Garo AB

STO:GARO

Earnings Call Transcript 2023-Q2

[Operator]

Hello, everyone, and welcome to the GARO Interim Report January-June 2023 Conference Call. My name is Bruno, and I'll be operating your call today. [Operator Instructions]

I will now hand over to your host, Patrik Andersson. Please go ahead.

[Patrik Andersson, executive]

Thank you, and welcome, everyone, to the presentation of GARO's Report for Quarter 2 2023. 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. Let's start with an introduction. GARO is a company founded in 1939 that develops and manufactures and sell innovative products and system for electrical installation and the own brand in the European markets. Developing products that are at the forefront has always been a significant aspect of our success. Our focus is on developing user-friendly and safe products with a modern design and a long service life. There is a market demand for product and solutions to assist in establishing a fossil-free society, in which a growing number of players are becoming conscious of their environmental impact. This makes the sustainability aspect a crucial factor in the choice of products and services.

Next slide, please. We have 2 business areas: GARO E-mobility, which consists of the E-mobility products and GARO Electrification, which including the electrical distribution products, project business and temporary power. We have operations in Sweden, Norway, Ireland, Finland, Poland and in the U.K. And we also sell in the European countries where we don't have -- own subsidies. We have also begun to establish operations in the German market, which we have previously reached through retailers, but we would now like to see a larger market footprint. We have production facilities in Gnosjö and Hillerstorp in Sweden and Szczecin in Poland, and we are approximately 550 employees in the group.

Next slide, please. In the E-mobility product area, we develop and market all types of charges for rechargeable vehicles. We have product and turnkey solutions for destination chargers for various locations, including at home, in public at working places and along the highway. To make the E-mobility business even more complete, we also offer a service agreement to assist our customers with annual service updates, et cetera. 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 36% of the total sales in the quarter.

Next slide, please. The largest product area in the GARO Electrification business is electrical distribution products, consisting 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 our product used daily in different applications, such as new building renovations, [ marine ] and camping sites industry and, of course, in E-mobility Solutions. This product area contributed to 38% of the group sales in the quarter. Our product business -- product area provides complete and customized solutions to all type of power supplies for apartments, senior family homes, industry and E-mobility solutions and accounted for 22% of the total sales. The temporary power product area, which has a product portfolio consisting of temporary electricity, lighting, heating and charging as well a product used on construction sites and events accounted for 4%.

These 4 products area make GARO's offer unique and easy for the customer. An example of this is when the customer requires charging solutions with different chargers for E-mobility, and also requires power supply for project business and as well as safety and installation products from electrical distribution products. These make 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 second quarter. Net sales amounted to SEK 386 million, giving us a growth of 10% compared to the same quarter last year. GARO E-mobility increased the sales with 47%. During the quarter, our production in this business area was gradually ramped up as a result of an improved material supply situation with fewer supply chain disruptions. Sales in GARO Electrification decreased with 5% as a result of a weaker economy in the market in general.

Operating profit for the quarter came in at SEK 18 million, compared to almost SEK 40 million for the same quarter last year. And this gives us an operating margin for the quarter of 4.7% compared to 11.3% last year. The higher sales in the quarter was offset by lower gross margins and some currency effects compared to the same quarter last year. During the first half of this year, in order to maintain long-term growth and profitability, we have implemented several changes in terms of premises, organization, and market activities.

And now back to you, Patrik, for some operational highlights. Next slide, please.

[Patrik Andersson, executive]

Thank you. And let's start with GARO E-mobility. After the end of the quarter, GARO signed a frame agreement with E.ON Drive Infrastructure, covering products and solutions for public charging in Europe. E.ON Drive Infrastructure choice of GARO as a supplier demonstrates the GARO's products maintain a high level of quality and safety and that we had good delivery capacity and established support and offer the market operations.

The safe aspect of product development has always been GARO's private focus. Therefore, GARO has elected to third-party certified GARO Entity Pro at Tüv Syd in Germany, to ensure that the product is quality assured to the current directives, laws and standards and passes the stringent testing carried out from during product developments. GARO Entity Pro has -- with this approval and the built-in safety solution, a unique wallbox. End users, customers and installation engineers can therefore be confident that the product delivers what it promise.

On the first of September, GARO Entity Compact will go on sales and delivers to the market will begin in the late September, early October. This is a smaller version of Entity and will mainly be used in single homes and outside apartments.

We go further with GARO Electrification. At the Nordic region's largest trade fair Elfack in Gothenburg, we presented the new product, GARO Entity Heat, a new car heater and GARO Entity Flex, a portable electrical car charger. Both products are based on the same platform as GARO Entity Pro and deliveries on GARO Entity Heat will begin in September.

Demand for products related to new construction has decreased primarily in Sweden and Norway. As a result of the financial situation, there is a weaker demand for new residential and major property projects. In parallel, demand for products related to the renovation and energy efficiency of building and production connected to the green transition is stable. We have said it before and say it again, our business model with 2 business areas completing each other is one of our core strengths, both in terms of product development, but also sales and of course, for the end user.

