Garo AB

STO:GARO

Earnings Call Transcript 2022-Q3

[Operator]

Hello, everyone, and welcome to the GARO Interim Report for January to September 2022. My name is Seb, and I will be the operator for your call today. [Operator Instructions] I will now hand the floor to Patrik Andersson, CEO, to begin the call. Please go ahead.

[Patrik Andersson, executive]

Thank you, and welcome, everyone, to the presentation of GARO's report for the third quarter 2022. 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 start with an introduction. GARO is a company that develops and manufacture and sell innovative products and systems for electrical installation under own brand on the European markets. Developing products that are at the forefront has always been a significant effect of our success. Focus is on developing user-friendly and safe product with a modern design and a long service life. The market for electrical installation material and charging infrastructure is continuing to grow, and we foresee a positive long trend for GARO.

At the same time, there is increasing demand for products and solutions to achieve a fossil-free society in which growing number of players become aware of the environmental impact. This makes the sustainability aspect a crucial factor in the choice of product and service.

Next slide, please. GARO'S footprint. We have 2 business areas: GARO E-mobility, which consists of product area, E-mobility; and GARO Electrification, which include product areas Electrical distribution products, Project, Temporary Power. We have operations in Sweden, Norway, Ireland, Finland, Poland, and in the U.K., and we also sell to other European countries where we not have owned subsidies. We have production facilities on 4 sites: 2 in Gnosjo in Sweden, where we also have our head office; 1 in Varnamo in Sweden, and 1 in Szczecin in Poland.

As we have announced before that we are investing in capacity and production efficiency for the future. In Poland, we are building a new production and logistics facility of approximately 15,000 square meters, which is a considerable increase in capacity, primarily in the GARO E-mobility business, but also in the GARO Electrification. The facility is expected to be completed by summer 2023.

GARO will also expand operations in Sweden by relocating a significant part of the operations of GARO Electrification to a new facility, 10 kilometers from Gnosjo. The new facilities the leasing contracts starting end of the year, and the existing lease in Varnamo has been terminated, and a smaller industry property in Gnosjo will be divested, and we are approximately 520 employees in the group.

Next slide, please. In product area, E-mobility, we develop and market all type of charges for rechargeable vehicles. We have product and turnkey solutions for destination charges for all various places at home, at public places, working places and along the highway. To make the E-mobility business even more complete, we also offer service agreements to help our customer with yield service updates, et cetera. We believe it's important to make it easy for the user and make it possible to charge where the people live and work. This area accounted for 1/3 of the sales year-to-date.

Next slide, please. In the business area, Electrification, the largest product area is Electrical distribution products, consisting of approximately 3,500 products and turnkey solutions for the electrical installation markets. Example of products is components, safety switches, meter cabinets, outlet boxes, plugs and sockets, which are products used every day in different applications such in new building, renovation, marina, camping sites, industry, and E-mobility solutions, and contribute to 42% of the group sales year-to-date.

Our product area, Project, provides complete and customized solutions for all type of power supply for apartments, villa, industry, E-mobility solutions, accounted for 20% of the total sales.

Product area, Temporary Power, with a product portfolio consisting of temporary electricity, lightning, heating and charging. Products used on construction sites and in events accounted for 5% of the sales.

These 4 product areas make GARO's offer unique and easy for the customer. An example of this, is when the customer needs a charging solution with different charges from E-mobility, that they also need power supply from the project and safety and installation products from Electrical distribution products. These make it easy, simple and safe for the customer and end user.

Next slide, please. Product development has been important for GARO, and is the core of our operation, and thus a key driver for organic growth. At the same time of component shortage, the advantage of being in charge of the product development becomes evident. For example, we can redesign product depending on the availability of various components. It is also an advantage of being able to create software integration and test environmental to various back-ends and customers.

On fact to make us different is the broad product portfolio and strength within Electrification in general. We see clear synergy effects between these 2 business area; Electrification and E-mobility. Our pace of product development continue to be high, and we expect launching interesting new products within E-mobility, which I will talk about in the next slide.

Next slide, please. New generation charges, I am proud to say that we will launch a new product program and platform for destination charging with smart services by the end of November. The product range are built on a whole new platform and compressor services for use at home, in houses, apartments, commercial facilities as well in public places. Our ambitious is always to offer our customers the most safe product and solution within electrical vehicle charging. The new product range and service will make a big difference for the installers and users in several ways.

