Garo Aktiebolag (publ) (GARO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the GARO Interim Report January-September 2023 Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Mr. Patrik Andersson, CEO. Please go ahead.

Thank you, and welcome, everyone, to the presentation of GARO's report for quarter 3 2023. My name is Patrik Andersson, and I'm the CEO of GARO Group. 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, manufactures and sell innovative product 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 product with a modern design and long service life. There is market demand for product and solutions to assist the establish of a fossil-free society in which growing number of paying or becoming conscious of the environmental impact. This makes the sustainability aspect a crucial factor in the choice of product and service. Next slide, please. We have two business areas: GARO E-mobility, which consists of the E-mobility product area, and the GARO Electrification, which includes the Electrification Distribution Products, Project Business and Temporary Power. We have operations in Sweden, Norway, Ireland, Finland, Poland, U.K. and Germany. And we also sell into European countries where we don't have own subsidies. Our production facility in Gnosjö and Hillerstorp in Sweden, where we relocated during the first quarter this year, and in Szczecin in Poland, where we moved into new production and logistics facilities during this summer to meet the demand for E-mobility products in the coming years. We are approximately 500 employees in the group. Next slide, please. In the E-mobility product area, we develop and market all type of chargers for rechargeable vehicles. We have product and turnkey solutions for destination charging 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 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 location where people live and work. This area accounted for 32% of the total sales in the quarter. Next slide, please. The largest product area in the GARO Electrification business 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 buildings, renovation, marina, camping sites, industry and e-mobility solutions. This product area contributed 42% of the group sales in the quarter. Our Project Business provides complete and customized solutions for all types of power supply for apartments, single homes, industry and e-mobility solutions and accounted for 22% of the total sales. The Temporary Power product area, which has product portfolio consisting of temporary electricity, lighting, heating and charging as well a product used on construction sites and events, accounted for 4%. These four product areas makes GARO's offer unique and easy for the customer. An example of this is when the customer requires a charging solutions with different chargers for E-mobility, and also requires power supply for Projects as well as safety and installation products from Electrical Distribution Products. These make it easy and simple for the customer and end users. Now over to Helena for some financial updates. Next slide, please.

Thank you, Patrik. I would like to start by looking at the financial summary for the third quarter. Net sales amounted to SEK 304 million, a decrease of 4% compared to the same quarter last year. Sales within GARO Electrification decreased by 7% as a result of a weaker economy in the market in general, while GARO E-mobility recorded a modest increase in sales of 3%. Operating profit for the quarter came in at SEK 5 million compared to SEK 37 million for the same quarter last year. This gives us an operating margin for the quarter of 1.7%. The lower operating profit is explained by lower sales, combined with a low gross margin where weak Swedish krona against the euro has continued to negatively impact our material purchases. This, together with an organization built for growth, results in the lower operating profit. GARO always try to adjust price to its customers correspondingly, even though this might happen with a delay in time. The ongoing change of the sales organization in Norway resulted in additionally non-recurring costs of SEK 3 million in the quarter, now amounting to SEK 5 million for the period January to September. Our new production and logistics facility in Poland is completed, and we have relocated production to the new place. For the quarter, this has resulted in certain non-recurring costs as well as initially lower productivity. Material flows have been fine-tuned and volumes in production have gradually increased during the quarter. The process to sell off the old property has begun, where the market value for this property is estimated for SEK 45 million. Now over to you, Patrik, for some operational highlights. Next slide, please.

