Garo AB

STO:GARO

Earnings Call Transcript 2021-Q3

[Operator]

Hello, everyone, and welcome to the GARO Interim Report for January to September 2021. My name is Bethany, and I'll be coordinating this call for you today. [Operator Instructions] I will now hand the call over to Patrik Andersson, the CEO of GARO. Patrik, over to you, when you're ready.

[Patrik Andersson, President & CEO]

Thank you. Good morning, and welcome, everyone, to the presentation of GARO's third quarter 2021. 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. I will start with an introduction of the GARO Group. GARO was founded 1939, and we have since then developed and produced innovative products and turnkey solutions for the electrical installation markets. We divide our business into 2 business areas: Sweden, which consists of our Swedish operation, and it includes also sales to other European countries that we not have own subsidies; and GARO International, which cover our business in Norway, Ireland, Finland, Poland and in the U.K. We have production on 4 sites: 2 in Gnosjö in Sweden, where we also have our head office; 1 in Värnamo in Sweden; and the fourth site is Szczecin in Poland. And we're approximately 470 employees in the group. Next slide, please. GARO's business consists of 4 strong product areas. And on this slide, you can see the share of the total sales in the 9 months of 2021 compared to the same period last year. The largest product area, Electrical distribution products, consist of approximately 3,500 products and turnkey solutions that the installer are using every day in many different application, such in new building, renovation, industrial and, of course, in E-mobility solutions. And the product area contributes to 42% of the revenues. Our fastest-growing product area is E-mobility, which GARO develops and market all type of chargers and solutions for rechargeable vehicles. And this area accounted for 33% of the total sales, up from 26% in the year earlier. Our product area Project, which provides complete customer solutions for all types of power supply, accounted for 18% of the total sales. And the fourth product area, Temporary Power, with a product portfolio consisting of temporary electricity, lightning, heating products used on construction sites and the different event, accounted for 7% of the total sales. Next slide, please. Operational highlights. And we start with growth, profitability and cash flow. We are pleased to see a continued good growth in the third quarter. Sales increased by 19% with a good development in GARO Sweden as well in GARO International and overall, a positive development in all product categories. The good sales development also contributes to a good improvement in profitability and strong cash flow, which is important in these challenging times. And Helena will talk more about that later in the presentation. We go forward with strategy and challenges. During the quarter, we have had challenges with supply shortage of mainly electronic components. This has affected sales mainly in E-mobility, and the uncertainty regarding supplies prevails. But the organization have handled the situation in the first 9 month in a very good way, both which is strategic supply and redesigned to make it possible to grow with profitability. The demand for E-mobility products was strong and had never been as such a large order book within the product area as by end of the third quarter. A successful factor for GARO has and will always be product development. During the year, we have continued to develop new products with the aim to broaden our customer offering. This enables a holistic go-to-market strategy and make our offering within E-mobility, together with our other product areas, unique. And we will launch new exciting and innovative products during 2022. Another important factor is capacity. We have continued to invest during the quarter to expand production capacity, mainly in the product area, E-mobility, to be ready where the supply of materials begins to normalize and to meet the increasing demand in all markets. We go further on with E-mobility. We had a sales growth of 32% in E-mobility. And as I mentioned earlier, this could be even more if we had better access to many electronic components. E-mobility Sweden increased by 52% with a good demand across a whole product range. Sales for other European markets to contract customers, such as utility companies, automotive companies established in Europe, grew strongly by more than 300% during the quarter. E-mobility from GARO International decreased by 6%. Sales were strong in Finland, Ireland and in U.K. However, development was negatively affected by a weaker sales in Norway due to higher maturity, primarily within home chargers. We have addressed this by adapting our sales process to better suit the customers' demand in Norway for complete solutions. We see that the demand for commercial installation will continue to be strong, and GARO is well equipped to deliver on this as we have a broad product and service offering. And now over to Helena for the financial performance. The next slide, please.

