Ladies and gentlemen, welcome to the GARO Q3 results call. My name is Laura, and I'll be coordinating your call today. I will now hand over to your host, Carl-Johan Dalin, CEO, to begin. Carl-Johan, please go ahead.
Thank you. Good morning, everyone. My name is Carl-Johan Dalin. I'm the CEO of GARO, and together with me, I have Rickard Blomqvist, acting CFO of GARO. Together, we will give the presentation of our Q3 results for 2018. And we will let you know when we are changing pages as well. Moving from the front to the first page, and a brief introduction to GARO. GARO is a company that designs, develops, and manufactures innovative products and turnkey solutions for the electric installation market. We have a quite broad product assortment. You will see that, a bit more of that later on. And are market leading within many product areas. Our operations is in Sweden, Norway, Finland, Ireland, Northern Ireland, and Poland.
Our production units are located in Sweden, in Gnosjö and Värnamo, and also in Szczecin, in Poland. The HQ is in Gnosjö, Sweden. We divide our business, as you will see, into GARO Sweden and GARO other markets. And currently, the group employs 403 people in total. Moving on to the next page and the financial summary of the quarter. We summarized a quarter where we have sales growth of 16%, mainly driven by organic growth. If you look at this growth, it's EV charging is a strong driver in this, especially in Sweden, but also the construction related areas in other markets have grown in a nice way, while in Sweden we maintain a high level in the construction related areas.
The EBIT increased 35%, delivered +26% in Sweden and 54% from other markets. The operating margin resulted in 13.4%, which is an improvement from previous year of 11.5%, which Rickard will come back to a little bit later on as well. And the operating cash flow 29.5 million SEK, to be compared with 8.5 million SEK from previous year. Next page, some operational highlights. The EV charging is that we are seeing a strong growth in all markets. Some of the markets are still small, but the growth rate is high, and the interest of the product area is continuously increasing. So we can see that there is an increasing demand for EV charging and more advanced EV chargers.
We also want to highlight the deliveries we made of high-powered DC chargers to Volvo Cars test operations. We have also seen during the quarter a very strong development in other markets, where we have taken market positions and also strengthened the organization all in line with our strategy. Also during this quarter, we have launched several new products really relating to the DNA and the core business of GARO to be an innovative company. We have launched several new products within the EV charging segment, but also several new products within the electrical installation segment. Also, for those following us, we have discussed a lot lately during the about the production reallocation we made from Sweden to Poland during the end of last year.
We can see here that we have a-- we are benefiting from lower manufacturing costs and increased productivity, as well as higher capacity from the group this quarter, which is also resulting in the numbers we are seeing. Going to the next page, you can see the turnover split between our different product areas, where it comes to the electrical distribution product, January to September 2018, it's 50% of our turnover. The project business or customized business is 25%, temporary power, 8%, and EV charging so far this year, it has grown to 17% of the total turnover. Going on to the next page, the financial highlights of Q3. I will hand over here to Rickard.
Thank you. Then we can summarize the financial highlights. Net sales increased with 16%, mainly due to organic growth of 12%. Also, we have some currency effect, 3%, and a very small effect from the acquisition of Emedius, who amounts to the rest. EBIT margin was strong, 13.4%, increased from 11.5%, mainly due to better gross margins and some price adjustment to compensate for higher raw material prices and the Swedish SEK. Also, we have the effect of the higher volumes, of course. It's important also to point out that the third quarter last year was affected by some extra costs to maintain a good service level and to increase the capacity of the manufacturing plants.
If we move on to the earnings per share, it's a little bit weaker. It's mainly due to higher financial expenses as a result of the revaluation of the currency derivatives, and we have also some effect from deferred tax last year. Next slide. If we move on to GARO Sweden, we saw a good sales increase by 11%, mainly due to strong growth in EV charging, but also some modest growth in construction-related areas. EBIT increased by 26%, and it's the same explanation for the group, more or less, higher volumes and better margins. Next slide. Other markets, there we saw a very good increase in net sales, amounted to 26%, and there we have a good development in all product areas and all countries.
Also, we saw that EV charging, higher interest for EV charging in all of other countries. Due to the higher volumes and improved operating margins, we increased EBIT by 54%. Next slide, please. If we look at cash flow and balance sheet, then we have a very good cash flow in the third quarter, 29.5 million SEK, compared with 8.5 million SEK last third quarter last year, mainly due to a better situation in inventory and account receivables.
Hello, it's the operator here. Apologies to interrupt. Would you mind moving closer to the microphone so we can hear you a little better, please?
