Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the Solar quarterly report Q1 2021. [Operator Instructions] Today, I'm pleased to present CEO, Jens Andersen. Please go ahead with your meeting.

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

Thanks a lot. A very warm welcome to this first quarter webcast for the Solar group, which is also the first quarter in our new 3-year strategic CORE+ period. Together with me here in Vejen at our headquarter, I have my colleague, CFO, Michael Jeppesen. The agenda for today is a general business update presented by me, then I will give you some insight in our focus area industry. Then Michael will take and present our first Q results including a high level cash flow status and naturally some comments to the recently revised guidance for the year 2020. Then finally, we will, of course, have our Q&A session. Next slide, please. With a good start of year 2021, our first Q EBITDA increased by DKK 62 million year-over-year, to DKK 204 million and exceeded the balance sheet. In fact, our EBITDA increased by 44%, and the EBITDA margin went up to DKK 6.8 million and increased 2.1% year on. And it makes me particularly happy that all markets and segments contributed to this overall positive development. As a good example, Solar Holland or Solar NL, more than doubled the EBITDA in Q1.The recipe for the positive development is more or less the same in all markets and segments. First of all, they needed courage to make necessary product improvement in bad business or low-margin business. Secondly, to accelerate and focus on our concepts. Thirdly, to be in control with cost. And finally, to accelerate growth on the various numbers of special sales share and we have [indiscernible].Next slide, please. Consequently, and due to the good start in Q1, we increased our guidance for year 2021 to a revenue of DKK 11.75 billion (sic) [ DKK 11.75 million ] up to DKK 200 million, and our EBITDA to DKK 725 million, up at DKK 75 million. And as the news of the day, we also, this morning, announced that the Board of Directors have decided to distribute an extraordinary dividend of DKK 15 per share.Our CORE+ strategy has shown its first effect on our business, and I'm very delighted and humbled to see how efficient we execute across all. I'm also 100% sure that our regions are set up within commercial market, operations, finance and industry in combination with local market knowledge are doing what is needed to execute as well as we do. Simply because strategy is, of course, one thing, but it's even more important that we are able to execute. So in my words, it's everything to execute. So again, a very big thanks to all Solarians in all countries.Lock can or will never be a long lasting strategy but it surely helps. And at the moment, we see extraordinary price increases on certain products due to increasing commodity prices. A part of these price increases will for sure materialize in one-off fluctuations on stocks over the coming quarters. And for good reasons, we have been cautious when calculating them into our revised guidance. Simply because they are very difficult to track and trace.Next slide, please. Focus area industry. As you may recall, Solar's industry segment are divided into 4 vertical, which are OEM, MRO, Infrastructure and finally, Marine & Offshore. But I think even more important, we have also organized our sales force as such in a regional set across 4.With this regional structure, we have set the goal that the industry business should be at least 30% of our total revenue stream by the end of year 2023. The sharp eye can also see that the profitability in the industry segment is close to be double as high compared to the installation segment, primarily because the cost to serve is much lower.Everything equal, it is normally also less cyclic than our installation and trade segment. So the rationale for industries as an important progress area in our CORE+ strategy should be more than this. Besides deep technical knowledge, a wide product assortment, different unified or sometimes also custom-made services, Solar also support a digital and green industry. With this winning formula or aspiration, we will do our utmost to convince our customers and new customers that we both can increase the productivity by delivering the right product at the right time and in the right quality by use of digital intervention. And at the same time, reduce waste and CO2 emission in our corporation.In our first Q report, we have included 2, I think, very interesting customer cases that are perfectly describing that. But I will also allow myself to let you read them on your own. I will now give the word to Michael for some more insights to the financials. Please, Michael.

