Garo AB

STO:GARO

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the GARO interim report first quarter 2024 call. [Operator Instructions]

I would now like to hand this conference over to our host, Patrik Andersson, CEO. Please go ahead.

[Patrik Andersson, executive]

Thank you, and welcome, everyone, to the presentation of GARO's Quarter 1, 2024. My name is Patrik Andersson, and I'm the CEO of GARO. With me today, I have Helena Claesson, our CFO, to present our financial performance.

Next slide, please. Let's start with an introduction. GARO is a company founded in 1939 that develops, manufacture and sell innovative products and systems for electrical installation and their own brand in the European markets. Developing products that are at the forefront, has always been a significant aspects of our success. Our focus is developing user friendly and safe products with a modern design and a long service life.

There is market demand of -- for products and solutions to assist in establishing a fossil-free society in which a growing number of players are becoming cautious of their sustainable impact. This makes a sustainable aspect a crucial factor in the choice of product and service.

Next slide, please. We have two business areas: GARO E-mobility, which consists of the GARO E-mobility product area and GARO Electrification, which includes the electrical distribution products, project business and temporary power. We have operations in Sweden, Norway, Ireland, Finland, Poland U.K., Germany, and we also now established a company in Spain, which I will come back to later in the presentation. And we also sell in other European countries where we don't have own subsidies.

We have production facilities in Gnosjö and Hillerstorp in Sweden and in Szczecin in Poland, where we moved into new production and logistics facilities in summer 2023 to meet the European demand for e-mobility products for the coming years. And we are approximately 440 employees in the group.

Next slide, please. In the E-mobility product area, we developed a market all type of chargers for rechargeable vehicles. We have a product and turnkey solutions for destination charging for various locations, including at home, in public, at workplace and along the highway. To make the E-mobility business even more complete, we're also offering service agreements to assist our customers with the annual service and updates. We believe it's important to make it easy for the user and to make it possible to charge in locations where people live and work. This area accounted for 39 -- sorry, 29% of the sales in the quarter.

Next slide, please. The largest product area in the GARO Electrification business area is Electrical distribution products which consists of approximately 3,500 products and turnkey solutions for the electrical installation markets. Example of products are components, safety switches, meter cabinets, outlet boxes, plugs and sockets, which are products used daily in different applications, such as in new buildings, renovations, marine and camping sites industry and e-mobility solutions. These product area contributed 45% of the group sales in the quarter.

Our Project Business product area provides complete and customized solutions for all types of power supplies for apartments, single-family homes, industry and E-mobility accounted for 23% of the total sales.

The Temporary Power product area, which was -- which has a product portfolio consisting of temporary electricity, lightning, heating and charging products used on construction sites and events accounted for 3% of the sales.

These 4 product areas make GARO's offering unique and easy for the customer. An example of this is when the customer requires a charging solutions with different charges and load balancing from E-mobility and also requires power supply from project business as well as safety and installation products from electrical distribution products. This makes it easy, simple and safe for the customer and end user.

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

[Helena Claesson, executive]

Thank you, Patrik. I would like to start by looking at the financial summary for the first quarter.

Net sales amounted to SEK 293 million, a decrease of 21% or SEK 80 million compared to the same quarter last year. Sales within GARO Electrification decreased by 16% as a result of the weaker economy in the market in general. E-mobility showed a decrease in sales of 31%. Out of the low sales in the quarter, SEK 65 million are related to the lower sales in the Sweden affecting both business areas.

Operating profit for the quarter came in at negative SEK 7 million compared to SEK 28 million for the same quarter last year, which is mainly explained by the lower sales volumes.

During the quarter, we have performed a savings and efficiency program to adapt the organization for the lower volumes, but at the same time, also be prepared for the recovery in the market. We will start to notice full effect of the program during the second quarter.

Also, we have noticed that the sales have somewhat recovered in April, as a result of more working days and a slightly better demand in both business areas.

Now over to you again, Patrik, for some operational highlights. Next slide, please.

[Patrik Andersson, executive]

Thank you. And let's start with GARO E-mobility. The prevailing market situation with macroeconomic uncertainty continued to affect purchasing patterns and investment decisions primarily in the Swedish market. This had a negative impact on the GARO sales. Moreover, some of our major contract customers still have volumes of GARO's product inventory due to the current market trends.

Our activities market outside Sweden appear more positive and showed a growth in the quarter. The beginning of 2024 was hectical for the recent established sales company in Germany. The company made its first delivery of [ ISO ] compliant products. which were well received by the customer. GARO will continue to expand the product portfolio for the German market with a more [ ISO ] compliant product during the year.

