product mix swing back? Or do you think it will be similar in the next 2 quarters or so?

[Patrik Andersson, executive]

We have already done some adjustments. But of course, we have our price windows. So we will have some months of lower margin in some product area. This is not the whole range. We can adjust some, but some -- we have to live with some. But of course, it depends also on the product mix, as you mentioned. So we think we could balance it quite well, but with some month delayed, so to say. So we are not so afraid for that over time.

[Kenneth Johansson, analyst]

And it's not that you are seeing demand being significantly lower across the board, so you need to take out employees or anything like that at the moment.

[Patrik Andersson, executive]

No, not at this stage, no.

[Kenneth Johansson, analyst]

Okay. Great. And then on the E-mobility side, there were -- you and some other players talked about the home charger market, the consumer market in Sweden being quite soft in the second half of last year. Have you seen any effects from one of the players in that market having stopped selling products in Sweden. Have that made demand better or pricing better? Or have you noticed any effect?

[Patrik Andersson, executive]

We can say the demand, of course, has been better. We have had a lot of discussion with different installers and end users. So it, of course, has given us a good window to make more business. When it comes to price, we haven't, as you know, not -- we will not be the cheap charger. We think it's important to have a safe, and a charger with a lot of functions and that will cost some. But of course, it has opened the market for more business due to homes. Yes.

[Kenneth Johansson, analyst]

Okay. Great. Yes, I think -- and in terms of moving production in Poland and in Sweden, all of that will be finalized towards the end of the summer, and that also goes for CapEx investments that -- end of summer, more or less those projects will be finalized.

[Helena Claesson, executive]

That's correct. The move in Hillerstorp is more or less finalized as of now. So -- and for the Polish establishment, the CapEx expenses, but also the -- yes, that will all be done in Q2.

[Kenneth Johansson, analyst]

Okay. Great. And now you have also started to ramp up production of the new GARO Entity. So can you say anything about -- you also wrote that sales were really good in March compared to the first 2 months and so on. So can you talk a little bit about the experiences in ramping up production of this new product? Has it been according to plan? Or have there been any troubles or so on?

[Patrik Andersson, executive]

It is going according to plan. And then of course, when you have a totally new product, you also get into some small bumps in the roads. And of course, we have had some small bumps in the roads, but we have fixed that quite quickly. So it's according to plan. So we started the deliveries in March. And then we will, month-by-month, ramping up the production and deliveries until summer. So it's according to plan, yes.

[Operator]

And we currently have no further questions on the line.

[Operator Instructions]

And we have a question on the line here from [ Char Saxon ] of [ Lenabo ] .

[Unknown Analyst]

I have a question regarding the sales prohibit that the EC got during the quarter, have you seen any new clients coming in from that? Or is that too early to say?

[Patrik Andersson, executive]

Of course, we have got contract with several new customers in that question. So yes, we have got some new opportunities. So that's correct.

[Unknown Analyst]

Yes. But that's nothing that you can see already in the figures for Q1? Or is that more long term?

[Patrik Andersson, executive]

No. Long term.

[Operator]

Thank you. And we have no further questions on the line today. So I'd like to hand back to Patrik Andersson for any conclusion remarks.

[Patrik Andersson, executive]

Yes. Thank you, everyone, for listening to GARO's Quarter 1 Report 2023, and I wish you a good day.

[Operator]

Thank you, everyone. This concludes today's call. You may now disconnect your lines.