New technology is being introduced, and in the development of the product, high focus has been on safety standards and future service to make it easy for all stakeholders. This will be GARO's most important product launch ever, and we will present the product program and platform at London EV, the 29th of November, and December the 2nd in eCAR Expo in Gothenburg.

Next slide, please. Operational highlights. We start with electrification, and I'm pleased to say that our development within business area, Electrification, has been strong this year and sales growth of 11% in the quarter and 13% in the 9-month period year-to-date. With this growth rate, we have a clearly outgrowing underlying markets. New construction, the renovation sector and work to improve energy efficiency drove sales of almost all products group, and we saw a healthy increase in sales within product areas, Electrical distribution products, as well in Project business. We also saw good development on our market outside the Nordics with a sales increase of 12% in the quarter and more than 30% in the 9-month period year-to-date.

We go further on with GARO E-mobility. Sales of E-mobility products were in line with last year, which is an improvement compared to the last year, but still well below our ambitions. Demand in the -- is there, and our order intake remains strong. However, our production and capacity to deliver is negatively affected by lack of electrical components, and this is an industry-wide shortage. And as a consequence of long lead times and strong order intake, we have a very large order book by the end of the quarter.

Similar to the quarter -- earlier quarter this year, we saw a weaker development of home charger due to long lead times for hybrid and electrical cars, and we expect that this part of the market to recover in line with car manufacturers' lead time reducing. At the other hand, we see a strong demand in advanced system for public charging where the expansion of infrastructure for public charging is continuing.

We introduced a new charger for heavy vehicle during the second quarter and signed a frame agreement with a vehicle producer, and we start delivery during the third quarter as planned, and we have also seen an interest from several other customers.

Growth and profitability. As mentioned, the strong growth within Electrification more than offset weak sales within E-mobility. This demonstrates the strength in GARO's business model, with 2 business areas completing each other and create growth in challenging times.

Worth mentioning is the good sales growth we had outside the Nordics. It's pleasing to see that our development in U.K. continues to be positive, and we will continue to invest in our U.K. operation, both when it comes to facilities [ as ] well in organization.

Profitability in the quarter was lower due to volumes, so within E-mobility. However, we had a long-term view on these 2 strong business area, and have a large order book. We will continue to invest for long-term in sales, marketing and product development.

And now over to Helena for financial performance. Next slide, please.

[Helena Claesson, executive]

Thank you, Patrik. I would like to start by looking at the financial summary of the third quarter. Considering the challenges of sourcing material, overall, I think we have done a decent quarter with net sales amounting to SEK 317 million, corresponding to a growth of 8%, where weaker sales within GARO E-mobility has been compensated by good growth within GARO Electrification.

Operating margins for the quarter came in at 11.8%, giving us an EBIT of SEK 37 million, which is below the SEK 48 million in the profit for the same quarter last year. The reason for the lower result is less invoicing within GARO E-mobility. At the same time, we have continued our investments in market and organization, mainly within the business area, GARO E-mobility.

Operating profit for the period January to September came in at SEK 143 million compared to SEK 150 million for the same period last year. When doing a comparison between the years, one has to consider the negative currency effect of almost SEK 12 million in this year, compared to a positive currency effect of SEK 4 million last year, giving a difference between the years of SEK 15 million.

Net debt amounted to SEK 45 million compared to a net debt of SEK 28 million in the same quarter last year. Investments in the new facility in Poland is for the period January to September amounting to approximately SEK 18 million, where we, on a rolling basis, take up a credit facility in corresponding degree.

Next slide, please. And now let's look into the 2 new business areas separately, and we start with GARO E-mobility. Net sales amounted to SEK 92 million, which was more or less in line with the same quarter last year. Also in this quarter, the challenges of sourcing materials, mainly electrical components, has continued to negatively affect our production, and limited our possibilities for deliveries to customers. As of today, and as Patrik just mentioned, we have a large order book within this business area.

In Sweden, we have seen a weaker sales to wholesalers, partly due to the long lead times for electrical and hybrid cars. This is causing many end customers to postpone the purchases of home charges. EBIT amounted to SEK 0.4 million and operating margins in the quarter came in at 0.4% compared to 22% in the same quarter last year. Mainly, again, it is the lower sales volume that is behind the weaker results. But also, lower productivity and continued investments in sales and operations has led to the reduced profitability in the quarter. In other words, GARO is building an organization for growth within our E-mobility.

