Garo AB

STO:GARO

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the GARO Interim Report April-June 2024 Conference Call. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Patrik Andersson, CEO. Please go ahead.

[Patrik Andersson, executive]

Thank you, and welcome, everyone, to the presentation of GARO's Q2 report 2024. 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. We will, as usual, start with an introduction of the company. After that, the Q2 report and outlook. And in the end of the presentation, comments on the press release we launched this morning.

So let's start with an introduction. GARO is a company founded in 1939, that develops and manufacture and sell innovative products and systems for electrical installation under own brand in the European markets. Developing products that are in the forefront has always been a significant aspect of our success. Our focus is in developing user-friendly and safe product with a modern design and long service life. There is market demand for product and solutions to assist in establishing a fossil-free society, in which a growing number of players are becoming conscious to the sustainable 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 the 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, the U.K. and Germany, and the establishment of our sales company in Spain which we announced in the previous interim report is in progress as planned. We also sell in other European countries where we don't have owned subsidies. We have production facilities in Gnosjö and in Hillerstorp in Sweden, and Szczecin in Poland, where we moved into new production and logistics facilities in summer of 2023 to meet the European demand for E-mobility products in the coming years. And we are approximately 420 employees in the group. Next slide, please.

In the E-mobility product area, we develop and market all types of chargers for rechargeable vehicles. We have product and turnkey solutions for destination charging for various locations, including at home, in public, at workplaces 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 29% of the total 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 new building, renovation, marine, camping sites, e-mobility solutions, et cetera. This product area contributed 45% of the group sales in the quarter.

Our Project business products provide complete customer solutions for all types of power supplies for apartments, single-family homes, industry, e-mobility solutions, accounted for 23% of total sales. The Temporary Power area, which is a product portfolio consisting of temporary electricity, lightning, (sic) [ lighting ], heating and charging, products used on construction sites and events, accounted for 3% of the sales.

These 4 areas makes GARO's offering unique and easy for the customer. An example of this is when the customer requires charging solutions for different chargers and load balancing from E-mobility, and also requires power supply from the project business, as well as safety and installation products from the 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. And I would like to start by looking at the financial summary for the second quarter. Net sales amounted to SEK 306 million, a decrease of 21% compared to the same quarter last year. Sales within GARO Electrification decreased of 5% and the sales within GARO E-mobility showed a decrease in sales of 45%. The market for both business areas has remained cautious in the first half year of 2024.

The lower sales volumes in the quarter are mainly due to a [ cool ] market in E-mobility, where sales have been low in Sweden, but also to our international contracts. Operating profit for the quarter came in at negative SEK 4 million compared with SEK 18 million positive for the same quarter last year. And this is explained by the low sales volumes.

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

[Patrik Andersson, executive]

Thank you, and we go further on with the operational highlights, and let's start with GARO E-mobility. The prevailing market situation with macroeconomic turbulence continues to affect the purchasing patterns and investment decisions. And the recovery of the E-mobility market is proceeding slower than expected, particularly in Sweden. Moreover, some of our major contract customers still have product in inventory due to the current market climate.

To summarize the market situation, we believe that the market will slowly improve and, out to 2025, is more positive. However, in the second quarter, the group sales outside the Nordic region again posted growth, which support our continued investment in Europe on our recent establishment in Germany and Spain. As support in this investment in Germany, GARO has decided to obtain Eichrecht certification for our wallbox GARO Entity and the factory in Poland.

Our long-term vision for the market remains unchanged. We believe the transition to electrical vehicles and the need for destination charging and increasing activities noted during the quarter regarding inquiries for the expansion of charging station for projects, for example, commercial properties, tenant homes associations and public places.

We go further on GARO Electrification. A continuing weak economy climate impacted by macroeconomic factors has led to a low production rate in the market for construction of single-family homes and apartment in Sweden and in the rest of the Nordic region. This need is driven by new construction, renovation, energy [ efficiency ], which are turning to create a need for both standard and customized products in GARO Electrification. The weaker construction market in Sweden is expected to continue for the entire year of 2024, but is expected to recover gradually during 2025.

The interest rate cuts both from this plan, and this already initiated, are expected to have a positive impact on house construction and investment willingness, and will result in a gradual increase in demand for GARO Electrification products. Demand is relatively healthy for public sector, commercial and industry purposes, that market is connected to the electrification of society and green transition is assessed to be stable.