Growth and profitability. A major focus area will be cost control and improving gross margin to measure such increased production efficiency and price adjustments. Our new production and logistics facility in Poland was completed as planned and commenced operation in July. The production was therefore relocated from the existing facility, and we have started a process to sell the building, valued approximately to SEK 45 million.

And now over to Helena. Next slide, please.

[Helena Claesson, executive]

Yes, and I will then continue with the 2 business areas separately, starting with GARO E-mobility. Net sales amounted to SEK 152 million in the quarter, giving us a growth of 47% compared to last year. With greatly improved access to components, we have reduced our order backlog during the quarter and now has significantly shorter delivery times. In Sweden, the current market situation, with among other higher interest rates means that many households are now postponing their investments or for instance, [indiscernible] cost. This is affecting GARO's sales of home chargers to private individuals.

Outside of Sweden, we have noticed a strong sales trend in the Nordic region during the quarter with sales in Denmark more than doubling year-on-year. In general, the demand for charging stations for larger projects at commercial properties, public places, and tenant owner associations remain high, and this is now the current main driver for the growth in this business area. EBIT amounted to SEK 4.5 million, the highest sales volumes have been offset by a weaker gross margin. Compared to the same quarter last year, we have seen a different customer and product mix as well as higher purchase prices where the weaker Swedish krona has had a negative effect.

Next slide, please. And now we look into the business area of GARO Electrification. Net sales decreased with 5% and amounted to SEK 234 million compared to SEK 247 million last year. Not surprisingly, demand for products related to house manufacturers, new construction was down sharply as a result of a weaker economy revising interest rates. In general, the market has slowed down, and it is our opinion that the market is more cautious now with reduced number of project starts for new housing in Sweden and the rest of the Nordic region. At the same time, there is a good demand for products related to renovation and energy efficiency of buildings. The market connected to the green transition is also considered to be favorable, which is driving sales in several product groups.

Compared with last year, for the Nordic countries, including Sweden, sales dropped with 11% while we noticed growth of 18% in the European market outside the Nordics. As an example, Ireland is a market that showed a heavy development in terms of new housing construction during the quarter. Our project business coming in late in the construction cycle continued to show good sales with a growth of 10% compared to last year. EBIT amounted to SEK 14 million, giving us an EBIT margin of 5.8%, down from 14.8% last year. The lower EBIT in the quarter is the result of lower sales, combined with a weaker gross margin due to production inefficiency and higher purchase prices. Furthermore, in Norway, GARO has initiated a change in the sales organization and its sales process on the Norwegian market, which resulted in a one-off cost in the quarter.

Next slide, please. Cash flow from operating activities amounted to a negative SEK 3.5 million in the quarter compared to a positive of almost SEK 34 million in the same quarter last year. This is due to lower operating profit and a continued high need for working capital. Working capital tied up in component inventories remained high where GARO is now increasing their production volumes for GARO Entity. We have investments of SEK 26 million in the quarter, of which SEK 8 million were related to product development. For the first half of this year, our investments in the new facility in Poland amounted to almost SEK 54 million. And as Patrik said, the facility is now more or less finalized and we have used the summer vacation to relocate our new facility.

The total investments in our new facility in Poland amounts to almost SEK 100 million, and we are now starting the process of selling off existing facility. Our net debt position amounted to SEK 308 million compared with SEK 52 million in June last year, where GARO is now using a large part of its credit facilities. Our net debt position, excluding the effects of IFRS 16 amounts to SEK 236 million compared to SEK 17 million last year. In the quarter, the first dividend payment of SEK 20 million was distributed to the shareholders. The second and remaining payment of SEK 20 million will be paid out in November. We have an equity asset ratio of 49.4% and available liquidity, including overdraft facilities of SEK 80 million.

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

[Patrik Andersson, executive]

Thank you, Helena, and we'll go further with GARO's outlook. In Sweden and the rest of the Nordic region, the construction of housing has declined and new production of single homes and apartments is expected to be weak for several quarters moving forward. Demand for other commercial and public construction, combined with the renovation requirements and energy efficiency remains favorable. The market for charging infrastructure is growing structurally with rising numbers of rechargeable vehicles, and we see a continuing strong trend with further expansion of the charging infrastructure in the European markets.

As Helena previously mentioned, demand for charging stations for larger projects at commercial properties, public places and tenant-owned associations is high and it's currently the main growth driver in the GARO E-mobility business. The current market situation with higher interest rates means that many households are postponing their investments, which is affecting sales of home charger private individuals, primarily in Sweden. All in all, we have a positive long-term view on the market condition, mainly driven by growth in charging infrastructure and its recruitment for power supply.

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

[Operator]

[Operator Instructions] Our first question comes from [ Amof Soderholm ] from ABG.

