Solar A/S

CSE:SOLAR B

Q4-2024 Earnings Call

[Operator]

Good day, and thank you for standing by. Welcome to the Solar AS Q4 Report 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jens Andersen, CEO of the company. Please go ahead.

[Jens Andersen, executive]

Thank you. A warm welcome to this fourth quarter webcast for the Solar Group. Together with me here, I have my colleague, CFO, Michael Jeppesen; and our Investor Relations Director, Dennis Callesen.

The agenda for today is a general business update with some highlights for 2024 presented by me. Then, I will give you some insights to our customer segments development for year 2025 or at least our expectations, including some comments to our revised ambitions towards 2026.

Michael will then present our 4Q results, including cash flow status and naturally also some financial comments to our results for year 2024 and the guidance for '25. Last but not least, if any, there will be a question-and-answer session.

If we turn to the highlights. Our guidance for 2024 assumed that all segments would show negative growth with recovery gain at ground at the end of the year. However, recovery was slower and less robust than expected. Consequently, revenue was below projections. As expected, 2024 saw a declining growth, but with 4Q performing better than Q1 to Q3.

Organic growth in the fourth quarter were 3% and was largely accounted by a big PV park delivered by our small subsidiary, Solar Polaris. Adjusted organic growth at group level amounted to minus 6.4%, and that means that our revenue declined to DKK 12.2 billion, coming down from DKK 13 billion in 2023.

Revenue from Climate & Energy, a very important strategic focus area, declined during the year under review and amounted to around DKK 1.1 billion, down from DKK 1.3 billion in 2023. Q4 posted an increase in residential sales, confirming that the long-term potential of heat pumps is still intact.

The Industry segment delivered adjusted organic growth of approximately minus 4% with MAG45 showing positive adjusted organic growth of almost 6%. The Installation and Trade segments posted adjusted organic growth of approximately minus 8% and minus 6%, respectively. Around 50% of the decline in the Installation segment can be accounted for the fall in residential sales.

EBITDA of DKK 646 million was above our expectations. When adjusted for non-recurring income and restructuring costs in 2024 and one-off price effects in 2023, the underlying EBITDA margin amounted to approximately 4.6%, down from 6.5% in 2023. The Board of Directors will propose a dividend per share of DKK 15, reflecting our significant investment in automation and digitalization. With the Swedish warehouse completed in late 2026, all major investments in AutoStore will be finalized across the four big countries.

Next slide, please. Our guidance for 2025. On a macroeconomic level, we expect to see the recovery in 2025, although we expect to see improvement in all markets, the timing and the strength of the recovery are very unpredictable. We expect all markets to post stagnant growth or experience less positive growth in all countries in 2025.

If we turn the view on customer segments, Installation, we again expect new construction to at least start from a very low point, and we expect the green transition to deliver slightly better than this year or last year in 2025. So again, a small positive growth within Installation.

Turning to Industry. The guidance assumes stagnant sales to Marine/Offshore and Utility coming from a very high level in 2024. On the other side, we expect the other subsegments to show positive growth. So all-in-all, again, we expect also within Industry a positive organic growth in 2025.

Last but not least, Trade, our smallest customer segment, but also the place we need to grow even more. We expect positive growth in special sales in 2025 within Trade segment, which is one of the Trade segment's primary activities.

If we look at the figures, we have this year made a range because of the uncertainty. And our range on revenue is between a revenue of DKK 12.3 billion up to DKK 12.8 billion. And again, if we turn the view on the EBITDA, our guidance also a range coming from DKK 530 million to DKK 600 million. And bear in mind, that is without one-off gains and costs. So it's more or less normalized the guidance we are giving within the range.

Next slide, please. During the uncertainty or due to the uncertainty, we have revised or revisited our ambitions for 2026. And now we have lowered our expectations within Climate & Energy to, I would say, a share above 10% coming down from 15%. And due to a lower-than-expected effect in 2024, we have also reduced the gains on our concepts from 0.7 to 0.5.

On the other hand, we believe that our ambitions within solutions sales is unchanged. But consequently, we have also lowered our financial ambitions for EBITDA margin to above 5%, coming down from above 6%. Despite that or nevertheless, we are more than confident that our ability to strengthen margin over time is stable. But as we see the uncertainty still rules in the market, so at least it's postponed for a while.

I will now give the word to Michael for some more insights.

[Michael Jeppesen, executive]

Thank you, Jens. Please turn to Page 7. Now revenue in terms of DKK increased with 2%, resulting in DKK 3.2 billion versus DKK 3.1 billion last year. This is equal to an adjusted organic growth of approximately 3%. Contrary to what we've seen in the preceding six quarters, we have now returned to growth, albeit it's at a low level.

