Garo AB

STO:GARO

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Interim Report January to June 2020 Webcast. My name is Ruby, and I will be your moderator for today's webcast. [Operator Instructions] I will now hand over to your host, Patrik Anderson, CEO of GARO, to begin. Patrik, please go ahead.

[Patrik Andersson, President & CEO]

Thank you. Good morning, everyone, and welcome to the presentation of GARO's Second Quarter 2020. My name is Patrik Andersson, and I'm the CEO of GARO. And with me today, I have Helena Claesson, our CFO, to present the financial performance. Next slide, please. Short introduction of the company. GARO was founded in 1939, which means that we have been over 80 years in business. We develop and manufacturing innovative products and turnkey solutions for the electrical installation markets. We divide our business into two business areas: Sweden, which consists of our Swedish operations; and Other Markets, which cover our business in Norway, Ireland, Finland, Poland and our newly established company in the U.K. We have production on four sites, 2 in Gnosjö in Sweden, where we also have our head office; one in Värnamo in Sweden and the fourth in Szczecin in Poland, and we are approximately 400 employees 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 6 months this year compared to the same period last year. Our largest product area, Electrical Distribution Products, which contributes to almost half of our revenues, where we saw a small decrease in the quarter, with Sweden showing a stable development, while Other Markets decreased due to the pandemic. Sales within E-mobility accounted for 25% of the total sales, which is up from 22% last year. E-mobility showed a good development in Sweden, while Other Markets were more or less at the same level of last year due to the COVID-19 situation. Our product area Project sales were stable in the quarter and accounted for 22% of the sales. And our fourth area, temporary power, decreased and now constitutes for 6% of our business, down 1 percentage point compared to last year. Next slide, please. Operational highlights. Sweden was stable in the quarter, while the lockdown measures had a negative impact on sales in Other Markets, and particularly, during April and May, which lead lower sales in the business area. Vacationing at home during the pandemic contributes to strong sales of recreational products used to measure, control and electrify marinas and camping sites. We also saw a good demand for our newly cable cabinet within the Project business with delivery starting this year. The E-mobility in Sweden increased sales by more than 30%, driven to a large extent by sales of our wallboxes. And in May, GARO strengthening its offering by acquiring 70% of the shares of EV Charge Partner, a company active with service and support within E-mobility. GARO can now offer a complete solution to the market with E-mobility products, power supply and service and support. Next slide, please. Recreational products and cable cabinets. Vacationing at home with an RV or boat has boosted the demand for recreational products used for measuring, controlling and providing electricity to camping sites and marinas. This is an area where GARO is a market-leading provider. New cable cabinets were launched in the first quarter and delivery during the second quarter were good. These were developed to meet the market demand for environmentally friendly, robust and user-friendly cabinet. Here we can see clear synergies between the product area, Project and E-mobility. Next slide, please. Product development. In the first quarter this year, we launched our own fast charger named Althea for the European market. The charger is developed in-house and stands out in terms of user friendliness, reliability and durability and can be used to charge all electrical vehicles on the market. We have also used environmentally friendly material, for example, the casing is made of a material called Magnelis. The design of our charger, wallbox and charging station are similar to fit into the GARO range. This gives the customer a complete product solution. The initial response from customers have been positive and deliveries is planned to start during the third quarter of this year. In the beginning of 2020, we launched the new box with 2 outlets, the Twin Box. The product makes our product range even more complete and become 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. A built-in smart master card for wireless connection to the property's network makes it easy to control the charger via the smartphone or computer. Next slide, please. Sustainability. Sustainability is important for GARO and our stakeholders. We have chosen to focus on 7 of [ SM's ] Global Goals where we believe GARO can make a difference. You can see on the slide, which 7 goals that we have been chosen. Number 7, 8, 10, 11, 12, 13 and 16. As a market-leading developer of charging infrastructure for electrical cars industry, we are in the front line of enabling the development towards fossil-free society. Material selection is a focus area in our product development. Worth highlighting is that many of our newly developed products have been built with more environmentally friendly corrosion-resistant material, Magnelis. Now over to you, Helena. Next slide, please.

[Helena Claesson, Chief Financial Officer]