Thank you, Helena, and we'll go further on with operational highlights, and let's start with GARO E-mobility. The delivery start of GARO Entity Compact signaled the completion of the development project of the new platform for destination charging. However, in order to meet the market expectation, continually maintains and the development of future functionality will be required which is when GARO will have conscious development expenditure moving forward. In the market for home charging, which is currently price sensitive, high sales of volume in a broader market are required to achieve economies of scale and improved profitability. This is especially the case for GARO with our product program in large parts direct to the premium segments. During the quarter, GARO Entity Pro was third-party certified according to the international charging standard of Tüv Syd in Germany. This ensures that the product is quality assured and that is ahead for the current directive laws and standards in according with the stringent testing carried out during product developments. In July, GARO signed a frame agreement with E.ON Drive Infrastructure. The agreement covers the sales of product in public charging for countries in Europe and runs until 2027 with the option of an extension. Eichrecht choice of GARO has, as a supplier, confirms that products maintain at a high level of quality and safety, that we have good delivery capacity and have established operation with support and aftermarkets. Several of GARO charging stations for public charging were approved in according with the Eichrecht regulation are now available for sales for the public charging in Germany. This represents a milestone for GARO since the German market requires public charging stations to comply with the Eichrecht regulations. Lars Frieg was recruited as CEO of our new established market company in Germany. Lars most recent position were as Elli, part of Volkswagen Group, which is a supplier of energy charging infrastructure solutions. GARO Electrification, not surprisingly, demand for product related of the new construction of single homes and apartments is down sharply, particularly in the Nordic region. And forecast shows that it will continue to impact the rate of production of housing for years ahead. Continued demand has been noted for new construction in the commercial industrial sector in parallel with need of renovation and increase energy efficiency in properties. This market continues to energy efficiency and green transition is assessed to be stable. However, these volumes do not fully compensate the lower volumes in new construction. The Project Business, which is late in the construction cycle, continued to show good sales with a growth of 3% compared with the year earlier quarter. GARO is seeing a continued healthy demand with a high delivery capacity, combined with large and more complex projects and develop that benefits the company. However, the declining of new construction, in general, will impact the sales in the product area moving forward. With our two business areas that completes on another, we are meeting an increasing demand for complete solution for large charging installation and even for more complex projects from power supply to connect charging station. During the quarter, sales commenced in Sweden and Finland of new car heat, the GARO Entity Heat, which is built from the same platform as the wall box GARO Entity. Deliveries to customers commenced during the end of the quarter and are expected to lead to positive synergies effects between business area with the simply expandable concepts. We'll go further on with growth and profitability. In September, an action and efficiency program was launched, primarily in GARO Electrification, leading to approximately 45 redundancy in the group. In addition, all temporary position was also terminated. The efficiency program is expected to cut personnel expenses by SEK 30 million and also includes several measures to strengthen the gross margin. In addition, we have continued to focus considerable on cost control. The next price adjustment window will take in place in the first quarter 2024 when we will implement additional price increases in all of our markets. The supply of components is currently healthy and predictable in both business area, which means that we have essential return to delivery times in line with our internal objectives. Prices for majority of the raw materials have stabilized. Production in Poland were relocated in July to the new production and logistics facility, which is crucial to have the capacity to meet the demand on the European market for our long-term expansion. This has lead to some non-recurring relocation costs and lower initial productivity. Material flows were then fine tuned and production volume gradually ramped up. The divestment of the old facility has begun and is expected to be completed in the fourth quarter. The building is assessed to have a market value of SEK 45 million. We believe that GARO E-mobility will post a strong growth in the fourth quarter, both sequentially and year-on-year, while GARO Electrification is expected to grow sequentially, but report negative year-on-year growth. Overall, the group net sales for the first quarter are expected to be in line with the last year. And now over to Helena for financial performance. Next slide, please.

