Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the Solar Q1 2020 Conference. [Operator Instructions] Today, I am pleased to present CEO, Jens Andersen; and CFO, Michael Jeppesen. Speakers, please begin.

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

Thank you, a warm welcome to this first quarter webcast for Solar. Together with me, I have my 2 colleagues, and that is CCO, Hugo Dorph; and CFO, Michael Jeppesen, and of course, with good social distance to each other. The agenda for today is, I would say, more or less like normal. But I will give you a general business update. Then later, Hugo will take over and give you a digital business update. And finally, Michael will present our first Q results and our outlook for 2020 before we go to the Q&A session. Solar is, today, fundamentally a digital company, and combined with our strong and agile supply chain services, we can support our customers 24/7, 365 days. And that is in a very efficient but also very safe way under the recent circumstances. Later, Hugo will give you some very interesting insights and facts about Solar's digital position as we speak. Financially, our total business achieved the best first Q result in a decade. And all entities delivered on or above our own estimates despite the business challenges followed by COVID-19 but also considerable cost for a very successful SAP eWM rollout in Denmark, partly also in Norway and of course, also cost for AutoStore in Holland. I will now give you a short insight in our strategic focus areas. If we start with strategic suppliers, our combination of dual product assortments on fast runs covering both A brands and Solar concepts allow us to compensate for potential shortage of certain products caused by the COVID-19 crisis. But up to now, I can only say our service degree to customers are stable and secure in all markets. Overall, all segments and markets are showing steady growth on our concepts and thereby support our long-term margin improvement goals on group level, similar to what we saw in 4Q 2019. Turning to industry focus. Just recently, Solar entered a strategic partnership agreement with Global Connect. And Global Connect is a leading Northern Europe data center and fiber infrastructure provider. The partnership involves a total supply chain solution, which means that we, Solar, will take over all local stocks from Global Connect and serve them directly from our central warehouses with extended use of our digital solutions. The partnership will potentially cover a number of geographic markets. And the first deliveries are already carried out in Norway. So our strong Scandinavian position within the Infrastructure business continue to strengthen, which is very positive. On the other hand, we have to say that declining oil prices is not good for our Marine & Offshore business. So far, we haven't seen a lot of problems yet. But of course, that will come in the autumn, no doubt about that. Turning to operational excellence. Our cross-border organizational setup has proved itself during these challenging times, enabling us to deliver united execution power and adapt to the new normal caused by COVID-19. With now 3 successful SAP eWM implementation, the next planned implementation in line is Solar Norway, and we still aim for an implementation before the summer holidays. However, timing will depend on possible travel restrictions due to COVID-19, and we need our product team to be on-site to secure a smooth and safe implementation. Last but not least is our AutoStore solution in Solar Holland. It's now fully operational. We pick and pack daily up to 9,000 product lines per day. And that is in a green context as the power consumption is reduced to 1/3 compared to the past. But green solutions is also a huge sales opportunity and has been that for some times, especially within light, ventilation, heat pumps and PV solutions. Our expectations to the growing market for EV chargers are huge, but also our latest solution with PV cells on the rooftop on vans have a strong potential. Here, we are combining green behavior with flexible and productive access to electrical power for the craftsmen. And that is why we, in Solar, call that better business. I will now give the word to Hugo, who will give you some interesting insights in our digital business. Please, Hugo.

[Hugo Dorph]