[Helena Claesson, Chief Financial Officer]

Thank you, Patrik. And as usual, we start by looking at some financial highlights for the third quarter. As Patrik just mentioned, GARO has had a strong third quarter with a sales increase of 19% compared to the same quarter last year. The growth came entirely through organic growth with a slightly stronger growth within the business area GARO Sweden, 20%, compared to GARO International with a growth of 16%. The sales growth was seen within all our product areas, even though limited access to electrical components has somewhat hampered the sales in the quarter, mainly in the product area E-mobility, as Patrik just mentioned. Net sales amounted to SEK 294 million compared to SEK 247 million in the same quarter last year. And operating margins for the quarter came in at 16.5%, giving us an EBIT of almost SEK 49 million. The main reason for the strong EBIT was positive gain effect from higher sales volume and the favorable product mix. Net income for the quarter amounted to SEK 39 million, which is a strong improvement from the same quarter last year. Next slide, please. Looking into the 2 business areas separately, starting with GARO Sweden. Net sales amounted to SEK 290 million in the quarter, which is an increase of 20% compared to the same quarter last year. High demand was seen in all of our product areas, driven by new constructions, renovations and energy efficiency together with the expansion of the charging infrastructure. The sales within product area Electrical distribution products varied depending on product group. For standard components, measuring products and recreational products, the development was good, while sales of products to industry were slightly weaker. Temporary Power was [ soft ] with 41% where sales was driven by one large customer investing in new equipment. EBIT increased to SEK 34 million, and margins improved to 17.9% from the weak quarter last year. This is again explained by higher sales volume and favorable product mix. Next slide, please. Looking into the business area of GARO International. Sales amounted to SEK 103 million, which is an increase of 16% compared to the same quarter last year. Sales within Electrical distribution products increased by 14% with a good growth in Ireland, in Finland and the United Kingdom. Sales within the Project business increased by 75%, where we continue to have some interesting customer projects, mainly in the U.K. and Ireland, also to some extent driven by the charging infrastructure. Our production facility in Poland had a satisfying efficiency during the quarter despite limited sources of electrical components. EBIT amounted to SEK 14.5 million, and operating margins in the quarter came in at 14.2% compared to 16.4% in the same quarter last year. During this quarter, operating profit was affected by costs for marketing investments in Ireland and in U.K. as well as resource allocations in Poland, where GARO is expanding production and training staff for higher production capacity. Next slide, please. Now looking into our product area E-mobility separately. Sales within E-mobility amounted to SEK 90 million in the quarter, which is an increase of 32% for the group, with GARO Sweden growing by 52%, while GARO International had a negative growth of 6%. For GARO International, we can see good growth in U.K., in Ireland and Finland while sales in Norway has been weaker in the recent quarters. Thanks to other European markets through contract customers, such as energy companies and automotive companies established in Europe, grew strongly by more than 300% during this quarter. The demand continues to be high, and our order books were at record levels by the end of the period. Next slide, please. Now looking into cash flow and balance sheet. The cash flow from operating activities amounted to almost SEK 52 million compared SEK 2 million in the same quarter last year. This was explained by a higher EBITDA and a less need of working capital. However, GARO still has a high value in inventory due to tactical purchase of components. In the quarter, we have had investments of almost SEK 11 million, of which SEK 5 million were related to product development. We have a strong balance sheet with a net debt for June -- sorry, for September amounting to SEK 28 million. We had an equity asset ratio of 16.4% and available liquidity, including overdraft facilities, of SEK 147 million. Now back to you, Patrik. Next slide, please.

