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Edited Transcript of GARO.ST earnings conference call or presentation 22-Aug-19 7:30am GMT

Q2 2019 Garo AB Earnings Call

Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Garo AB earnings conference call or presentation Thursday, August 22, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Helena Claesson

Garo Aktiebolag (publ) - CFO

* Patrik Andersson

Garo Aktiebolag (publ) - President & CEO

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Conference Call Participants

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* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Oskar Vikström

ABG Sundal Collier Introduce - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the GARO interim report for April to June 2019. My name is Zed, and I'll be the operator on your call today. I will now hand over to Patrik Andersson to begin. Please go ahead, Patrik.

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [2]

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Thank you. Hey, hi and welcome, everyone, to this presentation of GARO's second quarter 2019.

My name is Patrik Andersson, and I'm the CEO of GARO. With me also today, I have Helena Claesson, our CFO, to present the results.

Next slide, please. I will start with a short introduction of the company. GARO develops and manufactures innovative products and turnkey solutions for the electrical installation markets. We divide our business into 2 business areas: Sweden, which consists our Swedish operations; and Other markets, which cover our business in Norway, Ireland, Finland and Poland. We have production in 3 different locations: in Gnosjö in Sweden, where we also have our head office; Värnamo in Sweden; and Szczecin in Poland. During the last years, we have invested more in our capacity in Poland, and it's today a very modern and efficient production site. And we're also approximately about 400 people in the group.

Next slide, please. Product areas. Our business consists of 4 product areas. And on this slide, you can see the different product areas' shares of the total sales in the first half of this year. As you can see, our largest product area is Electrical distribution products, which contributes to almost half of our revenues. And as from this year, E-mobility is now of the size being our second largest product area, together with the Project business, both of them with 22% of the turnover. In the second quarter, we are seeing some signs of a slowdown within temporary power. However, these -- however, sales within this product area has been volatile and somewhat slow over the past 12 months.

Next slide, please. Operational highlights in the second quarter. GARO's product area, E-mobility, continued to have a strong growth in all markets during the quarter. We can see increasing demand in all countries and of all charging products. We have also seen a good development within our largest business area, Electrical distribution products.

During the second quarter, we have launched 2 new products within temporary electricity. Portable heating and drying fans. These products are unique on the market, and -- as we have implemented software for more efficient use and to optimize energy consumption. This is all in line with GARO's strategy for digitalization. We have also launched a new ground-mounted cable cabinet, which open up new markets within the product areas in Electrical distribution products and Project business. Important here is also to notice that these cabinets also will be used when supplying electricity to our E-mobility solutions.

We have continued to invest in high and close market presence. In order to meet the growing demand for products within E-mobility, we have invested in market presence and sales organization during the quarter: for example, the world's largest industrial fair in Hannover; and the largest fair in the Nordic countries, Elfack, in Gothenburg. All of these market activities have taken place in the Nordic countries and the Northern Europe, which is in line with our strategy to grow in these regions. We are also proud to mention this quarter we had the privilege to celebrate GARO's 80-year anniversary.

Now over to Helena for more comments about our financial performance. Next slide, please.

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Helena Claesson, Garo Aktiebolag (publ) - CFO [3]

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Thank you, Patrik.

First, some financial highlights for our second quarter. Net sales in the quarter amounted to almost SEK 247 million, which is a growth of 15% compared to the same period last year. All of this came from organic growth and is mainly driven by increased sales in the product areas Electrical distribution products and E-mobility. EBIT amounted to SEK 24 million, giving us a margin of 9.7%, to be compared with 10.6% last year. The lower operating margin is a result of investments in higher market presence and sales organizations in order to meet the rapid growth within E-mobility. Gross margins were stable and in line with last year.

Next slide, please. Looking at the development of net sales and operating profit from the second quarter of 2017 and onwards, you can clearly see some variations between the quarters, but rolling 12 months shows a good trend of growth and over time both for sales and operating profits. The volatility between the quarters reflects the seasonal changes in the business of GARO, where we normally have a strong performance in the beginning and the end of the year, especially to Q2 and Q3 due to public holidays and summer vacation giving us less working days in those periods.