Thank you, Jens. Yes, as Jens said, we are fundamentally a digital company. Yes, we supply physical products, but we do this as a highly digitalized business. From over 60% of orders being placed through our mobile app by installers in the field or through a deep integration with their digital business solutions, those orders are picked by our increasingly automated warehouse systems and digitally scheduled with our transport partners. And from our broad range of e-learning services, building customer competence to our technical support staff, interacting with customers remotely through video or connecting digitally with their installations to troubleshoot or just help them find the best solution. The products we supply are also increasingly digital themselves and connected through IoT, which further supports digitalization. So we are a digital business. We have invested in digital solutions since the late '80s, and our digital business results are clear today. Leading our industry on digital business development means we don't have our management focus and our cash tied up in a large retail footprint. But it also means that Solar prospers with the increasing digitalization of our industry. And digitalization is accelerating, especially now during the COVID crisis and demands for social distancing. More than 90% of our deliveries already support this with contactless ordering and overnight or courier 1-hour delivery. We can also see that the crisis is driving a further change in buying behavior towards digital. A fresh study by Molio, a construction company based in Denmark, among 450 companies, points to digital tools for coordination, communication and ordering as crucial for business continuity during corona. It's not a big surprise. There are 3 specific findings in the study, which I want to highlight. First of all, a clear majority of the companies state that they'll continue to use these tools after the crisis because it's not only safer, it also improves efficiency, productivity and collaboration, both internally and externally. Secondly, the biggest increase among companies was actually with contractors and subcontractors. And those are Solar's customers. And then thirdly, in terms of digital tools, the biggest increase we found was within construction technology, so contact solutions that are specific solutions built for our industry. So it wasn't about videoconferencing or Excel, as you might expect. This is great for Solar. Those customers will seek partners who can support and even challenge their digital efficiency, which is what we do. So digital transformation is accelerating in our industry. And you may ask what it takes to thrive. There are really 4 capabilities that need to be in place, and I'm happy to say that Solar has successfully implemented each of these: first of all, a robust digital operations platform providing transparency, control and transactional data across the business; secondly, a flexible customer platform supporting a personalized experience and behavioral data across all customer touch points; thirdly, a strong data integration, data analytics and data science expertise and tool set; and finally, access to top skills and technologies within the key new digital application areas of our customers' business. This means we are uniquely positioned to benefit from digitalization. Going to the next page. Digital is better business. It's not only fast and efficient, but it's also an opportunity for us to provide a better and more personalized customer experience. Our Webshop and our app is able to use data to tailor the assortment and the services to specific needs, whether you're an electrical installer doing daily service from your van or you're a procurement specialist of a food and beverage company or you're a large utility or infrastructure company using our Webshop to schedule third-party logistics services from Solar on materials that you procure yourself. Data also guides our sales reps on where to focus and provides our marketing department with precise metrics on our campaign effects and allows them to target with extreme precision. All this helps us serve our customers better, being more relevant and to better understand, anticipate or even predict their needs. The higher our digital order share, the more data we accumulate and the better our service becomes. This drives more customers to our digital channel, creating almost a virtuous circle. We also know from our data analysis that digital customers have a higher value for Solar, not only because they're often very happy to serve themselves, but because they're also more successful and they are more focused on productivity, which again plays to Solar's strengths. We have proven the benefits of our new customer platform, and adoption is accelerating in all markets. And the platform will be shouldering the majority of our almost EUR 1 billion of annual digital business by this summer. Our near-term focus will now be on leveraging data, leveraging our strengths digitally, especially around logistics services and leverage the high degree of digital orders, to increase automation of our operations for efficiency, quality and even better and more tailored customer experience. Many see digital transformation as a threat. We see it as a clear opportunity, not only because we believe we master what it takes to compete, but because we have a clear vision of the value we can bring in a more digitalized industry. We will see new strong players enter our markets, but one should not underestimate the value of combining 100 years of domain expertise with digital business acumen developed over more than 3 decades of digital investments. So Michael, over to you.

[Michael H. Jeppesen, CFO & Member of Executive Board]

