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

Hello, and welcome to the GARO year-end report 2023. My name is Alex. I'll be coordinating the call today. [Operator Instructions] I'll now hand it over to your host, Patrik Andersson, CEO, to begin. Please go ahead.

Thank you, and welcome, everyone, to the presentation of GARO's Quarter 4 and Full Year Report for 2023. My name is Patrik Andersson, and I'm the CEO of GARO. 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 products and system for electrical installation under own brand on 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 long service life. There is a market demand for product and solutions to assist the establishing fossil-free society in which growing number of players are becoming conscious of 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, U.K., and Germany, and we also sell in other European countries where we don't have own subsidies. We have production facilities in Gnosjö and Hillerstorp in Sweden and Szczecin in Poland, where we moved into new production logistics facilities summer 2023 to meet the European demand from E-mobility products in the coming years. And we are approximately 480 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 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 are also offering a service agreement to assist our customers with annual service or updates. 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 34% of the total sales in the quarter. Next slide, please. The largest product area in the GARO Electrification business is Electrical Distribution Products, which consist 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 in new buildings, renovations, marine, and camping sites, industry e-mobility solutions, et cetera. This area contributed for 41% of the group sales in the quarter. Our product (sic) [ project ] business provides complete and customized solutions for all type of power supply for apartments, single-family homes, industry e-mobility solutions and accounted for 22%. The temporary power product area, which are product portfolio consisting of temporary electricity, lightning, heating, and charging as well as a product used on construction sites and events accounted for 3%. These 4 product areas make GARO's offer unique and easy for the customer. An example of this is when the customer requires charging solutions with different charges and load balancing from e-mobility and also requires power supply from project business as well as safety and installation products for 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.

Thank you, Patrik. And I would like to start by looking at the financial summary for the fourth quarter. Net sales amounted to SEK 311 million, a decrease of 9% or SEK 30 million compared to the same quarter last year. Sales within GARO Electrification decreased by 17% as a result of the weaker economy in the market in general, while GARO E-mobility showed an increase in sales of 17%. The sales towards the end of the year was significantly lower than our expectations as the market was cautious in both business areas. Operating profit for the quarter came in more or less at breakeven compared to SEK 9 million in profit for the same quarter last year. The operating profit is explained by the lower sales and gross margin, together with an organization built for higher volumes. Also in the quarter, the profit was affected by a non-recurring write-down of SEK 10 million, SEK 15 million same quarter last year. As a result of phasing out inventory in connection to the change of technical platforms within GARO E-mobility. But then also the operating profit was affected by a non-recurring revenue for the sales of industrial properties of SEK 18 million. In the quarter, we have sold out our production facility in Poland for SEK 45 million as well as another smaller industrial property in Gnosjö for SEK 12 million. And these 2 together are the capital gains totaling SEK 18 million, and the divestments have reduced the interest-bearing net debt by SEK 57 million. And now back to you, Patrik. Next slide, please.

Thank you, Helena, and we'll go further on with operational highlights, and let's start with GARO E-mobility. The prevailing market situation with macroeconomic uncertainty has noticeable impact, purchasing patterns and investment decisions. As a result, market development in the business area is currently difficult to visualize with rapid changes in the demand. The delivery start of GARO Entity Compact signaled the completion of the development project of a new platform for destination charging. A number of new versions of the GARO Connect app were released from mid-November further simplifying the installation process for installation engineers and the management of operations for facilities owners. And GARO will continue to maintain the development for further features to meet the market expectation and maintains GARO Entity's uniqueness in the markets. In the market for home charging, which is currently price sensitive, high sales volume is in a broader market are required to achieve economic scale of profitability. This is especially the case for GARO with our Product program in a large part directly to our premium segment to meet the regulation and new features for rechargeable vehicles. We go further with GARO Electrification, as everyone is aware of, the number of construction starts for single-family homes and apartments has declined substantially in Sweden and in the Nordic region as a result of weaker economy with rising interest rates. Therefore, the demand for products related to house manufacturer was down sharply, and the forecast shows that we will continue to impact the production rates of house for a period ahead. In the market where GARO is active, there is a considerably underlying need for new housing and apartment and the long-term assessment in this market will gain new monument in the coming years when the financial situation has stabilized. In the public sector, we noted a continued demand for commercial properties, industries and the market connected to the green transition is also assessed to be stable, which is driving sale in certain product groups. However, this volume will not fully compensate for lower volumes in the new construction in the short term. In addition to the market for road and transport infrastructure development is growing, contributing to good demand for temporary electricity. With our 2 business area that completing 1 another, we are meeting an increasing demand for a complete solution for charging, installation and even for more complex projects from power supply and connected charging stations. Growth and profitability. In September, an action and an efficient program was launched, primarily in GARO Electrification. This program was carried out during the quarter. The efficiency program is expected to cut personnel expenses by SEK 30 million and also including several measurements to strengthen the gross margin. In addition, we have had continued to focus considerably on cost control. End of January, GARO announced that it was to adapt its organization in light of prevailing market condition and carry out an additional action and efficiency program, resulting in the reduction of about 50 employees. The action and efficiency program will prevail concern the GARO E-mobility area and is expected to reduce personnel expenses by SEK 25 million annually. This program is expected to begin to yield effect in the second quarter. We are also carrying out cost-saving measures and we have, of course, continued to focus considerably on cost control within the entire group. And now over to Helena. Next slide, please.