Thank you, Patrik. I would like to start with some financial highlights from the second quarter of the year. Despite COVID-19 and its effects on demand in many of our markets, sales have been fairly stable during the quarter, down by 4% in the group and amounting to SEK 238 million. Operating margins came out strongly at 12.7% and up from 9.7% in the same quarter last year. This was, among others as a result of a positive product mix, lower sales costs and higher efficiency in production. We have also in the quarter seen a positive currency effect in operating margin of SEK 5.9 million from a shortfall in March of the SEK and the NOK rates towards the euro. Since April, these currencies have rebounded back. At the same time, as we hedged about 70% of our need of euro, the currency movements had a negative impact on our financials, amounting to SEK 3.3 million in the quarter. Also during this quarter, an efficiency program was carried out, affecting results negatively by SEK 2.3 million. Next slide, please. Now looking into net sales by product areas. Our largest product area, Electrical Distribution Products and our Project Business were stable in GARO Sweden, while in GARO Other Markets, those 2 product areas decreased by 19% combined. The main reason was the lockdown measures following the COVID-19. Temporary power continued to have slower sales in Sweden, but stable in Other Markets, even if it is on lower volume. The demand of E-mobility has recovered since the drop in March, and sales increased with 17% for the group compared to last year, where the majority of the growth in Q2 came in the GARO Sweden. Next slide, please. And now looking into the 2 business areas separately, starting with GARO Sweden. Net sales amounted to SEK 166 million in the quarter, which is an increase of 4% compared to the same quarter last year. Market for Electrical Distribution Products in Sweden was stable during the quarter and GARO's sales in this area as well as in the Project Business, were in line with the growth of the market. The quarter is a season for sales for the recreational product, power supply in marinas and camping sites, as Patrik mentioned before, and within project business, we have seen good sales of our new cable cabinet. Temporary power continued to be weak. E-Mobility had a growth of 31%, driven by the demand of wallboxes, and we also made our first delivery of the Twin Box. EBIT increased and margins improved to 11.2%. This was explained by positive currency movements, mainly affecting this business area, a positive product mix and lower sales cost. Also in this business area, here, we have the SEK 2.3 million as an effect of the efficiency program carried out this quarter. Next slide, please. Looking into GARO Other Markets, we saw a decrease of sales of 16% in the second quarter as a result of trade restrictions in different markets due to the COVID-19. In Ireland, for example, construction sites were closed for a number of weeks. Volumes were low in April and May, but improved towards the end of the quarter as the market started opening up again. Finland was the country in the business area with sales growth during the quarter compared to last year. This is explained by a broadening of our product offering. Operating profit increased and margins improved to 16.1%. This is due to positive product/price mix in Norway and improved efficiency in the Polish factory. Next slide, please. The COVID-19 virus and the restrictions to prevent the spread of the virus had a fairly limited impact on the sales in Sweden, but more so in Other Markets, where the authorities took more restrictive lockdown measures than in Sweden. Sales volume, as said before, were low in April and May, while we saw pickup in sales toward the end of the quarter as markets started to open -- opening up again. The sharp depreciation of the SEK and the NOK in relation to the euro rate led to significant exchange rate losses in the first quarter as a lot of our purchases are priced in euro. These losses have then rebounded back in the second quarter. Next slide, please. Looking a little bit into cash flow and balance. Cash flow from operating activities amounted to SEK 10 million compared to SEK 25 million last year, mainly due to lower account payables and higher working capital requirements. During the quarter, we have had investments, excluding the acquisition of EV Charge Partners, of about SEK 12 million, where approximately half of this is related to investments within product development. The acquisition of EV Charge Partners amounted to SEK 5.6 million for the 70% of the shares. There are possibilities to acquire the remaining 30% of the shares in a 2-step solution expiring in 2025. In connection to this, we also acquired the property of EV Charge Partner in Gnosjö for a price of SEK 5.3 million. We have a strong balance sheet with a net debt through June amounting to SEK 71 million, which is almost SEK 40 million lower than the same time last year, explained by the dividend for 2019 that was canceled in April this year as a precaution. We have an equity asset ratio of 56.2% and available liquidity, including overdraft facilities, of more than SEK 100 million. Now back to you, Patrik. Next slide, please.

[Patrik Andersson, President & CEO]

Thank you, Helena. Strong growth and development opportunities. Our strategy remains the same. The main driver of the growth will be organic growth. A successful product development has been and will continue to be the key of 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, which we announced May 15, to strengthen our offer in the E-mobility business. We are also looking at new geographic markets with a focus mainly on north part of Europe. Next slide, please. Outlook. So far, in the third quarter, we see a stable demand in Sweden and gradually yet cautious recovery in the Other Markets. On long-term, looking beyond the COVID-19 virus, our assessment of the core market conditions have not changed. However, great uncertainty prevails due to the COVID-19's long-term consequences on the economy. The market for the E-mobility is growing structurally, and we see a continuing strong trend with further expansion of the charging infrastructure in all markets. Thank you for listening. And now we are ready for questions.

[Operator]

[Operator Instructions] We have a question from Oskar Vikström of ABG.

[Oskar Vikström, Analyst]

Okay. Congratulations on a very good quarter. It's good to see the strong profitability. I just have a few questions. So starting off, could you just give some more details on this positive product mix that you're mentioning within the E-mobility segment, what sort of chargers or products and so forth?

[Patrik Andersson, President & CEO]

Yes. As you know, we have the wallboxes, we have the charging station, and we have the fast charger. And the mix of this, of course, was good in the quarter. We had DC chargers, and we had a lot of system in the wallbox. So in that combination, it was good for the E-mobility. And of course, with the recreational products we mentioned for the marinas and camping sites and also this new cable cabinet. So all this in combination was a good combination for the margins.

[Oskar Vikström, Analyst]

I understand. And the synergies between the cable cabinets and the E-mobility, is that -- it's more like selling synergies that you sell both together, bundled together? Or how should we view those synergies?

