Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Dear ladies and gentlemen, welcome to the Solar quarterly report Q1 2022. [Operator Instructions] Today, I am pleased to present CEO, Jens Andersen; and CFO, Michael Jeppesen. Speakers, please begin.

[Jens Andersen, executive]

Thanks a lot. A very warm welcome to this first quarter webcast call for the Solar Group. Together with me here in Vejen, at our headquarter, are my colleague, CFO Michael Jeppesen.

The agenda for today is a general business update with some highlights here in the beginning of year 2022 and I will present that. Then, I will give you some insights about our biggest customer segment installation and a short status on our CV expansion in Denmark.

Then, Mike will present our first Q results, including a high-level cash flow status and naturally some comments to our revised guidance for year 2022. Last but least, there will be a Q&A session.

If we start with the highlights. In Q1 we delivered an EBITDA increase of DKK 77 million, up to DKK 281 million. This is by the way the highest Q1 EBITDA in our long history. High growth, combined with resilience in all market sessions resulted in an EBITDA increase of 8.1%, up to 1.3% year-over-year.

All our segments, Installation, Industry and Trade delivered strong organic growth of 9%, 18% and 35%, respectively. This, in combination with a substantial increase in the demand for renewable solutions across all our markets. A situation we expect will be accelerated and long-lasting lasted due to the after effects from the terrible war in Ukraine, but also more generic, the need for electrifying our society in a faster pace than ever.

As a consequence of the strong start of year 2022, revenue and EBITDA guidance were revised by DKK 500 million and DKK 125 million to a revenue of DKK 13.25 billion and an EBITDA result of DKK 975 million.

Finally, also announced today, the Board of Directors has decided to distribute an extraordinary dividend of DKK 45 per share, which will be paid out mid during Q. Again, I want to thanks my colleagues across border, for their continued efforts and dedication to execute on our Core+ strategy in an extremely volatile market environment.

Next slide, please. Installation, with a share of approximately 60% of our total revenue, Installation is our biggest segment, followed by our Industry with 32% and finally Trade with 8%. In Installation, our daily product and service sales account were approximate 70% and construction sites or what we also call projects were approximately 30%.

In the Solar Group, we truly believe that installation is a local business, meaning that the daily contact between installers and our sales and technical teams are key to mutual success. This is why our sales and technical organizational setup is locally anchored ensuring that we can draw on local knowledge or for the right product assortment and adjust the level of digitalization and the number of branches needed.

With more than 20,000 active in Solar customers and a huge product assortment the need for standardized services are obvious. So together with our customers, we have during the years tried to challenge status quo, aiming for increased efficiency, digitalization and technical knowledge sharing, and now also more and more in a green context.

The list of integrated services are huge, so thereby I will only give you a few examples. [ Light ] Distribution is a very well-known service from Solar, and it is sent out from our different warehouses across border.

Fastbox, 1-hour delivery in bigger cities, so that's an urban concept. Construction site logistics, smart supplies in brands and buildings, e-commerce trade and solutions, technical support, last but not least, in all our niche areas and that is both physically and 24/7 digitally. Then we have a competence development in the Solar School and one of our focus activities, namely Solar Concepts, which is what we call best buy, best saving.

You could state that we are deeply trying to be stronger, digital, and green together with the installers and even though we are pretty humble in Solar, I will definitely argue that we have succeeded with that over the years.

And if there is one customer segment that can make the society green, support that we decarbonize as soon as possible and reduce our dependency of fossil fuels, that is the technical startups. So not even the increased inflation and interest rates and a potentially slowdown in construction will not change the fact that the future for the installers look bright.

Next slide, please. The central warehouse expansion in Vejen is really going as planned. And the AutoStore solution is now up running for test, and we will start to move goods into the solution in the middle of May.

Our plan is that we will be fully operational at the end of Q. And capacity-wise, 80% of all our [indiscernible] will be serviced out of our AutoStore solution.

In our new [ high bay ] building of 11,000 square meters all racks have been mounted. Here, we will also start to move good into the racks mid-May. Parallel with that all external warehouses are under notice, and the last one will be left the latest in January 2023. Cut is so far is approximately DKK 157 million out of the estimated DKK 250 million, so we are on track, both the budget and time line.

Finally, I want to emphasize that the installation of a huge rooftop PV Solution at our central warehouse in combination with 45 heat pumps will enable us sooner than expected to be nearly CO2 neutral on country level in Denmark.

I'll now give the word to Michael for some insights to the financials. Please, Michael.

[Michael Jeppesen, executive]

Thank you, Jens. Turning to Page 7. Revenue in terms of DKK increased with more than 15%. We came out with almost DKK 3.5 billion compared to DKK 3 billion last year, equal to an adjusted organic growth of almost 14%. All main segments delivered strong growth rates, as mentioned by Jens. Particularly the Trade came out extremely strong and thereby continuing the strong performance we already saw back in Q4 last year.