Yes. And I will now continue with the two business areas separately, starting with here, GARO E-mobility. Net sales amounted to SEK 94 million in the quarter, giving us a modest growth of 3% compared to last year's as said before. The restrained growth in the business was partly due to delayed starts of the delivery of GARO Entity Compact, where deliveries now had commenced in October. Also, some of our major contract customers have had high volumes of GARO's products in their inventory since summer. This is a result of our previous delivery problems and no lead times from GARO forcing our customers to ensure their delivery capacity to end customers. We believe that these inventory effects will essentially lessen at the end of the fourth quarter. Sales in Sweden were lower compared with the same quarter in 2022, while we saw good growth for both the Nordics and the other markets in Europe. In parallel, we are also noticing a doubling of sales within DC charging even if it is from low volumes. The demand for public charging is the main factor driving growth in the business area. Angola's sales to contract customers are increasing steadily and they are becoming a bigger part of our year-on-year of total sales. EBIT amounted to negative SEK 15 million where low sales, a weak gross margin and an organization for built for growth, explains the negative operating results. In addition, during the quarter, GARO has started campaign activities for the charging box GLB based on the previous platform where sales takes place at significantly lower volumes -- sorry, margins. Next slide, please. And now we will focus on GARO Electrification business area. Net sales declined with 7% and amounted to SEK 210 million compared to SEK 225 million in the same quarter last year. The demand for products related to house manufacturers, new construction was down sharply as a result of a weaker economy with rising interest rates. In general, the market has slowed down, and it is our opinion that the market now is more cautious with a reduced number of project starts for new housing in Sweden and also for the rest of the Nordic region. At the same time, we noticed continued demand for new construction in the public sector, commercial properties and for the industry. Also, there is a healthy 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 certain product groups. EBIT amounted to SEK 20 million compared to SEK 37 million in the same quarter last year, giving us an EBIT margin of 9.8%, down from 16.5% in the same quarter last year. The lower EBIT in the quarter is a result of lower sales combined with some product inefficiency and higher purchase prices. The change of the sales organization in Norway that began in the second quarter has led to additional non-recurring costs of SEK 3 million in the quarter and now amounts to SEK 5 million for the period of January to September. Next slide, please. Now looking into cash flow and balance sheet. The cash flow from operating activities amounted to SEK 41 million in the quarter compared to SEK 32 million in the same quarter last year. This is mainly explained by lower results in combination with changes within customer receivables and payables. Working capital tied up in component inventories remain high. We have invested SEK 14 million in the quarter, of which SEK 6 million were related to product development. The total investment for our new facility in Poland amounts to SEK 100 million. And as Patrik mentioned before, we have started the process of selling off the old property with a carrying amount of SEK 28 million corresponding borrowing of SEK 11 million. The facility is assessed to have a market value of 47 -- SEK 45 million. Our net debt position amounts to SEK 293 million compared with SEK 45 million in September last year, where GARO is utilizing a large part of its credit facilities right now. Our net debt position, excluding the effects of IFRS 16, that is lease contracts, amounted to SEK 220 million compared to SEK 8 million in the preceding year. During the quarter, the first dividend payment of SEK 20 million was distributed to the shareholders. The [ recipient ] and the remaining payment of another SEK 20 million will be paid now in November. We have an equity asset ratio of 49.4% and available liquidity, including overdraft facilities of SEK 108 million. Now back to you, Patrik. Next slide, please.

Thank you, Helena, and we'll go further on with GARO's outlook. In Sweden and the rest of the Nordic region, the construction of housing has declined and new production of single family homes and apartments is expected to be weak for several quarters moving forward. Demand for the commercial and public construction, combined with the renovation requirements and energy efficiency, remains favorable. As Helena previously mentioned, demand for charging station for larger projects and commercial properties, public places, and tenant owners association is high and is currently main growth driver in the GARO E-mobility business area. The current market situation with high interest rates means that the many households are postponing their investments, which affecting the sales of home chargers to private individuals primarily in Sweden. We believe that GARO E-mobility will post strong growth in the fourth quarter, both sequentially and year-on-year, while GARO Electrification is expected to grow sequentially, but not -- but report negative year-on-year growth. Overall, the group net sales for the fourth quarter are expected to be in line with last year. All in all, we have a positive long-term view on the market condition and the investment we have done, mainly driven by growth in charging infrastructure and its requirements for power supply. Next slide, please. Thank you for listening, everyone, and me and Helena is ready for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Johan Skoglund with DNB.

This is Johan from DNB. I have a few questions. So for my first one is related to Germany and E-mobility. Could you give us some more color how the push is coming along there following the new certification? And if you have any more color on the E.ON program, how big that would be in terms of volumes?

If we start with the German, as we mentioned, we have established the sales company. We have, on board, our CEO, which is an introduction as we speak. And we also signed a sales guy. So we will start the sales in Germany from that sales company in 1st of January. Of course, we are already doing sales to Germany, but not through the company these days and that's through retailers and the customers handling from Sweden. And when it comes to E.ON, we have, of course, estimated volumes, but no volumes that we can mention. And they're not -- we don't know exactly how many -- how big the volumes will be. We have some estimation in the contract. So I have nothing there to mention at this stage.