And as Jens also stated, it's below our expectations. If we take a small -- a closer look at our strategic focus area, Climate & Energy, they delivered very strong results in Q4, reaching above DKK 400 million, but this was supported by large deliverances by Solar Polaris to a Solar Park here in Denmark. However, even if we adjust for this, we did see organic growth within Climate & Energy with a sequential improvement throughout the year.

If we take a closer look at it, we can see that air-to-air heat pumps have actually been performing rather well for the past quarters, but we are now starting to see a slow progress also within the sale of the more expensive air-to-water heat pumps to residential. We expect this trend to continue, and we also see a positive impact coming from the subsidiary scheme and Denmark is coming into force here during 2025.

As expected, particularly Installation have in the quarter faced headwind from the market, but is now also gradually moving up and has returned to growth. Looking closer at industry and looking at the subsegments, MRO, OEM remains a challenge. We are still around Index 85, whereas Infrastructure and Marine/Offshore have delivered solid growth rates. This development is not unlikely what we have seen in the preceding quarters. MAG also in Q4 came out with a solid single growth -- single-digit growth rate for the quarter.

Trade D&A continued to face headwinds, but of course, this was more than offset by the performance in Solar Polaris. So to summarize, the quarter was in terms of revenue below our expectations in all main segments if we disregard the performance of Solar Polaris, which were above.

Please turn to the next page. With an EBITDA of DKK 219 million, Q4 was above our expectation. However, the underlying EBITDA of approximately DKK 150 million was clearly below last year. We managed to sell the central warehouse in Örebro earlier than expected. It was announced in the annual report of 2023, that we will start the process.

If we look at the cost of goods sold, we see a decrease of 2.5 percentage points compared to last year. And this was not compensated by the positive one-off bonus of approximately DKK 0.6 However, if we try to normalize the underlying gross margin for the quarter, deliveries to the large solar park actually diluted the margin with approximately 0.4%. So leaving an underlying margin of approximately 20.6%, which is more or less in line with what we have been seeing throughout the quarters of the year. So we're not really seeing a major dilution of the margin, but we haven't neither seen any improvement of it.

As expected, our initiatives to reduce cost and our process optimization and staff reduction have successfully delivered, ensuring that cost didn't dilute the margin any further. Regardless, we will, of course, continue to have this focus, and you can actually see this also reflected in the number of FTEs throughout the year. Loss on trade receivables remain clearly under control.

So if we now turn to Page 9 and take a quick look at 2024 full year, yes, with an EBITDA of DKK 646 million, this was below last year. As Jens also stated, this is supported by approximately DKK 81 million in non-recurring net income, leaving an underlying performance of approximately DKK 565 million. If you look at the margin, we can see that we did see headwind on the gross margin. And even if adjusted for one-off effects, this is below last year. It can partly be explained by -- or in all material aspects, be explained by drop in margin across customer segment product categories and to a lesser extent, to mix.

Of course, the investment we did carry out in improved service also had a negative impact on our gross margin. Despite the headwind, resulting in almost DKK 100 million less revenue, we managed to reduce cost at a similar level, resulting in only a minor dilution from -- in the margin from the side of -- from the effect of costs.

Now please turn to Page 10. So to compare to our guidance, -- what went better than expected, stronger than expected was we managed to sell the central warehouse in Örebro, earlier than we anticipated. Our cost initiative delivered more savings than we expected, enabling us to avoid further dilution of the margin, despite the headwind in revenue.

As expected, yes, we did improve the service to our customers, and this came, of course, with the cost diluting the margin with approximately 0.3%. And we do now also see improved customer satisfaction as a result. So we're absolutely sure that the initiatives we took despite the cost were the only right initiatives, the situation taking into consideration. Less than expected.

Revenue, despite the fact that we reduced expectations down from 12.5% to 12.3% in Q3, Q4 was clearly a disappointment as well. In total, this resulted in that we came out almost DKK 300 million or less revenue than what we initially expected, even though Solar Polaris did better in Q4. In essence, I can say that our expectations for the recovery turned out to be too optimistic. As stated by Jens, this also plays into our guidance for '25 and our ambitions for '26. Gross margin were more suppressed than we expected. In addition, we did not see the expected impact from our concepts.