[Patrik Andersson, President & CEO]

Thank you, Helena. And sustainability is important to GARO and our stakeholders. We have chosen to focus on 6 of UN's global goals where we believe GARO can make a difference. You can see on this slide which goals that we have been chosen, and you can also see some example of the sustainable actions, such choice of material for the environmental, digitalization with aim to use energy on the best way, collaboration with suppliers, et cetera. Next slide, please. Growth and development opportunities. And here, our strategy remains the same. The main driver of 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're always looking for potential acquisitions where we can add either new additional product, product areas or companies with an edge. An example of this is the acquisition of EV Charge Partner last year to strengthen our E-mobility business. We're also looking at new geographical markets with a focus mainly in Europe. GARO's vision is to become the leading brand on its chosen markets. Next slide, please. Outlook. We assess the core market conditions have essential not changed, even though uncertainty prevails in society in regard to the pandemic's long-term consequences on the economy. The strong market recovery and growth has brought about certain challenges such as component shortage, and this uncertainty remains concerning access to electronic components. But as I mentioned before, in the first 9 months, GARO managed to handle this in a successful way. The market for charging infrastructure is growing structurally with rising number of rechargeable vehicles, and we see a continuing strong trend with further expansion of the charging infrastructure in all markets. Demand for construction-related products in Sweden, combined with the important renovation sector, is expected to remain stable. The trend in international markets served by GARO, aside from the pandemic, is expected to be similar. So all in all, GARO has a positive view of the long-term market condition, mainly driven by growth in charging infrastructure. Thank you for listening, and we are now ready for questions.

[Operator]

[Operator Instructions] We have a question from Karl Bokvist at ABG.

[Karl Bokvist, Analyst]

My first question is just on the near-term challenges here when it comes to supply chain situation. Just my first one is whether or not you've seen any changes during the quarter? Or now as of October, November, when it comes to -- if things have improved or become more challenging? And also if you could provide some insight into your regular lead times and what you think they are like now?

[Patrik Andersson, President & CEO]

When we come to the components, as I said, with supply, as I mentioned, we have handled this situation the first 9 month in a very successful way to -- both to get material, but also to redesign some electronic components to get more components to our production. So I will say it will be quite similar. And of course, we try to get more and more material. And also, as I mentioned, we have a record order book, which means that we have a bit longer lead time that we are used to, of course. But this is a focus area for the organization and GARO. And as I mentioned, we have handled this in a successful way. And hopefully, we also can do that during quarter 4.

[Karl Bokvist, Analyst]

Understood. And just to get some insight here, the components in question that you might see the most challenges related to, are they affecting any particular versions of your products or any particular customer categories within your businesses?

[Patrik Andersson, President & CEO]

No, we can't say that. It's electronic components. So it's -- you have it's, so to say, it's the most easy home charger or you have it in a, so to say, more advanced wallbox. So it's affecting the range, so to say, some more and less, of course. But it's the whole range, so to say.

[Karl Bokvist, Analyst]

Understood. And just a couple more, if I may. But just as you highlighted the market, excluding this bottleneck issues, continue to be very, very strong within E-mobility. I'm just a bit curious for what you've seen in light of the market growing very strongly, what you see on the pricing side when it comes to pricing dynamics among competitors and pricing ability to adjust prices and things like that?

[Patrik Andersson, President & CEO]

We can see that the price level, of course, is a bit different of the customer, so to say. And we have talked about that before also in some quarterly presentation that, of course, in the home segment, we think it will be more price pressure on the easiest wallbox, so to say, when you have less functionality. But then when you come to a more complete solution that GARO has a great offer with a broad range for both wallboxes and stations and DC chargers and service and support, we think the price level could be better. But if you only have some small niche, it, of course, can be quite price pressure. But we can't see that at the moment with our broad range, so to say.

[Karl Bokvist, Analyst]

Understood. And then just interesting to hear a bit about what you mentioned there when it comes to CapEx and investing in new production capacity. How do you think -- how should one think about it in terms of an absolute number in million figure or in relation to revenue? And for how long would that period will persist where you invest a bit more heavily? And then my follow-up is also just on product development. As of now, perhaps mainly in E-mobility, but what do you think are the sort of life cycles of a product generation now? I mean in how many years from now will you -- do you feel that you need to launch a new product to keep up with market expectations and maintaining your leadership?