GARO E-mobility, therefore, intensified its marketing activities in Germany, Poland and Ireland. In addition, we are now established a sales company in Spain. Spain is the fourth largest country in Europe in terms of number of passenger cars with about 27 million cars and a rapid growth market for rechargeable cars in the coming years. The first delivery are expected to commence in the second half of 2024.

GARO Entity Compact, the market only wallbox charging at home that is third-party certified according to the current charging standards in Europe is facing a market that is underpriced pressure from other players. However, GARO's uncompromising focus on safety and product development remains firm.

Demand for public charging points is the main driver of sales in the business area. We go further on with GARO Electrification. A continued weak economy, climate with high interest rates lead to a significant decline in the market for construction of new single family homes and apartments in Sweden and the Nordics region. Therefore, the demand for products related to house manufacturers was down sharply, and the forecast shows that this will continue to impact the production rate of housing for a period ahead.

However, in Ireland, the market for new constructions remains stable, and we see a growing demand for construction-related products.

In the market where GARO is active, there is a considerable underlying need for new housing and apartments and the long-term assessment in the market will gain new monuments in the coming years where the financial situation has stabilized. Demand is relatively healthy for new construction, renovation and energy efficiency in public sector, commercial properties and industry. However, these volumes will not fully compensate for lower volumes in new construction in the short term.

During the quarter, Ireland delivered products to a major international computer company with data centers across Europe. The delivery includes components for distribution cabinets that will be placed in the company's server facilities.

Growth and profitability. During the quarter, an action program was carried out to continue adapting the organization to the prevailing situation. The program reduced number of 40 employees in the group. The action program primarily concerned the GARO E-mobility business area. The program is expected to achieve full effect in the second quarter. Cost control and efficient organization will remain a major focus area for the entire GARO group.

The action program completed in GARO Electrification in autumn 2023 is now yield a desired effect with an organization adapted to prevailing market situation. And now over to Helena. Next slide, please.

[Helena Claesson, executive]

Thank you. And I will continue then by looking at the two business areas separately, and we start with GARO E-mobility.

Net sales amounted to SEK 84 million in the quarter, giving us a negative growth of 31% compared to last year. When comparing the same quarter last year, it should be noted at the launch of GARO entity took place during this quarter in 2023 and several large deliveries were done to [indiscernible] at the customer. Also in the first quarter last year, deliveries were made against back orders of public chargers. All in all, this gives us challenging comparative figures for the business area.

In the quarter, sales in Sweden and in the Nordics were down with 49%, respectively, 43% compared to the same quarter in '23. GARO is preliminarily affected by the market development in the Nordic market where we have a significant market share. At the same time, we saw growth of 15% for the other markets in Europe. In general, the markets outside of Sweden feels more positive. And as Patrik mentioned, GARO E-mobility is intensifying the sales activities in Germany and in Poland. And furthermore, we are now establishing sales company in Spain.

The operating profit for the quarter amounted to negative SEK 24 million compared to SEK 7 million giving an operating margin of negative 28%. Lower sales, weaker gross margin with excess loss in production as well as an organization that is built for growth explains indicative results. Also, the campaign activities for the charger box GLB, built on the previous platform, which began in the autumn of 2023 continues. The campaign partly explains the slightly lower gross margin as sales take place at significantly lower margins for this product.

Next slide, please. And then we will focus GARO Electrification business area. Net sales declined by 16% and amounted to SEK 208 million compared to SEK 248 million in the same quarter last year. The lower sales is, to some extent, explained by less working days in the quarter as the Easter weekend occurred early this year. The number of working days affect sales in this business area as these products are used continuously by the electricians in their daily installation work.

A continued weaker economy with high interest rate has meant that the market for new constructions of single-family houses and apartments has decreased significantly in Sweden and in the rest of the Nordic region. However, there is relatively good demand for new construction, renovation and energy efficiency in the public sector, commercial properties and in industry. But sales in these categories are not compensating for the lower volumes in other areas.

During the quarter, GARO Ireland has delivered products to a large international computer company with data centers around Europe. The delivery includes components for electrical distribution boards for server facilities. EBIT amounted to SEK 17 million compared to SEK 21 million last year, giving us an EBIT margin of 8%. The efficiency programs implemented during the fall of 2023 is having desired effect.

Since end of '23, GARO is running a project, updating our business system, which will enable better processes and collaboration between the group's various units. The cost for this project is further taken within this business area and has affected the result with SEK 1.5 million to the quarter.

In line with price increases on input materials and components, GARO regulates prices towards the customer to the corresponding degree but where delays in time may affect the margins in individual quarters.