[Unknown Analyst]

Just -- [ Amof Soderholm ] from ABG. Just a quick question on margins. Net sales in E-mobility grew by 50%, pretty strong development or almost 50%, but the margin just remained where it was a year ago or what are we missing here? Or are you delivering out of an order book where costs have sort of squeezed margins during the time of those orders being in order book? Or can you talk a little bit about the dynamics here and how we should expect the profitability and E-mobility to develop during the second half and into 2024?

[Helena Claesson, executive]

I think this is a little bit a mix of all the examples you mentioned. Yes, we have delivered from our order book where some of the price increases that we've done in the quarter has not sort of say, affected the already placed orders. So that is one of the reasons. Then also compared to last year, we see a different product customer mix, I should say, where we are more selling to, say, key accounts with a little bit in other kind of price strategy than compared to, for instance, wholesalers.

And then also, we have also seen a different product mix where -- well, the large part has been some of the products that are listed global in their gross margins as such. So it's a mix of all, really. And going forward, it's the change in products and customers can vary over time. So it's hard to predict where the volumes per quarter is. But I would say, with higher volumes coming, we should have an increased gross margin overall.

[Unknown Analyst]

Okay. And is it possible to somehow attribute a level of importance between the lagging price increases and the customer mix? What has been the most negative for you?

[Helena Claesson, executive]

I don't think I can elaborate on that, sorry.

[Operator]

Our next question comes from Johan Skoglund from DNB Markets.

[Johan Skoglund, analyst]

So Johan from DNB here. Just a quick question on the cash position. With the Poland investment now completed, what are your CapEx plans for the rest of the year? And do you have any other large investments on the horizon?

[Helena Claesson, executive]

The remaining cap expense for the year, well, we -- I think we should be more down to where we were before maybe SEK 30 million, SEK 40 million so to say, excluding -- yes, what we've done in the facility in Poland? We will always continue in product development, in R&D, but otherwise, we have a very modern and up and running, so to say, establishment, both in Poland and in Sweden, where there are no sort of a backlog of investments.

[Johan Skoglund, analyst]

Okay. And is it possible to quantify the impact of selling the old facility in Poland?

[Helena Claesson, executive]

One more time. I didn't hear you.

[Johan Skoglund, analyst]

Is it possible to quantify the size of the divestment of the old facilities in Poland? Or is that confidential?

[Helena Claesson, executive]

I would say that is confidential. It's worth SEK 45 million, approximately.

[Operator]

[Operator Instructions] Our next question comes from Kenneth Toll from Carnegie.

[Kenneth Johansson, analyst]

So a couple of questions. First on E-mobility. You said that in Q2, you were able to work off an order book, but when -- now that, that order book has been worked off, do you expect to see lower sales going forward? Or do you believe that the incoming orders are supporting good sales volumes also for coming quarters?

[Patrik Andersson, executive]

First of all, of course, we have lowered our order book, but we still have an order book. So we have still some delivery times to reduce, but we are now on a debt level and can deliver in a better time. So still order book. But of course, new orders is, of course, needed, and we are working on that, but we have some order book left still.

[Kenneth Johansson, analyst]

Okay. Great. Then you're talking about more focused on profitability, which is welcome, of course, and one part of that is pushing price increases. And do you think you will be able to do that now when demand is weakening in the residential construction area? Do you see more price pressure and more competition there?

[Patrik Andersson, executive]

Of course, in some product and product areas, you could increase prices. And of course, we will have also to work with the prices when we are -- supply products from both ends, so to say. So we need better prices from suppliers, but also push the prices to the market. And of course, when we have this new situation, we also need to push that to the market. So of course, we can change prices. We need to change prices. But some [indiscernible] Numbers we are in, as we mentioned in the report, we can do that with 2 windows, so we have to do that. And some customized product, [indiscernible] change prices whenever we need to, so to say. So we will work with that, both prices to the market but also material when we supply. So that is a...

[Kenneth Johansson, analyst]

And also the start-up of sales in Germany, where are you on that? Have you got your first order from the German sales office?

[Patrik Andersson, executive]

We can say like that, we are just at the moment recruiting employees. But of course, we are still already doing business in Germany because we have done that before. We have the subsidy, so to say. So we have good connection with German customers, but we are still working on the organization. So we will come back with that during quarter 3, so to say.

[Kenneth Johansson, analyst]

Great. And then on the balance sheet, we discussed already the plant divestment that you're planning and also that investments should go down. Do you think you will be able to lower working capital as well now that the move to the Polish plant is finalized and you're starting up production there?

[Helena Claesson, executive]

Yes. I would say that is absolutely, we will see lower working capital. It might not happen in the Q3, but when -- now where the bigger volumes of GARO Entity is up and running, we will start using all of those, so to say, strategic purchases we've done earlier. And the inventory of components should go down.

[Kenneth Johansson, analyst]

And the sort of lack or shortage of component, it's not really an issue anymore or...

[Helena Claesson, executive]

No, it's not.

[Operator]

We currently have no further questions. So I would like to hand over back to the management team for closing remarks.

[Patrik Andersson, executive]

Thank you, everyone, for listening for our report and have a nice day. Bye.

[Operator]

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