Okay. Also, our net debt was SEK 67 million, and also our solidity was improved to 55.1%. Next slide.
Yes. Here we look at a slide which basically shows our different ways of growing. Just to comment a little bit about what has happened here, if we go back, let's say 1.5 years. When it comes to acquisitions, for those that are used to following us, when it comes to Nordic electric companies, during 2017, beginning of 2017, we acquired a company named Emedius, which is now part of the GARO Group. We have also acquired a company called WEB-EL, which Rickard mentioned earlier. We would put that into both, or partly, I would say, new additional products and product areas, but mainly also companies with an edge. WEB-EL is now part of mainly our product development team.
If we go to the lower side of the matrix, we can see when it comes to product development, that's a continuous development we are doing on our current products, both upgrading and, but also, of course, to keep a healthy portfolio. In relation to new and additional products, well, of course, we are always looking at portfolio growth to broaden our portfolio and to have a more interesting offer. And when it comes to new business, new business divisions, we could mention, obviously, electric vehicle charging, but also solar, and new geographical markets, where we are moving, especially with the EV charging out to, let's say, Northern Europe. And our vision and goal is to become the leading brand in our chosen markets, and especially when it comes to the main products.
Moving on to the final page and our outlook for the remaining of 2018. We can see that the demand for construction-related products in Sweden remains on a high level. I would say that when it comes to the other markets, it's a combination of remaining at a higher level but also growing. We can see in Sweden that the growth curve is leveling off. There is still growth, but it's single-digit, and it's leveling off. When it comes to the Stockholm area, it's a slight slowdown that we can see in Q3. For the other markets, as I said, the growth remains high and stable. When it comes to EV charging, we see a continued rapid growth in several markets.
Some of the markets are coming from very low levels, but there is no question about that the electrification of the car fleets in Europe is ongoing. We are not waiting for the start, it's ongoing, and it will continue. The interest is very high. So all in all, we continue to have a positive view of the market conditions in 2018. Thank you very much, and we are now ready for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two, and when preparing to ask your question, please ensure your phone is unmuted locally. We have a question on the line from Johan Nilsson, from ABG Sundal Collier. Johan, please go ahead.
Okay, thank you. Congratulations on a strong quarter.
Thank you.
Yes, I'm wondering if you can help me out with, with one question regarding the sales split, if you're looking by product area. Looking at EV charging, it's 17%, and project business is 25. Can you give me something what's behind the numbers of those two?
Well, that's, I'm not really sure I understand the question, but the project business is-
Okay.
If I say-
Yeah.
The project business is quite related to the installation business.
Yeah.
So we are talking about basically customized electrical installation business when we talk about the project business, just to be clear. So the EV charging is a standalone. And of course, there is a lot of project business also for EV charging, but then that is within the EV charging product segment.
Okay. If I, if I put it like this, I was a bit surprised, of course, the, the strong growth in EV charging, even if this is on accumulated basis, the figures for that part. But I was also a bit surprised of, the downturn in, in projects.
If I put it that way. Yeah.
Yes. Yes. Well, we have to remember that we're looking at a split, so it's a – we have a quite nice growth overall in the period. So, but within the split, well, it's a bit difficult to say. Of course, you have some changes in mix. You can have some business. If we go back one year, we had some quite heavy business in the project that carries a lot of turnover. You have seasonality effects and everything. When I look at the project business today, the demand in the market remains high. And, if that would answer your question, when we look at Q3, we don't see a slowdown for the project business.
Demand is high, and we are more working with our productivity and capacity rather than being concerned about the market conditions in the quarter.
Great. Yes, that answered my question. Perfect.
Okay.
Also, a question about the ramp up in the EV charging. It's on new launch, just powerfully. Could you tell us if there is the margin picture? Is it higher contribution margins for the new launches we have seen?
Well, well, I would avoid going into those details and splitting up the segment. I mean, this is a very rapid growing market, but it's also a very, you have a very rapid development when it comes to the products. I mean, it is a quite new product area, it's a new market, so the development goes on and on. I mean, we're coming from, let's say, a few years back, more simpler products, to carry more and more intelligence in them. Of course, we see this as an interesting area, and of course, as you put more value into the products, the cost and the price goes up.
Yes. But you shouldn't say that, that's some part of the explanation of the margin increase. It's more about what actually mentioned text, or is it the EV charging, the launch is also some part of that?
I would say more—I mean, the increase of the margin is partly related. I mean, it's related a lot to the volume growth, and in the volume growth, you have a substantial part of EV charging, that's for sure. But it's not fully related to EV charging, no.