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

Thank you, Jens. Now turning to Page 7. In a nutshell, Q1 reflects the preceding 3 quarters, where we see a lower revenue that was more than compensated by increasing gross margin, combined with lower cost. Hence, leading to increased earnings.In terms of DKK, revenue declined slightly. We came out just about DKK 3 billion. If we adjust for a number of working days, the organic growth ended at minus 0.6% versus a positive organic growth last year of 1.4%. If we take a closer look at the segments development in Q1, we did see a flat growth within the installation segment, with Denmark being a notable exception where we did see growth rates. Both installation segment and the trade segment, there is substantial effect of pruning products, which is one of the initiatives in our better business projects.And this actually explains part of the negative growth, in particular, if you look into the Netherlands. As you may remember, we started off in the Netherlands, focusing on gas boilers, amongst other things last year. But we did encounter a setback due to there were quite some contracts that it took some time to terminate, meaning the initiatives did not gain full impact before H2.Regardless of the negative growth, the flat growth in installation and mixups growth in trade, we did see an increase in the earnings. If you look at industry, we did face some headwinds within infrastructure in Denmark, but this was mainly due to weather conditions where everything came to a hold for quite a part of February, and we expect, of course, this to normalize going forward.We're particularly pleased to see that the activities within OEM, MRO seems to be picking up, and we do expect infrastructure to return to strong growth rates going forward.However, Marine & Offshore were unfortunately still in the negative territory in Q1. Turning to the next Slide, 8, with an EBITDA of DKK 204 million, Q1 was actually the tenth consecutive quarter of year-over-year growth in EBITDA and at least, therefore, to us in Solar quite a milestone.The main growth driver was the increase in the gross margin, which delivered an astonishing 1.4% increase. This was driven by our CORE+ strategy focusing on concepts, but also on Better Business. We did, in addition a see a more favorable mix, particularly in the Danish business.If we look at the cost in absolute terms, we can see that they are down with DKK 32 million despite a negative impact from exchange rates of DKK 4 million. If we normalize the cost last year, we did actually encounter quite some SAP rollout cost, DKK 9 million and AutoStore implementation in the Netherlands of DKK 8 million.So the underlying really cost savings are DKK 19 million. If we take a closer look at the cost lines, it's the items we've seen deliver results in the last quarters. It's travel, it's entertainment, it's cost on cars that is the single main contribution within external operating costs.Please notice that the reference point going forward will no longer be pre-COVID cost level, but we'll start to get a quite different point of reference in Q2 in terms of cost.If we take a look at loss on debtors, it's actually one midsize installer that accounts for approximately 20% of the loss that we did see this quarter. So we definitely not a general trend. And this loss has nothing to do whether government support baggages being reversed. So for the time being, we do not see any concerning trends there.Turning to Page 9. Looking at the cash flow. We did, as expected, see a negative impact from operating activities of DKK 88 million, which I will comment on shortly. Investing activities were DKK 10 million positive impacted by the sale of a building, DKK 18 million.It should be noticed that the expansion and the upgrade of the central warehouse here in Vejen has not yet had any impact on our cash flow in Q2. But going forward, we will start to see an impact on it. It will start here in Q2. In total, we expect to invest DKK 250 million.Financial activities, DKK 71 million, mainly the payment of dividend of DKK 204 million, but also installment of interest and debt and lease liabilities had an impact on this.But if we take a closer look at the operating activities, we do have quite some noncash items, DKK 61 million. Inventory were actually slightly negative. As you may remember, one of the drivers for the improved net working capital during 2020 was that we reduced our inventory. Part of it has simply to do with the fact that we did see this unexpected stop in sale of infrastructure, which meant that there we -- there was a less -- and there's quite some lead time on these products. So we cannot adjust so fast, this will normalize over the year.So there's -- we don't see any concerning in it. Receivables increased by DKK 354 million. This is the normal seasonality that we always see since the reference point here is December where they are all-time low. We managed to increase liabilities with DKK 143 million, leading to a net impact of DKK 88 million.Turning to the next page. Yes. Looking at the net working capital. There is a minor improvement in Q1 compared to Q1 2020. Meaning we go from 12.2% to 11.8% at the end of the quarter. Or if we see it as an average, we came down from 12% to 11.4%.If you look at the right side figure, we can see the gearing. And the net interest-bearing debts, we see, of course in Q4, quite a drop, which is above the normal seasonality. And here, we have the impact from the sale of our shares in BIMobject, which generated DKK 237 million.Normal seasonality, of course, has an impact in Q1. But still, we end up with the gearing of 2.7% at the end of the quarter, which, of course, is also why there's room through the payment of the extraordinary dividend of the DKK 50, as Jens mentioned previously.Turning to the next page, 11, guidance for 2021. We did revise our guidance, the 22nd of April this year. So the guidance is based on the assumption that we'll not see any significant lockdown in our business segments or any other knock on related effects on the COVID-19.The guidance is DKK 11.75 billion (sic) [ DKK 11.75 million ] in revenue, which is equivalent to an organic growth of approximately 1%. It should be noticed that our better business project, which is an integrated part of our CORE+ strategy is expected to reduce revenue with approximately DKK 200 million compared to last year, meaning that the underlying organic growth is approximately 3%.If we take a look at the earnings, as illustrated here in the waterfall diagram, we disclosed DKK 637 million last year. If we compare the nonrecurring income with nonrecurring cost last year then all this balance out. We did have some additional tailwind due to cost contain in Asia -- cost containment, sorry, last year, so you can say a more normalized level last year is DKK 617 million, which basically means that the current guidance of DKK 725 million, which we need to deliver an improvement of DKK 108 million, which, well, the DKK 725 million is equivalent to approximately an EBITDA of DKK 540 million.That was the last [indiscernible]

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

Thank you, Michael. So now it's time for questions if there are any. So please, I will hand over to our speaker or to our audit, sorry.