Please turn to Page 11. Operating activities in the quarter delivered DKK 525 million. And if we take a closer look, we can see that the inventory contributed with DKK 47 million, which is in line with what we've seen for the last quarters. We did clearly overestimate the demand in Q4, meaning that the current inventory level is, despite the reduction, still above the optimal point. The drop you see in accounts receivable is the normal seasonality, and it will more or less reverse during Q1.

Please turn to Page 12. If we look at the net working capital as an average for the last 4 quarters, we see a continuing improvement, down from last year, 16.8% to 15% here in 2024. If we look at the net working capital at the end of the quarter, we're now down to 13.9% versus 14.2% in 2023. Despite the improvements, we are still above our target, and we expect, therefore, further improvement in this year.

If we take a look at the gearing, we see in the quarter dropped from 2.7x to 1.9x at the end of the quarter, of course, supported by the sale of Örebro, but also its negative and also the normal seasonality comes into play here.

Please take a look at Page #11, our guidance for 2025. We now expect a revenue in the range of DKK 12.3 billion to DKK 12.8 billion, corresponding to an organic growth in the range of approximately 1% to 5%. We expect an EBITDA in the range of DKK 530 million to DKK 600 million. In general, the market, as Jens also mentioned, is unpredictable. The recovery we saw in the latter part of H2 2024 was clearly below our expectations, and this, of course, continues into 2025.

During the latter part of '23, we saw a loss in gross profit margin in several product categories despite positive impact from concept. This development continued throughout 2024, where we did not see the expected impact from our concepts. We expect this downward trend to taper off in 2025. So our outlook does -- is based on the assumption that we will see a slightly lower gross margin in 2025 compared to 2024, partly due to continued price pressure combined with no price increases in the market.

In addition, we decided, as I mentioned previously, to elevate our delivery service, and this has a rollover effect in 2025 of approximately DKK 20 million plus/minus negative. So contrary to what we initially expected, salary inflation will continue to have an impact in part due to carryover effects from 2024. We already entered into collective labor agreements that are now coming into force. So therefore, also in 2025, we will experience higher-than-normal salary inflation.

We do not expect that we will be able to pass this on to the market, partly because the market is still suppressed, partly because we have, during the last couple of years, seen substantial price increases, but also because we are hit by new taxes, road taxes that we have to pass on. So we do not assume that any further price increases can be passed on to the market. The figures show a simple high-level bridge between '24 and '25. Thank you.

[Jens Andersen, executive]

Thank you, Michael. Now it's time for questions, if any. So please.

[Operator]

[Operator Instructions] Your first question comes from the line of Kristian Tornøe from SEB.

[Kristian Tornøe Johansen, analyst]

A couple of questions. So on your guidance, I think, you explained well the dynamics. We have seen your SG&A costs go down during 2024, reflecting the initiatives you take. And based on what you are indicating for '25, we should expect that to start increasing. Can you comment a bit on the phasing? I mean, should we start to see an increase already in Q1? Or is it more back-end loaded?

[Michael Jeppesen, executive]

I think, it's actually a combination, because the mandatory salary increases, they come stepwise throughout the year. So it's not like there is a certain point. I think, it will be more or less evenly spread out through the year. And again, we expect the effect to wear-off as we get closer to the end of the year. But -- so it's not in one quarter. It's a bit all the 4 quarters, I would say.

[Kristian Tornøe Johansen, analyst]

So if I apply the same level of SG&A growth rate to all the 4 quarters, that's probably the best way to go forward. Is that what you're saying?

[Michael Jeppesen, executive]

Yes, I think, that's a fair assumption. But of course, you should be aware that you have a rollover effect. So you should be a bit cautious with what you compare with what. So you have increases that have come into force here late in Q4, which you haven't really seen much of an impact of yet, but will have full effect here in Q1. So they will come into it. So I think, for all practical matters, I would take the approach that we could allocate it more or less even, I would say.

[Kristian Tornøe Johansen, analyst]

That's quite helpful. Then, just an update on your investments. So the divestment of Örebro, as you mentioned, was executed in Q4. You still have a second warehouse, as I reported, that you are planning to sell. When do you expect that correct?

[Jens Andersen, executive]

It's on the market right now as we speak. So -- and we have seen interest for it, but we don't know yet what will happen. But of course, it can happen as we speak or it can take half a year or a year. We don't know, but it's on the market now. It's a central warehouse in Halmstad.

[Kristian Tornøe Johansen, analyst]

And should we expect a similar EBITDA gain for that as what you booked for Örebro?

[Michael Jeppesen, executive]

Ultimately, it depends on the pricing cost, but it's [indiscernible] it's going to be in that ballpark, I would say. But of course, ultimately, it depends on the sales price. But you'll get into more of this...