[Patrik Andersson, President & CEO]

When you are selling an E-mobility solution, for example, if we are selling 20 charging stations, you need to power supply them often with a cable cabinet that you mount in the ground, so with that said, we could offer the customer both the cabinet, the mobility products and also now the service and support. So this is a unique offer that we could hand over to the market.

[Oskar Vikström, Analyst]

Okay. And then secondly, so these lower selling costs, are they an effect purely of the sort of initiatives that you took earlier in the year? Or is it sort of related to COVID with less travel and so forth? And I guess my question is, are there any of these costs that you see coming back maybe in Q3, Q4? Or is this sort of a new level of selling costs?

[Patrik Andersson, President & CEO]

We can say, as you mentioned, we haven't traveled at the same level and you know all the exhibitions, for example, is put on hold. So we have had a lower cost. But of course, when the economy open up and so on, we will increase the cost, of course, but not at the same level as last year, but it will increase due to the market is opening up, yes. Of course, we need to meet the customers, we need to be on the exhibitions, and we need to be out on the market to have that growth that we will increase. So it will increase slowly, yes.

[Oskar Vikström, Analyst]

Okay. Great. And sort of -- if you tie these 2 questions together, looking now at Q3, maybe both the product mix, but also in terms of exhibitions and traveling and so forth, how have things been in the first 2 months here? Have they been sort of in line with what you saw in Q2 or?

[Patrik Andersson, President & CEO]

As we mentioned in the report, as we said, we see a stable demand in the Swedish market. And in the Other Markets, it's opening up. Norway and Ireland is opening up slowly, and it's harder in U.K., so to say. So we can't say more than that. It's opening up slowly and Sweden is demand good, still good.

[Oskar Vikström, Analyst]

I understand. And also, I guess, in terms of this positive effect from the currencies, we should expect them probably to also be positive in the third quarter here, I'm assuming, given the development of the Swedish krona or --?

[Helena Claesson, Chief Financial Officer]

It's Helena here. I would say that the change from March in Q1 due to the development of the currency in Q2 with a stable euro or a somewhat stable euro, we should not see as the currency fluctuations going forward as we have done in Q1 and Q2.

[Operator]

We now have a question from Kenneth Toll of Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

So I was a bit curious about this new Althea charger. Do you see higher demand for that charger than the old charger you -- the old fast charger you used to sell?

[Patrik Andersson, President & CEO]

Of course, now when we have the complete solution under the same brand GARO and the same design, and you have a lot of software synergies, of course, we think it will be in higher demand. And of course, when we see in Sweden, for example, today, we have a lot of hybrid cars you charge with the AC products. But more and more, when you see pure electrical cars, the demand for DC charging will increase. So of course, we think this is a really interesting area. Therefore, we launched this own development DC charger.

[Kenneth Toll Johansson, Financial Analyst]

Have you seen any gaps in demand that customers didn't want to buy the old product and are waiting for the new one, so to say, that has affected orders or sales for you?

[Patrik Andersson, President & CEO]

No. I can't say that. No.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And do you plan -- there are other powers in DC chargers, do you expect to broaden the range from the sort of 50 kilowatts to other rate -- other powers?

[Patrik Andersson, President & CEO]

Of course, we are looking at it all the time, but it's nothing that I can't announce at this moment. So this we are focusing fully on these 50-kilowatt DC chargers and nothing at the moment.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And then when you read the report of one of your competitors, Allison, they talk quite a lot about new incentive packages in several European countries, like Germany, U.K., France, Spain and so on, for more government support for investing in electrical vehicle chargers and so on. Is that something that you have seen as well? And what effect do you think to see from that?

[Patrik Andersson, President & CEO]

We can say we haven't seen the effect yet. But of course, we know this is a support, and we are fully aware of them. But of course, this type of support is always good for the market. So hopefully, we can see a positive effect of that, hopefully. But I can't say it will be that. But of course, this support is always good.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And if -- imagine if demand was very strong and you all of a sudden had, I don't know, say, 50% or 100% higher orders than you have right now, would you be able to cope with that from a production point of view?

[Patrik Andersson, President & CEO]

Of course, we are always looking at production capacity, especially in E-mobility, as you mentioned. Of course, we are ready for more volumes. But as you say, if they increased with 100% very quickly, of course, you will get some problem because you have to supply all the material, and we have to have the people in place, but we are ready for higher volumes. And we all -- we are prepared and our prognosis for more volumes. So we are not afraid for that. But of course, you need to act in the right time to not get into delivery problem, of course.

[Kenneth Toll Johansson, Financial Analyst]

Yes. So if you get a couple of months, say, then you will have time to expand production capacity and so on.

[Patrik Andersson, President & CEO]

Yes, correct.

[Operator]

We currently have no further questions. [Operator Instructions] We have no further questions. Patrik, back over to you.

[Patrik Andersson, President & CEO]

Thank you, everyone, for listening, and goodbye.

[Operator]

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