Thank you, Hugo. Looking at the next slide. With an organic growth slightly above 1%, we delivered well above DKK 3 billion in revenue in Q1, which is in line with our expectations. We did not encounter any impact from COVID-19 until the last week of March. The impact was limited to only some of our markets. Looking at the next slide. EBITA was up from DKK 80 million to DKK 97 million on a group basis. As Jens were mentioning earlier, it's particularly notable that we managed to increase the gross margin with 0.4% despite the continuation of sale of low-margin products in NL, which had a diluting effect on the gross margin. So basically, the trend that we saw in Q4 continues into Q1. And we have a very strong focus on increasing our profitability through our Project Better Business but also our other strategic initiatives, which are continuing to deliver improvement. There was a positive impact of DKK 7 million regarding the settlement of a litigation. Staff cost diluted, however, the margin slightly with 0.3%. It should be noticed that we did initiate restructurings in both MAG and Solar Nederland. We implemented AutoStore in Netherlands, and we had an SAP rollout in Denmark. In total, we spent DKK 17 million on what you can define as one-off costs. Of this, approximately 80% relates to staff cost, which more or less balances out the dilution we saw from staff cost. If we calculate the net impact from the one-off income and the one-off cost, this has -- this is equal to approximately a loss of DKK 10 million. So not only did we manage to compensate for this net loss of DKK 10 million, but we also managed to increase the profitability on top of this with DKK 17 million. So it's only fair to say that the underlying business performed very well during Q1. Looking at the cash flow at next slide. As expected, in Q1, we saw a negative impact from operating activities, albeit at a slightly lower level than last year. I'll comment on this shortly. Investing activities were slightly down from DKK 31 million last year to DKK 25 million this year. The main part of the PPE investment is related to our AutoStore investment in the Netherlands. IT investments is mainly our CXP platform, that's the customer journey experience, and also to -- and to a lesser extent, our warehouse management system. If we take a closer look at the operating activities, we're particularly happy to see that inventory was reduced with DKK 85 million. This is partly due to that Sweden is now more or less normalized after the acquisition of activities we did in Q2 but also due to a focused effort. As mentioned in previous quarters, this has been one of our focus areas and I think we've succeeded. We've done this in a structured way without jeopardizing our ability to serve our customers. The normal seasonality had a slightly stronger effect on receivable compared to last year. We saw an increase of DKK 303 million versus DKK 279 million mainly because there was 1 additional working day in March. So it's very -- it's imperative to emphasize that we are not seeing any payments being delayed from debtors. We had a minor increase in liability compared to last quarter. But it should be seen with -- in connection with the fact that we, at the same time, are reducing the inventory. So looking at the next page. Regardless of the initiative, net working capital remained at the same level more or less as last quarter when calculated as an average over the last 4 quarters. Looking at net working capital at the end of the quarter, we do see a minor reduction compared to both Q2 and Q3, and we were on par with Q1. So in all, we are very comfortable with the development we have seen this quarter. Gearing ended at 1.9, which is a slightly increase from the 1.7 we saw at the year-end. Again, this is due to the seasonality but also to the fact that we have paid out DKK 101 million in dividend in Q1. So we are, therefore, well within our range -- within our target for gearing, which is between 1.5 to 3x. Turning to the next slide. At 27th of March, we withdraw our guidance for 2020. Looking at April, we ended up with a negative growth of just 1.6%. We're particularly happy to see that our best-performing entities in terms of earnings, that's being the Danish and the Norwegian entities, are keeping up the performance in April. It should be said that in general, we've seen a slightly more volatile sales pattern compared to what we normally see, but we do not see any deterioration during the months as such. And we can see in Netherlands now that the sale of low-margin products is starting to slow down as announced previously. In general, construction does not seem to be impacted so severely by the lockdown as we initially expected in March. Within installation, the overall trend seems to be that service sales is declining slightly whereas the product sales remains stable. Within the industry, there seems to be a slowdown among OEM customers, whereas infrastructure as a total continued to grow. Despite the development in April, we have already taken several initiatives to protect our earnings and cash generation. And as stated before, we are fundamentally a digital company with a very agile business model. This has also been confirmed by the analysis we have done in order to prepare ourselves for several different scenarios. So this, in combination with the strong balance sheet we have as a starting point, we are comfortable that this will enable us to continue to develop our business also during 2020.

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

Thank you, Michael. So now it's time for questions and hopefully also good answers. So please, if there's someone on the line who wants to raise a question.

[Operator]

[Operator Instructions] Our first question comes from the line of Mikael Petersen of SEB.

[Mikael Petersen, Analyst]

Congratulations on a relatively strong Q1. First question is regarding the staff cost, it's up around almost 6%, but among the full-time employees, it's up around only around 2.3%. What is driving this? Is this higher salaries? Or have you reduced your workforce and hence some cost relating to that? That will be the first question.

[Michael H. Jeppesen, CFO & Member of Executive Board]

It's driven by the restructurings that we have initiated in Denmark -- sorry, in the Netherlands and in MAG, which, of course, carried some cost with us. Plus as a consequence of the SAP implementation, quite some money was spent on overtime in Denmark. But there's also the movement, the installation of AutoStore in the Netherlands is a fairly complex operation, where we as a part of the installation are moving articles from [ Diever ] to our central warehouse in Alkmaar. This has also triggered a substantial more spend of staff cost. So it's not that we see salary inflation going through the roof, definitely not.

[Mikael Petersen, Analyst]

Okay. So maybe if you can maybe put a figure on how much of the structuring relating to Netherlands and MAG45. Is it like a couple of millions? Or is it very limited?

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

DKK 4 million. Approximately DKK 4 million has been spent.

[Mikael Petersen, Analyst]

Okay. And then to my second question, you reported your figure for April, which shows on a group level a decline of 1.6%. You say that Denmark and Norway are kind of flat and the other ones are down. Since Denmark and Norway are quite profitable, would this cause a higher margin as those regions are stable and the other ones are declining?