Okay, great. So about the, regarding the volume growth and the scalability, looking at the production condition about the capacity utilization in Poland.
Would you say that level that you see now, is there more to do on that one?
Well, I'm a production guy by nature, so I mean, when it comes to productivity, you're never finished if you ask me. We have reached, after the quite big moves and the ramp up we did in Poland, a good level, but we are, of course, never satisfied. There is always more to do. But we are on a good level now, and that we can see in numbers; we can see it in service level as well. We also think that we have a very good position, when it comes to our capacity right now and for the near future.
Perfect. And is there any reason to think it would be more unfavorable in Q4, or maybe is it the opposite that's more likely?
Regarding capacity utilization. If you're looking some months ahead, is it-
No, it-
more reasonable to think it's more favorable or not?
No, I mean, our situation regarding capacity, not only related to Poland, but I mean, what we did during wintertime was—I mean, we extended the factory in Poland last year. We moved the GARO Elf lex to new facilities as well, to give ourselves more space and opportunity for further growth. And as we see it right now and for the near future, we think we are in a good position to handle further growth. And then, of course, taking into account the rapid growth of EV charging as well.
Okay, great. Yeah, I'm a bit curious about the sales abroad. We're talking abroad of Scandinavia. How is this going in the Europe and so on, ex Ireland?
Are you talking about EV charging or overall?
Yeah, overall. But, of course, I'm curious about EV charging also.
Yeah. No, I mean, if you look at the other markets, so to say, I mean, we have... I mean, the growth is good. We have opportunities in our different countries where we are present. I'm not going to disclose our strategies here, but we have opportunities in Finland, we have opportunities in Norway as well as Ireland and Poland. So I think we, with the outlook for growth there is good. The market conditions are stable. When it comes to EV charging, then of course, I mean, we are looking at, it's a product area which is probably a bit easier to move with, to enter new markets. We have been talking about Northern Europe, how we want to be a player there.
We have also talked about the way, the way we do it, where we have partnered up with big international companies like E.ON and whatnot as well, and it's progressing, it's progressing.
Okay. Thank you. I have one final question about the DC station and Volvo Cars. You're saying that the product is, yeah, the technology is really high level here, and also the output, what you call it, the power output. Could you give us something about that in relation to competitive assortment on the EV?
I would say that when you come to... I cannot disclose any details about that for obvious reasons. But it's a project where you are on the very highest, I mean, really highest level, when it comes to EV charging. It's advanced products, it's the latest products, and, well, of course, when you move up in the segment, the number of competitors are fewer.
Yes, and we're talking about the power output. Is it more than we have seen before?
I cannot disclose anything that was not in the press release. I'm sorry.
Okay. Okay. Thank you anyway. Thank you very much. That's all.
Thank you.
Thank you.
Our next question today comes from Kenneth Toll from Carnegie. Please go ahead.
Yeah, hi. So, the new products you are talking about on the EV side, could you explain, are those in the high voltage or semi-fast chargers or home chargers? And the new products, what kind of functionality do they add?
Yeah, it's a bit difficult to talk about it without getting quite technical. It's not related to, let's say, just a higher level or that kind of thing. It's more the functionality with the way they are communicating, it's regarding dynamic load balancing and how it's working. So it, I would say it's all over the spectrum. It's wall boxes, it's semi-fast chargers as well. And it's more regarding the functionality rather than just increasing power output, I would say.
So, they are becoming easier to use and install and safer, basically?
As smarter, more, I mean, smarter, the development is fast going. I mean, you have different protocols, of course, the way the communication is working with back-end systems. So it's, I mean, both hardware and software development we're talking about.
The new products, do they have a complete new design, or do they have new model numbers like the LS4, I think, what was your last? Is it the LS5, or is it more-
No, it's more development within the segments we're having.
Let's say by looking at them, they pretty much look the same.
... the different products. So it's more so to say that we are within the current available products, it's more intelligence within.
And you also had some product launches outside of the EV charging.
Yeah.
What are those?
It's different things. I mean, different bits and pieces within the electrical installation. It could be timers, it could be energy meters, it's new cabinets. So, it's, I mean, we have a very broad portfolio, so, it's larger and smaller, but, but several different products.
Nothing in solar power this quarter?
No, nothing in solar this quarter, no.