In Ireland, which is an important market for GARO, both the market of GARO performed -- sorry, something happened with the digital here, performed well in Q2. This trend was partly attributed to broad and product range that is able only to meet -- address a price-sensitive market, but also to create a possibility for improvement in margin. The Temporary Power product area, with power supply products for construction process, noted a growth of 12% compared to year earlier quarter.

We go further on to growth and profitability. The action program at GARO Electrification completed in autumn 2023 had a desired effect, and the business area was able to present an improved EBIT margin of 9.2% in the quarter. This will still be a focus area for the business area. In addition to already implement an efficient program in GARO E-mobility during Q1 and as a result of the current market situation, we will continue to adapt cost and other part of the organization to demand in various geographical markets. Within the business area, we're also placing key focus in reducing our inventory level.

The 3 product areas, including GARO Electrification together with GARO E-mobility, create synergy effects and provide a stable foundation for GARO operations which is particularly important during times of sluggish demand in some product area. Small and large complex projects all required products and service from several of our products area.

And now over to Helena. Next slide, please.

[Helena Claesson, executive]

Yes, and I will continue with the 2 business areas separately. And as usual, I will start with GARO E-mobility. Net sales amounted to SEK 84 million in the quarter, giving us, as I said, a negative growth of 45% compared to last year. Current market situation with macroeconomic uncertainty continues to affect purchasing behavior and investments, particularly in the Swedish market. Markets outside Sweden feel more positive, and we continue our investments in Germany and in Poland. .

When comparing with the same quarter last year, one should also keep in mind that the large deliveries of public chargers for international accounts were made in 2024, and this gives us challenging comparative numbers for the business area.

Sales in Sweden and the Nordic countries showed a negative growth of 66%, respectively, 48% in the quarter compared to last year. GARO is preliminary unaffected by the market developments in the Nordic markets as we have significant market shares there. At the same time, we noticed a growth of 3% for other markets in Europe. The French market, as an example, has shown great interest in GARO's 43 kilowatts charger for heavy vehicles, which resulted in orders during the quarter.

The operating profit for the quarter amounted to negative SEK 25 million, giving us an operating margin of negative 28%. The combination of low sales, weaker gross margin, production redundancies and an organization built for growth explains the negative results. Next slide, please.

And then we continue with GARO Electrification business area. Net sales amounted to SEK 222 million in the quarter, giving us a negative growth of 5% when comparing with the SEK 234 million for last year. The market for new constructions of single houses and apartments remain at a low production rate in Sweden and in the rest of the Nordic region due to the continued weak economy influenced by macroeconomic factors, as Patrik mentioned before. However, it is our opinion that the market has bottomed up. Positive signs such as lower inflation and falling interest rate levels are expected to lead to a rebound in housing construction in 2025. During the quarter, we have received 2 large orders for engine heaters to be delivered to the north of Sweden in the coming Q3.

EBIT amounted to SEK 20 million compared with SEK 14 million in the same quarter last year, and this gives us an EBIT margin of 9%. The efficiency programs within the business area have had the desired effect, which can be noticed in the improved operating profit. Also in Ireland, an important market for GARO, both the market and GARO performed strongly during the second quarter. To summarize, one could say that the business area GARO Electrification has had a stable quarter, while GARO E-mobility continues to face challenging market conditions. Next slide, please.

And now over to the cash flow and balance sheet. Cash flow from operating activities before change in working capital amounted to negative SEK 2 million, and the cash flow from operating activities after change in working capital amounted to negative SEK 9 million. The tied-up capital in inventory increased net by SEK 12 million. And as Patrik mentioned, the high stock value is a focus area for management.

Furthermore, we have a deposit with a supplier for materials. At the end of the period, the deposit amounted to approximately SEK 44 million, and this includes an increase of SEK 5 million done in the quarter. Our net debt position amounted to SEK 293 million compared with SEK 309 million in the same quarter last year. We had an equity asset ratio of 49.6%, and available liquidity, including overdraft facilities, of SEK 65 million.

Now back to you, Patrik. Next slide, please.