[Michael H. Jeppesen, CFO & Member of Executive Board]

I mean all other things equal, you are right.

[Mikael Petersen, Analyst]

Okay. And then maybe if you can elaborate a little bit on what's driving these respective geographies, like what markets like in Denmark and Norway. I assume that construction seems to be pretty well going on here in Denmark. But what is driving the flat development in April in Norway?

[Michael H. Jeppesen, CFO & Member of Executive Board]

In Norway, we did actually see a slight surprisingly development. The beginning of April was a bit weak and then we regained momentum at the end of April. And one of the surprising things was that offshore started very weak and then it gained actually some momentum towards April. We're still concerned about the development long term on offshore, as mentioned by Jens, whereas in Denmark, it's more spread to various segments. But one of the segments, we are performing well, as we also stated, is Infrastructure.

[Mikael Petersen, Analyst]

Okay. And then maybe the last question, if I may. You talk about service sales being down. Is that like caused by like a periodic hesitance and something that you expect to pick up later? Or is it a general slowdown?

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

I think the reason why the service sales are down to our installation companies is simply because they do not have the access to the industry companies they are used to work for due to COVID-19. So when everything will be opened again, we are pretty sure that we will see also that, that will increase again. But at the moment, it seems not possible to get access to all industry buildings for our installation customers. That's the reason, Mikael.

[Operator]

Our next question comes from the line of Simon Blok of Nordea.

[Simon Møller Blok, Analyst]

Just one question for me. I was thinking maybe you could elaborate a bit on the cost saving initiatives that you have implemented. I mean what exactly are you doing? And how much are you expected to be able to save?

[Michael H. Jeppesen, CFO & Member of Executive Board]

We haven't set out any official target on what we expect to save. It's more to give a clear -- to make it absolutely clear that we will take the initiatives needed in order to protect the earnings. What we've done so far is we've used -- follow-up in several countries in order to adjust for development. We've seen them with tightened cost control, with tightened credit management. But we will -- I mean it all depends on how the development goes in terms of activities. And that is very uncertain. So I can, unfortunately, not give you a clear answer. But it's a lot of initiatives that have been launched.

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

But at least we prepared ourselves for a worse situation than we have seen so far. So we have been at least able to -- remember that a great part of our cost is related to staff. And we have used the 3-part possibilities in Denmark. We have made some permission -- or permutation is the name, in Norway and partly also Sweden. So we have done a lot of government or used the government possibilities, so far, when it's possible. But as also stated by Michael, April went pretty okay. And therefore, we also need to have the warm hands we need to serve our customers in the daily work. So it's a balancing act, I would say.

[Operator]

And we have a follow-up from Mikael Petersen of SEB.

[Mikael Petersen, Analyst]

It's relating to the government spending that it's looking to maybe increase maybe in the second half of this year and next year. How much of this do you expect to hit your markets? I would say, like infrastructure is one of the areas being mentioned and then also renovating of the business or the building mass, in general.

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

Of course, we assure that some projects will be postponed. On the other hand, we also think that the government will open for other opportunities. The sector -- I don't know the English word for that but [Foreign Language] that is one of the things at least in Denmark which will be put into the market. It's a DKK 30 billion investment over the next 5 years. And of course, we'll benefit from that. On the other hand, I think, as also Hugo stated, there's a lot of opportunities within e-commerce, within data. And also, we hope that climate and energy will be subsidized some way or the other and, thereby also, that we will gain our part from that. So there's not a precise measurement on that. But I think there is both pros and cons going forward.

[Hugo Dorph]

We have seen some green refurbishment projects being moved forward. And we've been lucky to win a couple of those. So I think we're well positioned for that part as well.

[Mikael Petersen, Analyst]

All right. And then maybe if you see maybe a little bit of a slowdown, have you seen any actions from your competitors in terms of pricing or similar? Or do you see the competition as unchanged during the COVID-19 period?

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

I'd say in our business, there's always price competition. So nothing new there. So it's sometimes crazy, but it's still crazy. And it has not accelerated, at least. So that's an honest answer on that.

[Operator]

[Operator Instructions] There seem to be no further questions coming through, so I'll hand back to our speakers for the closing comments.

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

Okay. Thank you to all who are listening in. Have a great day, and hopefully, we will all be safe out there. Take care, and bye-bye.