Next slide, please. And now following cash flow and balance sheet. Cash flow from operating activities before change in working capital amounted to SEK 8 million. Cash flow from operating activities after changes in working capital amounted to negative SEK 44 million. The negative cash flow during the quarter is mainly attributable to reduced operating liabilities. Other items such as inventories and account receivables show minor changes.

Tied up capital in inventory decreased by approximately SEK 10 million in the quarter. However, our inventory value is still significantly higher than internal targets and a focus area for the management.

Our net debt position amounted to SEK 278 million compared to SEK 207 million in the same quarter last year. We had an equity asset ratio of 52% and available liquidity, including overdraft facilities of SEK 85 million.

And now back to you Patrik. Next slide, please.

[Patrik Andersson, executive]

Thank you, and we'll go further on with outlook. The market, which slowed for both business areas at the end of 2023 is cautious and really remain solid during 2024. It was gratifying, however, that the group sales outside the Nordic region show growth, which support our investment in Germany, which we entered at the end of 2023.

International expansion is important for us, which we have started to establish operations in the Spanish market. Spanish -- Spain is a country with expansion of E-mobility infrastructure and, therefore, suitable for our products. The transition to fossil-free fuels as well as energy efficiency system and services is crucial to achieve a sustainable development goal, which benefits GARO since its offering is adapting to these current needs.

The market for home charges is affected by prevailing market situation with macroeconomic uncertainty, which is affecting purchasing patterns and investment decisions. The expansion of charging stations for major projects, for example, commercial property, tenant-owned associations and public places is expected good but slow, especially in the Swedish market.

The forecast for 2024 still indicates a cautious market in GARO E-mobility, followed by a considerable growth in 2025. The current market situation for new construction of single-family homes and apartments is expected to persist at least the entire of 2024 in Sweden and the Nordics region. But as I mentioned before, there is a considerable underlying need for new houses and apartments and in gaining in the coming years when the financial situation has stabilized.

On the other hand, demand for other commercial and public construction combined with renovation and energy efficiency remains favorable. So all in all, we have a positive view of the long-term conditions, mainly driven by growth in charging infrastructure and requirement for power supply.

Next slide, please. Thank you all for listening, and we are now ready for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Anton Lund at Kepler Cheuvreux. Please go ahead.

[Anton Lund, analyst]

Patrik, Helena, can you hear me?

[Patrik Andersson, executive]

Yes, we can hear you.

[Anton Lund, analyst]

Perfect. Two questions from our side. First, what can you say about the price volume mix in the quarter?

[Patrik Andersson, executive]

The price?

[Anton Lund, analyst]

Price and volume mix in Q1 between the 2 segments. Can you add any color on that?

[Helena Claesson, executive]

You mean between the segments or within the segment?

[Anton Lund, analyst]

Yes. Within the segments, for each segment, what can you say about the volume decline and price increases and so on.

[Helena Claesson, executive]

Well, if we look into Electrification, where we saw the decline then of 16%. If I'm going to make a guess, I would say that perhaps 10% is less volume and then we have -- sorry, 20% perhaps is less volume and then we have compensated with price increases like 5%. Is that kind of what you were?

[Anton Lund, analyst]

Yes, exactly. And therefore, E-mobility, what's the...

[Helena Claesson, executive]

And for E-mobility, I would say that it's maybe a 2%, 3% price increases, and the rest is saying volumes like 34% is lower volume. It's a little bit since we are doing the campaign of the GLB. It's a little bit more -- old platform, it's difficult to then say what is price, so to say, and volume effect.

[Anton Lund, analyst]

Sure. That's good. And then in terms of order intake for first half here of Q2, do you see any signs of customer destocking coming to an end?

[Patrik Andersson, executive]

Yes. We can see, as we have mentioned before, we can see that our contract customers are coming to on point. They're lowering their warehouses and their stock. So yes, but that will also -- the volume will come quite slightly, and it will not come so quick, but we can see that they have a lower component and product in the warehouse, yes.

[Anton Lund, analyst]

Perfect. And then what can we expect from the Spanish expansion when can we start seeing sales and so on?

[Patrik Andersson, executive]

We announced that we will deliver our first product during the second half this year. So I think you don't -- should expect too much during 2024 [indiscernible] because we -- we just set the organization and set the company and we will see the sales more during 2024. But of course, we will see some sales during '24, but don't expect too much during this year.

[Anton Lund, analyst]

Okay. And then one last question from my side. Net debt to EBITDA is increasing rather rapidly, I think, from 2.2% last quarter to around 4%, if I go right. How do you view your financial position?