[Kristian Tornøe Johansen, analyst]

Okay. And just to be crystal clear, that's not included in your guidance, right, for '25?

[Michael Jeppesen, executive]

Correct. Because we don't know when it will be sold. And secondly, you can have it, the money will be reinvested in the new one. So it's not money we can distribute.

[Kristian Tornøe Johansen, analyst]

But it's not included here, right?

[Jens Andersen, executive]

It's not included, because we don't have any agreements.

[Kristian Tornøe Johansen, analyst]

Yes. Makes sense. So what should we expect for investment level? I mean, if we just exclude the potential income from investments. So on your new central warehouse in Sweden, how much do you plan to invest in '25?

[Michael Jeppesen, executive]

It's going to be in the plus DKK 300 million in this year.

[Kristian Tornøe Johansen, analyst]

It's a quite substantial amount.

[Michael Jeppesen, executive]

Yes.

[Kristian Tornøe Johansen, analyst]

The DKK 300 million on top of the, you can say, regular maintenance investment.

[Michael Jeppesen, executive]

Yes.

[Kristian Tornøe Johansen, analyst]

Great. And then just another question on your margin side. You highlight the booking as a one-off, but you also highlight the supplier bonuses as a one-off. I mean, have you not received supplier bonuses on a more regular basis? I mean, is it really a...

[Michael Jeppesen, executive]

We get hundreds of million of supplier bonuses. But these are, you can say, outside normal agreements where you do not necessarily have a contractual obligation to them. So it's the sum of several things. So it's not something that we can guarantee will reoccur next year. So you should see it in that context. You can always discuss the right figure is 20, 25 or 15. But the 20 is the best guess. There were some special things that occurred in 2024 that enable us to get some additional compensation from the suppliers that were not from a very narrow reading of the contracts were entitled to.

Can we pull it? We can definitely not do it again in Q1. That's for sure. Can we do it again in Q4? It's an open question. It's not something again that happens.

[Jens Andersen, executive]

It's more to be transparent, but of course, we will do our utmost to do it again.

[Michael Jeppesen, executive]

Yes. But just be a bit cautious and saying, okay, this will repeat itself quarter-by-quarter.

[Kristian Tornøe Johansen, analyst]

I understand. I guess I'm just curious, the level of supply bonus you had in '24, is that materially higher than what you saw in '23 and '22 and '21?

[Michael Jeppesen, executive]

No, no. It isn't great. So there's nothing changed substantial to the contracts as such. But I mean, Yes. There's always some horse trading and sometimes we succeed more than other times, and they did a tremendously good job here at the -- just before the end of the year. But a lot of this was done in very late hours just before New Year.

[Kristian Tornøe Johansen, analyst]

Sure. And then, just a question on ThermoNova, also considering the impairment you're doing in Q4. So can you elaborate a bit on the cash flow of this business? I mean, I guess what I'm asking, what is the risk that you need to get more money into the ThermoNova considering that it's progressing slower than expected?

[Michael Jeppesen, executive]

We don't see any risk in that, not at all. On the contrary, they have more than sufficient cash to support the growth. This is basically just a delay compared to our initial expectations that triggers this. So we think the potential is still there. We are signing contracts as we go, but it's at a slower pace than what we initially thought when we entered into this. So -- and also, you can say -- it can explain by, yes, timing, is the main explanation to this. The potential we think is intact, and they don't need cash.

[Jens Andersen, executive]

Cash-wise, that's doing fine.

[Michael Jeppesen, executive]

That's doing fine.

[Kristian Tornøe Johansen, analyst]

Okay. That's comforting. And then, just my last question then, Solar Polaris, not a part of the business we typically spend a lot of time on, but obviously, somewhat substantial in the quarter. So can you just touch on, I mean, projects of the size that we're seeing here in Q4? Is that something you have more of in the pipeline? Is that something we should expect again going forward? Or is this more of a special circumstance?

[Jens Andersen, executive]

Yes. I would say, our strategy was mainly that we would do large PV projects on the rooftops. Now we expanded that scope into also doing large PV parks. And we have more in line, at least we have a lot of offers in the market right now within that new way of doing business in Solar Polaris. So we expect that they will keep up the level also in the years to come. But that being said, that depends that we win some of the offers we have in the market. And that's, of course, again, a little bit unpredictable.

We have seen big players leaving the market. And of course, that leaves the room for smaller companies like Solar Polaris, compared to -- I don't want to mention the name. I think, you know whom we are talking about. But at least it gives us a better room for doing our business with Industrial customers mainly.