Next slide, please. As Patrik mentioned earlier, the business of GARO is divided into 2 segments: segment Sweden and segment Other markets. Here we can see the split of sales between both product areas and segments. In Electrical distribution products, where we have half of our business today, we can see a good growth of 17% in Sweden and 14% in Other markets. Sales in Project business and temporary power were overall slightly lower compared to last year. And finally, our product area E-mobility grew with approximately 60% in both segments Sweden and Other markets.

Next slide, please. Now looking into the 2 segments separately, starting with GARO Sweden. The underlying market in which GARO operates grew with approximately 3% during the second quarter and just above 4% for the first 6 months. For GARO, the net sales in segment Sweden amounts to SEK 160 million, which is an increase of 13% compared to the same quarter of 2018. It was driven by strong growth within our largest product area, Electrical distribution products and our fast-growing product area, E-mobility. EBIT amounted to almost SEK 15 million and gave us a margin of 9.2%, which is lower than in last year. In order to meet the increasing demand within E-mobility, we have invested in market presence and sales organizations during this quarter, which explains the lower margin.

Next slide, please. In our segment Other markets, net sales amounted to SEK 86 million, which is an increase of 20% compared to the second quarter last year. Also in this segment [we continue to have] good growth, and to a large extent it's driven by E-mobility, although from lower volumes compared to the segment Sweden. Operating profit increased by 19% to SEK 9 million, which gave us a margin of 10.6% for the quarter, which is more or less in line with the margins from last year.

Next slide, please, cash flow and balance sheet. Our cash flow from operating activities amounted to SEK 23 million in the quarter, to be compared with SEK 5.6 million in the same quarter last year. This is explained by stronger earnings combined with low increase of working capital. Cash flow from investing activities was almost SEK 8 million, of which about SEK 3 million was related to product development. Net debt through June 30 amounted to SEK 102 million. However, when adjusted for the new IFRS 16 lease regulation, the net debt amounted to 6 -- SEK 60.5 million.

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

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [4]

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Thank you, Helena.

Strong growth and development opportunities. Here our strategy remains the same. The main driver of the growth will be organic growth. A successful product development has been and will be the key of this growth. On top of this, we are always looking for potential acquisitions where we can add either new additional products, product areas or companies with an edge. Example of this in 2017 is when we acquired WEB-EL, bringing new and additional R&D knowledge to our company. It can also be acquisitions of other Nordic electrical companies in order to strength our market position, such as the acquisition of Emedius in 2017. We are also looking for new geographic markets, with a focus mainly on the northern parts of Europe.

Next slide, please, outlook. Demand for construction-related products in Sweden remains favorable but is expected to slow in 2019, in line with fewer construction starts. However, the renovation sector has been deemed stable. The trend in other markets served by GARO is expected to remain favorable. We see a strong trend for the E-mobility product area with further expansion of the charging infrastructure in all markets.

All in all, GARO has a positive view of the market condition mainly driven by the continued expansion of charging infrastructure.

Thank you for listening, and we are ready for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Oskar Vikström from ABG Sundal Collier.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [2]

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So I have a few questions regarding E-mobility. So these investments that were made in markets and the sales force and so forth to meet this demand, is that something that you think will continue, or is this like a onetime thing? Or should we expect that -- I mean as this rapid growth is happening, that margins will suffer?

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [3]

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As we said, we have done this, invested in sales organization, for the demand, but of course when this market is growing, but -- we have to invest in sales organization but not during every quarter. But now we have done some investments here, but it will -- invest small during the years but not every quarter. Of course, we have to fill up with more people but not every quarter.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [4]

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So you wouldn't say that this is sort of like a new level or something like that, it's more like a onetime thing? The weaker EBIT margin, I'm referring to.