[Patrik Andersson, President & CEO]

I just also answer on the latest question with the product there. I think, of course, these products could be used for many years. But of course, you have a lot of software changing. And that means a lot more information will be sent from the car and also much more information will be handled in the cloud, so to say. So I think it will be the oldest charging station, so to say, they will change them quite quickly because they need to upgrade some charging for new applications and functions in the future. So I think it's more software updates and things like that have more function because the cars will leave more and more information to the charger and charger can leave more information to the cloud. So I think the electronic and software will be more value in the future.

[Helena Claesson, Chief Financial Officer]

And Helena here. If I remember the other questions regarding the CapEx and investments, GARO has had a strategy of investing continuously over the years both when it comes to -- in R&D and equipment and production facilities. So I would say that we are on a good level to start with in all categories. We have had investments, if I look back, about SEK 45 million per year, I think. And as of September, I believe we are, rolling 12, more or less on the same levels also right now. But of course, in product development within R&D, we have -- we believe it's important to be in the front line when it comes to functionalities and meeting the market expectations within all our product areas. So we will continue, I would say, to have a similar or maybe slightly above the same CapEx as we've had recent years.

[Operator]

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

[Kenneth Toll Johansson, Financial Analyst]

Yes. So just on the component shortage, do you see any easening on that front? There have been some discussions that maybe Q3 was the worst quarter when it came to the semiconductor shortages and so on. So are you seeing any easening at all in the market? Or do you think it will be as tough for the next couple of quarters?

[Patrik Andersson, President & CEO]

Of course, it will -- I think as I mentioned in the presentation that we have succeed quite well during the 9 month that we have been working quite hard with the suppliers, of course, but also with this redesign to make it possible to change the components. And yes, maybe some better view. But I think we will continue with this work we are doing. And of course, the uncertainty prevails as we mentioned, but maybe some better view, so to say. But it's quite hard to predict, to say. But maybe some better situation, yes.

[Operator]

We have another question from Karl Bokvist at ABG.

[Karl Bokvist, Analyst]

My question is on the other sites outside of E-mobility. I believe you mentioned a bit of comments on the market situation on housing starts and everything like that. But just if you could provide us some comments on what you're seeing in both in housing in general. And there's been a bit of talks now with uncertainty related to cement shortage, how that will affect construction and infrastructure and so on.

[Patrik Andersson, President & CEO]

Yes. At the moment, we haven't been so affected of the cement, as you mentioned, and so on. We can see a quite nice growth in the Electrical distribution and Projects and Temporary Power, which is driven by new buildings and renovation and energy efficiency. And if you look at the new building and renovation sector in Sweden, for example, it's quite stable on a high level, so to say. We need to renovate. We need to invest in new buildings. So that sector is quite well during the future. And if we look to the international markets, it's quite similar to Sweden. And Norway is stable growth and also in Finland. We can see an increasing demand for housing in Ireland, for example, and also in the U.K. So that sector is stable or slightly growth. So that will drive our growth in Electrical Distribution, Projects and Temporary Power and energy efficiency, so to say.

[Karl Bokvist, Analyst]

And a follow-up on that. Have you've seen any issues related to installation capacity in terms of sickness, leave and things like that?

[Patrik Andersson, President & CEO]

You mean in our production or the installers installing our products?

[Karl Bokvist, Analyst]

Well, actually both, in general, if you've seen any in terms -- any kind of bottlenecks related to the entire installation chain.

[Patrik Andersson, President & CEO]

No, not so much, so to say. Of course, the construction time maybe has been a bit longer than we are used to because of maybe some lack of material with the woods and some metal and isolation for construction sites. But it has not affected us so much at this stage. So I can't say that have affected us at all.

[Operator]

We don't have any further questions in the queue. So I hand it back to you for any closing remarks.

[Patrik Andersson, President & CEO]

Thank you, everyone, for listening, and have a good day.

[Operator]

This concludes today's conference call. Thank you for joining. You may now disconnect your line.