[Helena Claesson, executive]

Well, as I said, we have an overdraft cash, including overdraft facilities of about SEK 85 million. And we have a focus on free out cash from our inventory. So yes.

[Anton Lund, analyst]

And you're confident that you will be able to pay off the debt?

[Helena Claesson, executive]

Yes.

[Patrik Andersson, executive]

Yes, we are.

[Helena Claesson, executive]

Yes.

[Operator]

[Operator Instructions] The next question comes from Sofia Sörling of Carnegie.

[Sofia Sörling, analyst]

All right. Sofia here from Carnegie. My first question is about the acceleration in the expansion in Spain and Germany. Should we expect any necessary investments ahead due to this expansion?

[Patrik Andersson, executive]

The investments, so to say, is more in organization. And when it comes to Germany, as we write in the report, we have some more products that we should make [ ISO's ] approval which is ongoing, but not a big investment more than staff or employees, so to say. So no big investment.

[Sofia Sörling, analyst]

Okay. And could you also remind us between different products? Or do you focus on the market for home chargers or more destination chargers in Germany and in Spain?

[Patrik Andersson, executive]

We will focus on destination charging with this both public, commercial and then, of course, home also. But in Spain and in Germany, it will be more project business, tenant-owned locations, industry and that type of application. But of course, we will also sell to the whole market. So destination charging, including home.

[Sofia Sörling, analyst]

All right. And why would you say that Spain is a good market for GARO to enter? And also, if you could give us some more details on how the competition is in Spain versus what you see in the Nordics? And also in Germany?

[Patrik Andersson, executive]

We have looked into that market for a quite long time, and we looked into several markets. And we can see Spain is an interesting country due to a lot of [ regulatory ] recalls. We can see the transaction now starting to happen in the country. And we can also see that our product adapting quite well to the Spanish market. So we have a good portfolio for that market. And the competition, of course, you have a lot of players also in Spain. But we think our portfolio, our offer suits that market quite well, therefore, we are entering.

[Sofia Sörling, analyst]

All right. And then I also wanted to focus on product launches. Should we expect that you will launch any new products during 2024 within E-mobility?

[Patrik Andersson, executive]

In E-Mobility, we have made our big launch, so to say, we got GARO Entity Compact and GARO Entity Pro that is third-party certified. Of course, we can expect more, I would say, functionality in that type of product. But I don't think we should, during '24, maybe see a new hardware products, so to say. But more functionality, and we are now focusing on this product portfolio we have at this stage to get volume on that and maybe fine-tuning and get more functionality.

[Sofia Sörling, analyst]

All right. Okay. And then a question about demand within Electrification. I got the impression that it's somewhat stabilized, although at low levels during Q1. Is that your expectation as well? Or do you see that it will be even tougher ahead within Electrification?

[Patrik Andersson, executive]

I think your view is quite correct. We think we have -- we are stabilized on a low level, so to say. We think it will increase slowly quarter-by-quarter, but we think it will be quite tough during 2024, but it will be better, we think. We get some positive signs in the market on maybe not a new construction yet, that will come later on, but we can see it on energy efficiency. We can see in industry and in power supply, which we have a good portfolio. But slowly, it gets better, yes. And we can also see that our program, giving the effect that we wanted. So we think it's exactly as you said, it will be better and better quarter-by-quarter, but slowly.

[Sofia Sörling, analyst]

Okay. And my last question is also about the financial situation about -- as I calculated the net debt divided by EBITDA it reached almost [ SEK 3.9 ] per Q1. Would you say that is correct? And also is that something that -- I know the other speaker were talking about this topic, but is that something that you have included in your covenant levels? And if you can give us some more details on your covenant levels and how you view that this will decrease ahead?

[Helena Claesson, executive]

Yes. We don't have any covenants of that kind with the bank. And as I said, we are aware of that we have a little bit too much cash set up in inventory values and we are working on it intensively. And at the same time, we still have a -- our overdraft facilities and sales. So, yes. that's also...

[Sofia Sörling, analyst]

And it's mainly you will have -- you expect improved...

[Helena Claesson, executive]

In the long term we want our net debt to decrease. Absolutely.

[Sofia Sörling, analyst]

Yes. But in the short term, you expect the -- some positive effect within working capital change due to lower inventory levels ahead if I understand it correctly.

[Helena Claesson, executive]

Yes.

[Operator]

As there are no additional questions waiting at this time, I'd like to hand the conference back over to Patrik Andersson for closing remarks.

[Patrik Andersson, executive]

Thank you, everyone, for listening, and I wish you a good day. Goodbye.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's call. You may now disconnect your lines.