Yes, and I will then continue with the 2 business areas separately, and we start with the GARO E-mobility. Net sales amounted to SEK 94 million in the quarter, giving us the growth, as I said, of 17% compared to the last year. And as I said before, this is lower than our expectations. The lower sales towards the end of the year in the business area is a result of the cautious market primarily in Sweden. The private market has been cautious as a result of higher interest rates, the economic climate and the removal of the climate bonus. For GARO, it is primarily right now, the demand for public charging that drives the growth in the business area, where our sales to contract customers now take place at a slower pace than at the start in 2023. EBIT amounted to negative SEK 33 million in the quarter, where low sales, a weaker gross margin and an organization built for higher volumes explains the negative operating results. Also, the operating result has been negatively affected by SEK 10 million as a non-recurring cost for the write-down in inventory. Next slide, please. And then we move over to GARO Electrification. Net sales declined by 17% and amounted to SEK 217 million, compared to SEK 261 million in the same quarter last year. Sales growth here in the European markets outside the Nordic increased with 9% for the full year of 2023. Within the product group project an increased sales of distribution centers, cable cabinets, and switchgear that supplies power to different types of properties. E-mobility solutions, and conversions for energy efficiency was noticed in the quarter. EBIT amounted to SEK 33 million compared with SEK 30 million in the same quarter last year. This gives us with an EBIT margin of 15%, up from 11% in the same quarter last year. However, the operating profit has been positively affected by the SEK 18 million as a non-recurring revenue from capital gain for the sales of the 2 industrial properties in the quarter. Excluding this SEK 18 million, I would still say that the business area has a good profitability, given the current economic situation. Next slide, please. And now looking into cash flow and the balance a little bit. And despite a weaker quarter in terms of profitability, we have generated good cash flow from operating activities amounting to SEK 35 million compared to SEK 13 million in the same quarter last year. This is mainly explained by the changes within customer receivables and payables. GARO has made a deposit with supplier for place but not yet called orders for materials. The deposit amounts to SEK 39 million, of which SEK 19 million was placed during the fourth quarter. And I said before, in the quarter, we have divested a production facility in Poland of SEK 45 million and also a smaller industrial property in Gnosjö for SEK 12 million. The capital gains totaled SEK 18 million. The total investment for the quarter amounted to SEK 18 million, of which SEK 11 million were related to products development. Our net debt position amounted to SEK 222 million compared to SEK 144 million last year. Compared with the third quarter of this year, net debt has declined with SEK 70 million. During the quarter, the second dividend payment of SEK 20 million was distributed to the shareholders totaling SEK 40 million as a dividend for the operational year 2022. We had an equity asset ratio of 50.9% and available liquidity, including overdraft facilities of SEK 164 million by the end of 2023. And now back to you, Patrik. Next slide, please.

Thank you, Helena, and we'll go further on with the outlook. The current economic situation and high interest rates has significantly impacted customer purchasing behavior and company's willingness to invest for both business areas. Despite this, the transition to fossil-free fuels, and as well energy-efficiency systems and services is crucial to achieve the sustainable development goals, which benefits GARO since its offering is adapted to these current needs. Ahead of 2024, a caution market is expected in the GARO E-mobility business area, which is projected to return to a period of substantial growth in 2025. The demand for charging stations for larger projects in locations such for commercial properties, public places and tenant-owned associations is believed to be stable. The current market situation for new construction of single homes and apartments is expected to persist at least for the entire 2024 in Sweden and the Nordic region. But as I mentioned before, there is a considerable underlying need for new housing apartments and will gain in the coming years when the financial situation has stabilized. And the demand for new building in the public sector, commercial properties and for industry is still healthy. So all-in-all, we have a positive view on the long-term market condition, mainly driven by growth in the charging infrastructure and its requirements for power supply. Next slide, please. So thank you for listening, and me and Helena are ready for questions.

[Operator Instructions] Our first question for today comes from Sofia Sörling from Carnegie.