Okay. Then, you write in the outlook statement that you remain very positive for 2018, and that there aren't so many months left. But then when we look into 2019, and if the building permits and building starts that have gone down, if they should translate to sort of lower sales to the residential construction side, is that something that you are worried about or that you are preparing for in some way? And if there should be a downturn of sales into residential construction, could you shift production resources to other areas? Or, what, what's your thinking around next year and if the slowdown comes?
Yes. Okay. Well, first, the conditions is that we are quite late in the cycle, you should remember. So the exposure to construction starts is, I mean, of course, we are, we have a, we are in connection with the level of construction, but we are late in the cycle. So if the start goes down, it will take some time before it affects us. That said, what we can see for next year is that we think that the level we are still on high levels.
And the question would be whether or not there is any growth or not, but we will still be on high levels, so we're not seeing, let's say, a complete disaster or sinking ship next year, not even for the construction business. Also, what should we see, I mean, what should be noted is that we have, if you would ask me, a bit of a strange situation in Sweden, where the construction starts is probably decreasing, but we have a very strong underlying demand for new homes. And that, to me, is an equation that it simply won't work, that has to be addressed. But and then to come back to your question, what can we do?
I mean, of course, we are following this, and by following it, we are also preparing. Can we shift resources in production? Yes, we can. If we would have a fast-growing segment, for instance, we could very well shift resources to where we are growing.
And, and, when we look at the split between the Polish plant and the Swedish operations, is it... I'm just painting a scenario, but if the EV charging continues to grow very quickly and other parts of the business goes down, is there a risk that you will have one of the plants being very highly utilized, and you may run into overtime, and you have one plant being underutilized, and you have to lay off people, and that you get sort of an uneven split between Sweden and Poland or Swedish plants or something, that's hard to sort of even out?
No, I would say that-
Do you see what I mean?
Yes, yes. But I would say that we are already today, we are quite, quite balanced between these plants on what to do with. It's not that one plant is specialized on just one product segment, but... So, we can use our resources, and I'm not seeing, let's say, any larger risks that we would go, let's say, out of the roof in one plant, but have nothing to do in the other one. We can rebalance our production-
without any big hassle.
Well, sounds great. Also, now that the Polish plant is sort of inaugurated, it's up and running, the workforce is trained, and it, from seeing your margins, it seems like it, everything works well. How much capacity could you increase from here without running into sort of a lot of overtime worries and difficulties that you had a year ago? Could you add maybe 20?
Yeah. I'm not going to give you a number, but I mean, if we look at space and time and the workforce, I would say that we have a good position. We are available to grow. Let's say, I mean, if we would look one year ahead, I don't think we are going -- we have any risk of running into, let's say, capacity problems that we- that would be too difficult to solve.
So we have room for growth now after the investments made during the last year.
Then, of course, it's very difficult, I mean, to say too much, especially about an area like EV charging, where the growth rate in the market is so high. But we are aware of that, and we still think that we have a nice situation when it comes to growth.
And if we say in three years' time or something, if you are very successful and the growth is very strong, you could still expand your operations in Poland?
Yes.
I mean-
We have a... If you would look three years ahead, I mean, we are well geared for to take care of any growth to come in the near future, and we are well prepared for future growth as well, both in Sweden and in Poland.
We have been preparing, and I really hope that we're going to have to invest in more capacity.
And then if we look at balance sheet, I mean, the, your cash flow is very strong now when we see both the earnings coming up and also, the inventory levels coming down after, yeah, the move of production to Poland and so on. So are you, are you looking more into acquisitions and spending more time to look for that now, that the operations are is running better in Poland and everything, and, and, and the balance sheets are is stronger again?
I mean, when it comes to the cash flow and the inventory level, I mean, we are doing what we said we would do. We wanted to secure our service level. We had the production transfer that we made. During that time, we increased the inventory. Now we are bringing it down to the level where it should be, and we can see that in the cash flow from this quarter. And then, I mean, if I would just come back to our possibilities to grow, then of course, acquisitions is one area, and it's something that we have done. We made two acquisitions in 2017. We have not made any acquisitions this year.
Instead, we have been focusing on the capacity and to get the well-oiled machine running well.
But of course, we are looking also for acquisitions.
As a reminder, ladies and gentlemen, that's star followed by one to ask any further questions. We currently have no further questions on the phone line, so I'll hand back to you, Carl-Johan.
Okay. Then I would just like to say from me and Rickard, thank you very much for listening in to our Q3 result presentation. I hope you all have a very good day. Thank you.
Thank you.
Ladies and gentlemen, that does conclude today's call. Thank you for joining. You may now disconnect your lines. Have a lovely day.