[Michael Jeppesen, executive]

But be aware that there's not much operational leverage in this type of business. So even though you double the revenue, your margin in percentage doesn't change that much. So...

[Jens Andersen, executive]

No, it's more -- you see that game.

[Michael Jeppesen, executive]

Exactly. So yes, in terms of euro, it goes up. But if you double revenue, yes, you double the earnings, but it's not like it triples or something like that.

[Jens Andersen, executive]

You double in absolute figures, not in percentage.

[Michael Jeppesen, executive]

Correct. Exactly. So -- but it's also low risk, because a lot of it is higher. There's a lot of -- the costs are not fixed variable, the way they are doing things so far.

[Kristian Tornøe Johansen, analyst]

Okay. That makes sense. And I was just to clarify the gross margin for such projects would be substantially below the group.

[Michael Jeppesen, executive]

I think, as you can hear that since we -- but when they have the gross margin, there's not much below that in the way the business is done. So if you have a gross margin of X, you're close to have an EBITDA margin of the same amount. There's hardly anything in between. Of course, it is, of course, substantially lower than the average gross margin. It kind of goes without saying, but there's hardly any costs between the gross margin and EBITDA.

[Operator]

[Operator Instructions] There seems to be no further questions from the telephones at this time. If you wish to proceed with your webcast questions.

[Dennis Callesen, executive]

Absolutely. First question up, you're expecting overall growth in '25 in revenue, but you are not expecting EBITDA growth. What is the reasoning behind this? And what should happen before we begin to see EBITDA growth again?

[Michael Jeppesen, executive]

Thank you. The main challenge is that we do expect the gross margin to be slightly below the level we've seen in '24, combined with substantial cost, mainly salary inflation. And that is -- and we cannot pass this on to the market for the reason that I mentioned before. Of course, as the market sooner or later will start to normalize, this will change, because ultimately, we can, of course, not absorb all the cost increases that need to be passed on to the market.

[Jens Andersen, executive]

Yes. So the explanation is that the revenue growth will be diluted by the inflation growth, at least as we see it right now as price increases are extremely low on product level.

[Dennis Callesen, executive]

Second question. Do you see any significant risk in your business raising from a potential Trade or between the U.S. and EU? Do you have any purchasing or sales risk in this situation?

[Jens Andersen, executive]

I would say it's difficult for us to judge. I think it's difficult for all to judge, I would say. But I think we are very agile. And of course, if there will come price increases, on top of that due to tariffs, we will pass it on to the market. But right now, it is as it is. It's very unpredictable, and we do our business as we have done for many years and adapt to the new situation if that should occur.

[Dennis Callesen, executive]

Third question, uncertainty has been a word used often in the latest calls. How do you see uncertainty in '25 compared to '24? Are you beginning to see an improvement or increased uncertainty?

[Jens Andersen, executive]

I think, it's more or less unchanged. At least, it's my -- I don't -- what do you say, Michael? I think it's -- at least it's very unpredictable. So I don't see that uncertainty have gone up or down. It's still on a very high level compared to what is normal, I would say. I think, I speak for many people and many companies if we stay there.

[Dennis Callesen, executive]

And last question. Can you quantify the impact of Solar Polaris in the organic growth in Q4?

There's second part. No, please go ahead.

[Michael Jeppesen, executive]

It constitutes the main part of the organic growth in Q4.

[Dennis Callesen, executive]

Can you come back on the reasons that led to underperformance in your concept initiatives? What didn't work as planned?

[Kristian Tornøe Johansen, analyst]

I would -- I can start, you can complete. But it's clearly that even though the concepts are much more resilient than the other products we sell, they are not completely immune. So they have also come under price pressure from the market, plus we have used them, I would say, in some instances in a very clever way to gain projects and thereby potentially also market share. So it's -- we are still a firm believer in that this is the right way to continue what we're doing. But of course, as stated previously, the outcome for 2024 was slightly disappointing.

[Jens Andersen, executive]

Yes, I would say the concept is still -- we are still a true believer in concepts. Of course, also the mix within the concepts have been a little bit difficult to manage throughout 2024. So it's still a clever move from us in Solar to stick to that, and we will also invent new concepts if we believe in that could be a part of the market going forward. But as we see it right now, it is, as Michael stated, under pressure. And it's also, I would say, price-wise, the price increases have been extremely limited. So also there, there is an explanation.

[Dennis Callesen, executive]

No further questions.

[Jens Andersen, executive]

Okay. Then I will conclude and say thanks for listening in, and have a very nice day. Thank you. Bye-bye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.