[Operator]

[Operator Instructions] And our first question comes from the line of Alexander Borreskov from Carnegie Investment Bank.

[Alexander Borreskov, Equity Analyst]

Just a few questions on my side. One, you mentioned sort of the continued improvement in concept sales share as a key driver of the gross margin improvement. This is a trend we've seen for a few quarters now. Could you maybe talk a little bit about where we are at in terms of the share of concept sales in Denmark and internationally? And are you sort of beginning to close the gap internationally to Denmark?And maybe a second part of that question. Previously, you've said that your share was around, I think, 30%, and that was sort of a glass ceiling. Have you now broken that glass ceiling?

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

Yes. Yes. Hello, Alexander. It's the situation right now is that Denmark is above 30%. And as a group, on group level, we've above 22%. So we are definitely above the 20%. So -- and our goal is still that we -- on group level at the end of '23, should reach 25%. So a very good track record in the beginning of the year. So 22% on average. And mainly Holland is improving a lot. That was...

[Alexander Borreskov, Equity Analyst]

Okay. That's very clear. And maybe just moving on, could you talk a little bit about what you've seen so far in the year in your climate and energy segment, considering the strong interest there's been in sort of the energy efficiency subsidy schemes, especially in Denmark that's focused on heat pumps. Is that something you've seen in the numbers yet?And when do you sort of -- if not, when do you expect that to have an impact?

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

Definitely, especially in Denmark, we see it's a rapidly growing market, of course, also because it's subsidized. So that helps, that's -- people like to be green when it subsidized, obviously honestly speaking. Now we really see the effect of the government to subsidize that.On group level, we are more or less flattish and that's simply because we have been pruning a lot of certain brands, which were -- with the -- the market was simply too low. So -- but in the markets where we have, I would say, the right products, we have definitely see a strong one. And we also foreseen that, that will continue over the coming quarters and years.So we are very satisfied with the -- with our climate and energy folks that's for sure. EV chargers, of course, is also growing revenue. That's, I would say, a more or else a no-brainer. But it's really growing a lot. Yes.

[Alexander Borreskov, Equity Analyst]

Yes. Just for clarification, the flat growth you mentioned, is that in -- on group level or on the energy? Okay. So you're growing in the energy part?

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

Yes. We are growing -- I would not say the figure, but it's strong growth, strong 2-digit growth, I would say, to be honest.

[Alexander Borreskov, Equity Analyst]

Within energy and climate?

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

Yes. Yes.

[Alexander Borreskov, Equity Analyst]

Then just a final question for me, and I'll let someone else ...

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

And also I mean if you look at it from another perspective, when we sell heat pumps, we also sell cable. So you have like a parallel positive situation. So I think -- don't underestimate the effect on cable sales when you're growing on plan just to be -- choosing to be transparent.

[Alexander Borreskov, Equity Analyst]

Okay. And then just a final question for me on industry. I see you do a deep dive in your quarterly report on one -- and yes, one of these 4 key enablers of your 2023 strategy. But just to get a sense, are you seeing improved momentum and sort of less hesitancy from industry customers in general? I know that they've been quite impacted quite a bit by COVID-19? What should we sort of expect for the remainder of 2021?

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

I mean, we did see this step back on infrastructure here in Denmark. We think that is a temporary thing clearly. And we have also stated that Marine & Offshore is still being challenged at least it was in Q1. But the good news is that, in general, OEM, MRO are starting to pick up and gain momentum again.And if we compare to last year because if you look at the top line last year in the industry, you didn't really see that much, but there were quite some changes within the subsegment where we did see our OEM MRO suffer, and of course, Offshore, to some extent, but that as the top line, we managed to keep due to a very, very impressive growth within infrastructure.But now it looks like that they are starting to gain momentum. It's still early days, Alexander, but it looks like it's really momentum.

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

Yes. If you look at the PMI figures, they look really strong...

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

Yes. In all markets.

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

In all markets.