Sofia Sörling here from Carnegie. Can you hear me?

Yes, we can hear you.

Great. So my first question is related to the E-mobility segment. Could you give some more details around the development in E-mobility in each country for this segment?

Sorry?

Sorry, go ahead.

Yes. We can say we saw in the end of the quarter, the quarter 4, we saw a slowdown in mostly all of the countries, but of course, mostly in Sweden and the Nordic countries, we saw a good growth in Ireland and also in the U.K. But mostly in Sweden and in the Nordics we saw a slowdown at the end of the quarter. So that was the reason for lower volumes in there, that we have expected in the E-mobility area.

Okay. And -- is it any way related to the product offering in each country? Or would you say that is mainly related to the market condition?

I would say it's mostly to the market condition. Now as we mentioned in the presentation here, we have finalized our new platform. We released the Entity Pro in the quarter 2, 2023. And then in quarter 3, the GARO Entity Compact. So now we have a full range, and we have also that we announced a good range for the German market with some IFRS approved products. And we also have approved products in the U.K. market. So we have today a strong and good range. So I would say it was a downturn in the market who has -- was the most reason for that.

All right. And then -- and what would you say ahead then to actually turn around this profitability within the E-mobility? What needs to happen?

In the E-mobility, as we mentioned, we have now an efficiency program to adjust the organization. But of course, now it's -- we have volumes, because we still have an organization to grow, and we have a good belief in this market that it will grow. We will see a channel transition to fossil-free cars, but of course, it has not increased in that pace that we thought, but it's still a good market. So we just have to make this efficiency program and then focus on sales, and we know that we have a very strong and good program to destination charging. So it's a -- we can call it a bump in the road that we have to adjust and the volumes will come, but it's a bit delayed, so to say.

Okay. And then, this negative SEK 10 million due to the impairment of the inventory of this residual components in GARO E-mobility. How do you view the risk ahead that you need to make further impairments related to components? And maybe if you can give some details on like the lease and why you needed to actually make impairments on components?

We did the same exercise last year in 2022. We have -- we are switching from one, so to say, platform to another. And we mentioned, with that we have some technical windows, how long technicals can be used in the new platform. And then when we balance the volumes we have with our sales forecast, we are being cautious and we rather do as I said now, than hadn't -- yes. Right now, it looks like it's the technical window will not be sufficient so to say. And that as, today, we do not foresee any other actions similar to that going forward.

Okay. But it's not the case that you could actually use these components in products that you are continuing to sell like you previously said.

Yes.

We are...

We are using them.

We are using them in other as well, but still...

Okay. All right.

As being cautious and yes.

Okay. And I have a couple of final questions here on your financial situation. So net working capital was quite positive in the quarter. What was that mainly related to?

Customer receivables, I would say, and inventory not continuing to increase as it has done in the quarters in '22.

Yes. All right. And then my final question was, you mentioned this deposit for suppliers. Could you elaborate on that? What does that mean? Did you make a deposit or did your suppliers make a deposit?

We have done the deposits with our -- one of our main suppliers. And this is just an action based on the current contract and we have for the supplier to help them do the investments they need to do in order to.

Secure material.

Secure the material, we would like them to have.

Okay. All right. That was all for me.

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

I'm wondering about the budgeted CapEx for new business system. And how do you see the investment impacting your margin?

You mean our investments for 2024 and going forward?

Yes.

Yes. Well, I would say that GARO the last 3 years have done quite large investment, both in a new platform called GARO Entity and also the production facility in Poland. So I would say you would see much lower pace in the coming 1, 2 years, even if we -- I still need to say, we will continue to invest in product development, but not as at this high pace as we've done before. So maybe, what could it be? SEK 50 million, SEK 60 million on a yearly basis going forward?

All right. And regarding the most current efficiency program, do you expect a sequential cost reductions? Or do you see it all happening now once in Q3?

I would say you would as we will notice the first effect in Q2. And the full effect in more or less in Q3, I would say. Little bit depending on.

Okay. And then how does the current situation impact your intentions or time plan in Germany?

It doesn't really affect us at all. We have -- we started the business there last year and -- we've taken a first...

We are now ramping up the business, both in volumes and in organization. And as we have mentioned before, Germany is a very interesting country. And as I also mentioned on the question before here that we also have the product now IFRS approval, some of them. So yes, it's an interesting country and that is not affecting us for the German expansion. No.

Perfect. That's all for me.

At this time, we currently have no further questions. So I'll hand back to Patrik Andersson for any further remarks.

Thank you, everyone, for listening for our report, and I wish you a good day.

Thank you.

Thank you for joining today's call. You may now disconnect your lines.