Next slide, please. And now looking into GARO Electrification. Net sales increased by 11% and sales amounted to SEK 225 million compared to SEK 203 million in the same quarter last year. High demand was seen in Electrical distribution products and in Project, both driven by new construction, renovation and energy efficiency. Sales of electrical distribution products varied depending on product growth. Sales of standard components, such as safety products and products for energy measurement and power stations, were particularly positive. These products are used in new production as well as similar renovation and energy efficiency of properties.

Noticeable this quarter was the continued sales of recreational products for controlling, measuring and power supplying marinas and camp sites. For this kind of products, the season is now coming to an end and is replaced by the sales of car heaters during the winter season. Project sales continue to grow.

In Sweden and in Ireland, sales was driven by new construction, renovation and energy efficiency of properties as well as the buildup of the charging infrastructure. In the U.K., you can say that the growth is more or less entirely driven by the buildup of the charging infrastructure. The trend of strong demand in combination with the need of a high delivery capacity for large and complex customer projects, is something that benefits GARO. Sales within Temporary Power was somewhat lower compared to the same quarter in 2021. However, 2021 is a difficult year for comparison as one single customer was then investing heavily.

Next slide, please. Now looking into cash flow and balance sheet. The cash flow from operating activities amounted to SEK 32 million in the quarter compared to SEK 52 million in the same quarter last year. This is a result of lower operating profit as well as higher need of working capital. Working capital requirements remained high, mainly in inventory of components. This is a result of tactical material purchases where GARO has secured material for upcoming product launches, such as the one Patrik just mentioned.

The high inventory value is also an effect of component shortages, where a large portion of components for pending orders remain in stock, waiting for a few missing parts to finalize production and make deliveries to customers.

In the quarter, we have had investments of SEK 21 million, of which SEK 7 million were related to product development. We have a strong balance sheet with a net debt position for September amounting to SEK 45 million. We have an equity asset ratio of 61.4% and available liquidity, including overdraft facilities of more than SEK 142 million.

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

[Patrik Andersson, executive]

Thank you, Helena, and we'll go further on with strong 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 continue to be a key to this growth. On top of this, we are always looking for potential acquisitions where we can add either new additional product areas or companies with an edge. We're also looking at new geographical markets with a focus mainly of the north part of Europe. And GARO's vision is to become the leading brand on its chosen markets.

Next slide, please. GARO's outlook. We start to look into the outlook on short term. The GARO Group's net sales for the fourth quarter will be in line, or just below the year earlier period. Of all, GARO E-mobility has challenging competitive figures compared for the fourth quarter 2021, but the main issue is lack of critical electrical components. As I mentioned earlier, we have a large order book, but the hamper delivery capacity within E-mobility is compensated by growth within GARO Electrification.

On long term, housing production remains at a high level, although products of new houses are expected to slow down during the second half of 2023 in, for example, Sweden and other markets, but at the other hand, increasing building activities on Ireland. Demand for commercial and public real estate is expected to remain good, also renovation activities, investment into energy efficiency, and Electrification in general are expected to remain at the high levels.

To meet market demand, we continue to invest in production efficiency and capacity in both Sweden, that we relocate Electrification from 3 to 1 facility. And in Poland, we are investing in a new production and logistics facility which will be finalized summer 2023.

We continue to invest within E-mobility for improving our market presence and to strengthen the organization. This, we will, to a high degree, due to enable future expansion outside the Nordic countries. To repeat also, I'm very pleased that our significant product development efforts will lead to the launch of our new generation products within E-mobility at the end of this month. With these products and services launches, we will future strengthen our position within E-mobility.

Next slide, please. And thank you for listening, everyone, and we are ready for questions.

[Operator]

[Operator Instructions] Our first question today is from [indiscernible]from ABG.

[Unknown Analyst]

So my first question is about the component shortage. Could you tell me how much was sales held back in Q3 due to the component shortage?

[Patrik Andersson, executive]

I can't quantify that exactly. But of course, it held our sales back. We had a nice growth if we have had the right components, but I can't quantify that in numbers. I'm sorry for that.

[Unknown Analyst]

But could you tell me how are they -- how are you looking at the component shortage going into 2023?

[Patrik Andersson, executive]

As we mentioned in the report here, we can see that we will have some lack of components, of course, during the last quarter here, in quarter 4 in 2022. And we will also see that, of course, we will have some lack of components also in the beginning, but then also we will start to ramp up our new platform, as we mentioned. But of course, in the beginning, it will be some lack of components also. But we're also [ solving ] many things.