Okay. Okay. Understood -- okay. Yes, yes. Okay. So you also mentioned a cost control program, which you press released here a few months ago. And -- but you also mentioned measures to strengthen gross margins. I mean, outside of the personal expense cut, could you give us some examples of any measures being taken and how large effects you would expect them to provide?

We have done a lot of things. Of course, we have the cost control, but we also are working a lot with our suppliers to decrease the prices of components and raw material and that things. And we also increased the prices in the market and of course, production efficiency. And so that is the most part to increase the gross profit. And I don't know, Helena, if you have any numbers to mention there.

No, we do not communicate any numbers regarding the strengthening of gross margin, not yet at least. There is work ongoing.

But we have -- the personnel cost will be approximately around SEK 30 million here, Helena. Yes.

Yes, therefore, the people who will have to leave the position and also for the -- in combination with the ones on, so to say, temporary employment and consultants, yes. That's correct.

Okay. Understood. And then you made a number of updates to GARO Entity. What were the main reasons for this? Do you believe it was difficult to install? Did it lack some functionality? Or were there any other factors that affected this?

Sorry, I missed the beginning there, Johan. Repeat the question again, please.

Yes. So you made a number of updates to GARO Entity. I'm just curious about the main reasons for this. Difficult to install? Did it lack any functionality? Did the customers have any say? Or any other reasons that I can't think of right now?

Of course, when we implement a totally new technical platform, you often, in the beginning, made some quick updates. You get some support from the market. You put on some functionality. And of course, you have always some things in the beginning. You have to adjust quite quickly. So that was due to the plan, can I say. So no big hiccups in that place. We will continue to make these short updates all the time. And that could be also from an installation point of view. It can be from end user point of view. It can be from an installation point of view. So the update will come for the future also, so to say.

Okay. Got it. So no major hiccups then. That sounds good. And then what can you tell us about price hikes? You mentioned price hikes in all markets to come. Does this also mean both business areas?

Yes, it means both business area. Then, of course, it depends from which products. Some of the products, we can increase more and some, less. But yes, we will increase the prices in both business areas and in all countries.

Okay. Good. So finally, I just have a couple of questions on cash, which was quite okay in this quarter. So can we also expect continued working capital release in coming quarters from accounts receivables, payables, you mentioned a high inventory, et cetera?

I would say, yes, giving you -- we are working, and the cash release will come from mainly the high inventory value, I would say.

Okay. Good. And do you have any further CapEx plans now? Or are most of them in the rearview mirror?

Not as big as the one investment we'll now just highlight in Poland. But then, on the other hand, as we tried to explain in the report, there will always be, so to say, CapEx invested in the R&D and functionalities of GARO Entity and other products going forward, but not to the same volumes or the high amounts as of now.

Okay. Very good. That was all for me, and I appreciate your answers, and good luck with Q4.

[Operator Instructions] The next question is from Anton Lund with Kepler Cheuvreux.

I'm just wondering a little bit about your exposure to residential construction in the Nordics. Can you please provide any color on that?

You mean in percentage, you mean?

Yes. Yes.

I don't have the exact percentage. But of course, we have a volume to this type of production. But as we have seen in this type of market situation we have been in before, our product range, so to say, when it comes to inclusions and in components, we can switch it quite quickly to, as we mentioned, in renovation and energy efficiency and now also the expansion in the E-mobility. But of course, we will see a decline in this area. But I don't have an exactly percentage number in this. But of course, we will see some decline in this area, as we mentioned in the report, that's correct.

And then one more question. Competitors of yours have similar agreements with E.ON. I heard you say that you can't really provide any type of volumes there. But how meaningful do you think this agreement could be to you?

We have had long-term relationship with E.ON. And now we have signed this agreement with the E.ON, which is E.ON company. That is really important as we say, in several things because they are a very really skilled utility and company, which means that we can have a good development together. And it's also really important because they will build a lot of infrastructure in Europe. They will be a leader of that. So of course, it's really important for GARO to have this agreement, even if we are not have -- it's not exclusive for GARO, but it's really important we won of these agreements.

[Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn then back to Patrik Andersson, CEO, for any closing remarks.

So me and Helena, thank you, everyone, for listening, and wish you a good day.

Thank you.

Ladies and gentlemen, the conference has now completed.