[Patrik Andersson, executive]

Thank you, and we go further on with the outlook. The recovery of the E-mobility market is proceeding slower than expected, particularly in Sweden. We expect a lower growth in the E-mobility market in short term. Our long-term vision in the market remains unchanged. We anticipate a major transition to electrical vehicles, increasing the need for destination charging. The transition for fossil-free fuels as well energy efficiency system and service is crucial for achieving sustainable development goals.

The construction of new housing in the Nordic region has declined considerably on the last year and new production of single homes and apartments is expected to be weak through 2024. On the other hand, demand of other commercial and public construction, combined with renovation requirements and energy efficiency, remains favorable. Demand outside the Nordic region showed growth, which is supporting our investment in Germany and the ongoing establishment in Spain. To summarize, we believe that the market will gradually improve for both business areas and that outlook for 2025 is more positive. Next slide, please.

This morning, we press released that GARO has started a recruitment of a new CEO. This is a decision that the Board and I totally agree upon, and the reason for that is that GARO will need a new leadership for the coming phase, which will be growth-oriented and to capitalize on the investments made. During this time, I will remain as CEO until the replacement takes up the position, which is expected to start in the first quarter in 2025. Next slide, please.

Thank you for listening, everyone, and me and Helena is ready for questions.

[Operator]

[Operator Instructions] Our first question comes from Johan Skoglund at DNB Markets.

[Johan Skoglund, analyst]

I just have one short question. I noticed in your annual report that you have covenants tied to the working capital to sales ratio. Could you please elaborate a bit here? Is this tied to any specific initiatives or reducing inventories, for example, selling old chargers or something else? And the second part of the question could be if you perhaps could comment on what headroom you currently have to these covenants?

[Helena Claesson, executive]

We have a covenant, correct, of net working capital in relation to turnover in rolling 12 months and with a, so to say, measuring point now in June. GARO at that time was in breach of that KPI, but we had a waiver, so yes. And yes -- no, nothing further.

[Johan Skoglund, analyst]

Okay, good. Okay. No, just curious if it's tied to an initiative, for example, are you selling out the old chargers? Or what are your plans on kind of meeting those covenants?

[Helena Claesson, executive]

This is just -- it's a combination of different actions, I would say. But the majority, I would say, we have 3 things to work with, as you say, it's the stock levels and then we have payables and receivables, and we are focusing on all 3 of those. But with a declining sales as we've had, the relationship, so to say, becomes tougher. So we are a little bit, so to say, punished in the KPI due to the -- not so much the net working capital as such, but also in relationship to the weaker sales if you look back historically.

[Operator]

[Operator Instructions] Our next question comes from Anton Lund at Kepler Cheuvreux.

[Anton Lund, analyst]

Patrik and Helena, can you hear me?

[Patrik Andersson, executive]

Yes, we can hear you.

[Anton Lund, analyst]

Perfect. So one question from my side. In Electrification, you mentioned 2 larger engine orders are expected to be delivered in Q3. Can you say anything about the size and the margin on those?

[Patrik Andersson, executive]

The size is around SEK 6 million, SEK 7 million for that, and I don't have exactly the margin of that business, to be honest. But that will be approximately in line with our other margins, so it's not a lower-margin business, so to say. So it's ordinary business for us.

[Anton Lund, analyst]

Perfect. And then you also mentioned that you continue to adapt your expenses within E-mobility. Do you have any additional cost savings program in mind? Or can you add any flavor on this?

[Patrik Andersson, executive]

As I mentioned in the presentation, we had a program in Q1 that we have closed, so to say. But of course, due to the market situation, we will look over at all different possibilities and -- to manage this in the best way. So we will look through different things to do to make this business profitable.

[Anton Lund, analyst]

Okay. And the previously mentioned cost program within E-mobility, the number of employees seem to be rather flat over quarters. Would you say that the cost savings turned out aligned with what you previously commented?

[Patrik Andersson, executive]

The cost saving program that we presented is in line with what we have presented, yes.

[Operator]

[Operator Instructions] Ladies and gentlemen, we have no further questions at this time. Let me hand over back to the management for any closing remarks.

[Patrik Andersson, executive]

Yes. Thank you, everyone, for listening to our quarterly report, and I wish you a great day. Bye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thanks for participating in the conference. You may now disconnect your lines. Goodbye.