Today, we have lack of components -- electronic components. We have [ solved ] a lot of other components, so to say, in Electrification, but it is still some components in the E-mobility business. So we will see it during quarter 4 and maybe in the beginning of next year also.

[Unknown Analyst]

So my final question is, is it possible to discuss the order backlog in E-mobility? How much larger than normal is the backlog? And is there a potential for growth, both in H1 '23 as the backlog is converted to sales?

[Patrik Andersson, executive]

Yes. The order book is much higher due to normal order book, so to say. So -- but we don't quantify the order book, but this is much higher. And of course, if we can get the components we are missing, it could be some boosted quarter, of course.

But I can't say at this time when this will happen, but we have, and as you mentioned, a large order book, much higher than in normal times.

[Operator]

Our next question is from Dennis Toll (sic) [ Kenneth Toll ] from Carnegie.

[Kenneth Johansson, analyst]

It's Kenneth here. It's probably me. I have some questions about the new chargers. If you can tell us more there a little bit. What's the main things there? Will they be easier to produce, to assemble, when you introduce them? Will that help your component shortage situation? Will they be easier to install for the electricians? Will they have more functionality?

[Patrik Andersson, executive]

We can say, of course, it will be in many several ways. If you start with the production, of course, this platform will be much easier for us to assemble. But also, as you mentioned, for the installer, it will be really nice to install these products, and easy and quick and safe, but also for the owner or the user. So we have the whole -- all stakeholders. We see a totally new platform and now the use of this product. So a lot of improvements.

And as we mentioned this season -- and not just the charger, this is a new platform, as you mentioned, with a lot of functionalities, but also a future platform that we can add on new functionality that doesn't exist today, so to say. So we have a future safe platform that we can add on a lot of functionality coming -- in the coming years, and that is extremely important for the customer and end user to feel that. And we have also put in a lot of effort in safety, because -- I have mentioned it before, now you should charge your car at your home or apartment. It's really important that this is in a safe way. And here GARO has a lot of experience, and we have put in a lot of effort in this to have the most safe charger in the markets.

[Kenneth Johansson, analyst]

So when do you expect to start deliveries? You said that you are expanding the Polish plant and will manufacture a lot of those there? Is it more mid next year? Or is it second quarter or something?

[Patrik Andersson, executive]

We will start to deliver in small quantities in end of quarter 1, and then we will ramp up from there.

[Kenneth Johansson, analyst]

And also, will you -- in the beginning, will you produce the new chargers in parallel with the existing chargers? Or will you sort of make a clear cut between them?

[Patrik Andersson, executive]

No, we will not make a clear cut. We will have a phase in and a phase out plan, which means that they will have an overlap over time these 2 chargers.

[Kenneth Johansson, analyst]

And the new chargers, they are prepared for vehicle to grid solutions?

[Patrik Andersson, executive]

The functionality in -- all functions, we will tell you at the launch in 29th of November. So the more detailed information will come there. So I'm waiting for that moment. Sorry for that, Kenneth.

[Kenneth Johansson, analyst]

Yes. No problem. You have to save something. Also, now that you have started to deliver chargers to this heavy vehicle manufacturer, can you tell us a bit more? Is it chargers that this vehicle manufacturer would use themselves in their own operations? Or will they also sell those chargers to buyers of the products? Or can you tell us a bit more about the potential there, please?

[Patrik Andersson, executive]

The potential there is that the producer here will -- when you buy this truck, you will have the charger delivered with the truck, so to say. So they will give all the chargers at the customers' parking slots, so to say, but of course, will also be installed at production sites, but mostly at the truck customers, so to say. It will come along with the delivery of the truck.

[Kenneth Johansson, analyst]

And then also, if I remember correctly, for many of the contracts you have, you changed prices in the middle of the year and in the beginning of the year with the big distributors you had. And in the beginning of -- sorry, in the middle of 2022, you increased prices quite a bit since there were component prices going up and so on. But prices from January 1st now, do you see a similar high price increase from January 1st?

[Patrik Andersson, executive]

No. Of course, we see some price increases, but that's in a lower stage, so to say, because we can see on several materials it is stabilized. It will increase some in electronic components still, but many of raw materials is stabilizing. So we really not see so high increases in prices in the markets.

[Operator]

[Operator Instructions] We have no other questions on the call. So I'll hand the floor back to Patrik.

[Patrik Andersson, executive]

Thank you, everyone, for listening in, and have a great day. Bye.