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [5]

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Yes.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [6]

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Okay. And so just -- I was just curious. I know you don't give up the split between what's fast-charging, semi-fast and the sort of regular charging boxes, but has it -- has the margin anything to do with the mix of that? So product mix. I'm thinking maybe the more basic options are -- have a bit worse margin. It's nothing to do with that, or...

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [7]

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No, this has -- and we deal with that.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [8]

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And could you give -- is it possible to get a flavor of...

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [9]

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That's -- as we can see also the gross margin is stable, that -- yes.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [10]

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Yes, yes, yes. And so that -- but is it possible to get a flavor of sort what's on this segment? Of the entire E-mobility, what's fast-charging, semi-fast and regular boxes?

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [11]

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You mean how much of the segment is wall boxes and...

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [12]

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[Yes, yes. I mean]...

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [13]

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Most of the sales today is, as we say, in the AC side, which is the wall boxes and the public chargers is the mainly sales here.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [14]

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And when you say main, like what sort of figure are we talking, like 90%, 60%? Like sort of ballpark...

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [15]

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No, we don't split that figure. Sorry.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [16]

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Yes. All right. Yes. No worries. Let's -- No, no. No problem. All right. The other thing I was thinking is a bit about temporary electricity. So I know you mentioned before that you look at that as some sort of leading indicator internally. And we could see now also that the Project business was softer. Does that relate to distribution products as well? Or I mean -- or is it mainly a leading indicator for the Project business? Or would it be possible that maybe softening within the distribution side as well? I know you mentioned that you think the market is looking overall favorable, but...

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [17]

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Of course, it's an indicator for the temporary power. And as we say, for the Electrical distribution products, we see this renovation sector is stable. And it's also properties investing in products for energy, to reduce the energy consumption, which we have products for that use. So we are not so worried about that, but of course, with fewer construction starts, it will be a bit slowdown, but we are not so afraid of that overall in Electrical distribution products.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [18]

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I see. So what you're saying is basically, if new builds go down and so forth, you -- the customers sort of change towards more -- so the -- so it changes sort of the end customer eventually.

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [19]

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Yes.

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Oskar Vikström, ABG Sundal Collier Introduce - Analyst [20]

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I understand. And just one thing on the -- I don't know if you can give any comments about just the M&A strategy. And are you currently -- do you currently have a pipeline that you're looking into? And sort of what kind of these options of geographic or new products, et cetera, is it tilting towards? Or do you have like a more firm view on where you would like to take the company going forward in terms of acquisitions?

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [21]

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We can't go into that, but of course, as we say, we are always looking at geographic markets or interesting product areas. But we can't go further than that. Sorry.

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Operator [22]

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Next question comes from Kenneth Toll from Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [23]

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Yes, yes. So I was just curious about these new additions you do to the sales organization. What are those additions? Are they based in Sweden? Or have you started to open sales offices outside of your sort of old, established markets?

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [24]

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It's a mix. Of course, we have invested in more people, of course, in Sweden, but we have also invested in people in our other markets. So it's a mix between that.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [25]

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Okay. But last year, you reported that you started to sell those EV chargers in Germany, in U.K., in Poland and Slovenia and so on. Have started to -- have you started to recruit people locally there to set up sales offices and technical support and those things?

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [26]

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No. We are running that type of business from Sweden.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [27]

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Okay. I guess that as long as you have, call it, few market channels into those newer countries, that could be a good strategy, but if you want to expand more into those markets and sell through regular distributors or so on, then you may need more sales and marketing and technical support in that country. So do you have any plans to establish that?

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [28]

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As we said before to other question, of course, we are looking of all -- of these types of things, but we can't comment more around that. And sorry for that.

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Operator [29]

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(Operator Instructions) We have no further questions on the call, so I'll hand back to you, Patrik.

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Patrik Andersson, Garo Aktiebolag (publ) - President & CEO [30]

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Thank you, everyone, for listening to our presentation. And yes, thank you from me and Helena.

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Operator [31]

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Ladies and gentlemen, this concludes today's call. Thank you all for dialing, and you may now disconnect your lines.