[Operator]

The next question comes from the line of Mikael Petersen from SEB.

[Mikael Petersen, Analyst]

I have a couple as well. First, let me start in the Netherlands, it was down around 8% organically. Can you try to come up with a figure, how much of that is due to better business or maybe give a figure for around the organic growth, excluding the better business for Netherlands?

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

I think I don't have the exact figure present here, Mikael. But it is, I would say, the entire drop can be referred to pruning and probably also of the [indiscernible] to see some underlying growth, if you take that one out and so they're really doing all the right things in the moment, but the exactly high.

[Mikael Petersen, Analyst]

All right. That's fine. And then you mentioned some contracts that you're supposed to...

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

Oh, that was last year. So this is why -- and now that is out.

[Mikael Petersen, Analyst]

It's all out, okay.

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

That part. So that is why the reference point here in Q1 and Q2 will be very different and then you certainly see a drop in the revenue in the Netherlands last year. So when you measure the organic growth you measure towards last year.

[Mikael Petersen, Analyst]

Okay. That makes sense. Then my next question is in terms of the installation market, it's been going quite well and especially Denmark in recent quarters. Do you see clients having capacity constraints? Or do you still see that potential, let's say, like 5% growth in the next 2 coming years? Or do you think that the market is stretched in terms of capacity right now?

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

I think you have a point. The capacity is, it's more or less -- it's -- the market needs more skilled workers. And there will be a capacity problem, that's for sure. So -- and I would say, definitely, the installation market, it's not only to [indiscernible] market, also the renovation market. The renovation market is, in fact, bigger than the market for new facilities.So there will be a need for hands. So maybe there will be, again, people from Poland, et cetera, who will join the workforce in Denmark, but so far, it's not a possibility due to COVID-19, but there's definitely a capacity problem.

[Mikael Petersen, Analyst]

Okay. And then I have another question relating to the CORE+ strategy. You say it's progressing well. Can you try to mention some of the things that has been successful during the first quarter, in particular?

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

Yes. As said before, our concept is really moving in the right direction. Climate and energy might not be on the top line. As we have said we want to grow 5% on average per year, that has not been the case on the top line.But on the gross margin, we have grown much faster less than expected. So it's still another pruning and we're still working with that. Within industries, as Michael stated, it's starting to really to move in the right direction.So everything is starting to opening again. So you also see that in Solar. So -- and our trade segment, of course, we are not delivering directly to B2C. So the lockdown, for instance, in Denmark, in January and February were hitting us partly.So what we saw in March when the DIY retailers start to begin there. At the market, we're there. So also there, we are quite positive, but that was Denmark. Sweden, Holland -- Holland is also there, we have been pruning some customers and then some partners.And in Norway, we have start to build off the trade-off decision. We never had one. So there, we are, I would say, it's more or less a turnkey situation we have in there. But we are quite positive about the trade segment. We are going to see a lot of due interest customers and also the way we work as a team, first of all, is quite impressive. So I think that will come over the coming quarters.

[Mikael Petersen, Analyst]

Then maybe a final question. You mentioned before, like the heat pumps and the cabling, where the cabling is a part of the whole contract value as well. Can you try to split up the cost for, let's say, heat pump and the cabling, like so, lets say heat pumps like 70% of the total value? Or how would the split be?

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

I think it's more, it's more. But if you then take the EV chargers, they really need heavy cables. Then you have a more balancing situation from heat pumps versus cable. I think that the 10% to the cable and 90% to the heat pumps and then you go to EV chargers I think, 30/70. But it's anyone's guess. It's my guess. So don't [indiscernible]

[Operator]

[Operator Instructions] And we have a follow-up question from the line of Alexander Borreskov from Carnegie Investment Bank.

[Alexander Borreskov, Equity Analyst]

Just one quick one for me and previous -- I think last year you mentioned that you have this contract with Global Connect in Denmark and Norway, and they did an acquisition in Sweden. I was just wondering if you have an update on -- has there been a tender on their cable business in Sweden? And -- or do you still see that as an opportunity for you?

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

Yes, we see definitely as opportunity, but the tender will -- I think that will be in the autumn as far as I remember. So far there will not come anything out of that this year at least, I can say. So I think that their agreement with the recent distributor is it's running out at the end of the year. So we will see a tender maybe soon or at least in the first quarter. That's my best guess.

[Operator]

There are no further questions at this time. Please go ahead, speakers.

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

Okay. Thank you for listening. And of course, have a nice day despite the rain. So we will say goodbye here from Solar in Vejen. Bye-bye.