Looking at the Industry segment, we are particularly happy to see that the growth within Marine & Offshore delivered strong 2-digit growth rates. It's no secret that Marine & Offshore had seen quite a roller coaster development over the last years. So we're very happy with this very strong performance.

If we shortly reflect a bit on the growth rates, it should be noticed that back in Q2 last year, we saw a substantial trend shift in growth movement from minus 0.6% to 8.6% and reaching actually 8.8% in Q3, meaning that the point of reference for Q1 growth is the easiest point we will see in 2022. This is also reflected in our guidance, on which I'll comment shortly.

Turning to Page 8. Wherein EBITDA of DKK 281 million Q1 was the 14th consecutive quarter with year-over-year growth in EBITDA. And actually, one of the few quarters if not the only one where Q1 actually exceed the Q4 earnings.

The main driver in the earnings was the increase in gross margin combined with strong growth. The gross margin in itself delivered astonishing 1.8% increase. This was driven by our Core+ plus strategy focusing on concepts, but of course also our as business project.

We did also realize a one-off impact of approximately DKK 35 million compared to 0 last year or equal to 1% increase compared to last year.

Looking at the cost level, and please notice that the reference point here in Q1 is actually the COVID cost level. External operating costs, travel, entertainment cost which are the main single contributions and IT as well within external operating costs are increasing just slightly and it is in line with what we expected. It should be noticed that we are actually still below the pre-COVID level.

The absolute increase in staff costs were more than outweighed by the increase in revenue and also in gross profit. It should be noticed that the main driver in staff cost is a combination of incentives, but of course, also cost for handling the growth.

Looking at loss and debtors, it remains firmly under control. We have not seen anything odd here. In absolute terms, earnings thereby increased from an EBITDA of DKK 204 million to DKK 281 million or 38%.

Turning to Page 9. Looking at cash flow. We see, as were expected a negative impact from the operating activities of DKK 202 million, which I'll comment on shortly. Investing activities came out with DKK 109 million. It should be noticed that the investment in the expansion and operating of the central warehouse in Vejen is by far the main driver here with DKK 51 million, meaning that there remains, as Jens was saying, slightly above DKK 19 million of the total investment of DKK 250 million.

But also, we did an acquisition of a small company called Hojager, which had an impact of $34 million. And please notice that there was a cash position in this company of DKK 10 million, meaning that the net investment is DKK 24 million. Hojager is a small B2G business that we will start to expand within this area, but more will follow on this.

Financial activities, net amounted to minus DKK 37 million, which can be -- which relates to the repayment of noncurrent interest-bearing debt of DKK 2 million, installment on lease liabilities of DKK 29 million, raising in current interest-bearing debt of DKK 323 million, which actually equals the payment of dividend we did in Q1 of DKK 329 million.

But let's take a closer look at the operating activities. And what initially spring to mind is that last year, we saw a change of minus DKK 88 million, whereas this year came out with DKK 202 million despite the substantial increase we have seen in our earnings.

However, the main difference compared to last year is that accounts receivable here has a negative impact of DKK 531 million versus DKK 354 million last year, meaning a delta of DKK 177 million.

There are 2 main reasons behind this. Firstly, of course, the strong growth, which explains a major part of it. And bear in mind that last year we did see a negative growth of 0.6%. And also the fact that Easter has moved slightly, meaning that last year, the quarter ended, including the 3 days up till Easter where we normally see a slowdown. We normally drop to index 50, 60, 70 in these days, that plays a role as well. Whereas here in this year, we will see the full impact of Easter in April, meaning our Q2 will bear the entire weight of Easter.

In order to secure our performance towards our customers, we stick to the increased inventory level we have seen during last year as well. It's important to notice that approximately 85% of the increase can be referred to AR things, meaning it's fast runners. So [indiscernible] we have increased the inventory value, we do not see an increased risk since the major part of the increase can be referred to AR tables.

This means, of course, that we will see an increased net working capital going forward, at least until things get more normalized. But in the current environment base we dealt that it's a prerequisite in order to business that you actually have the goods available. And it is still a challenge that we are fighting every day.

Turning to Page 10. Looking at the net working capital, yes, as I was mentioned before, we see a minor increase in Q1, where the average increased from 11% in Q4 to 11.5% here in Q1. And please notice that in the way we calculate net working capital here, it's debtors, it's creditors, it's inventory. And therefore, it's not affected by the temporary support packages, of which we still have DKK 85 million left, of which the main part will be repaid here during Q2. If we look at the gearing, we see again the normal -- the effect of the seasonality, which lifts us to 0.6.

Turning to page 11, our guidance. As announced on the 21 of April, we now expect a revenue of DKK 13.25 billion, corresponding to an organic growth of approximately 7%. Bear in mind that our Better Business project is an integrated part of our core strategy, and it is expected to reduce the revenue by approximately DKK 200 million compared to last year adjusted for this, you can say we expect an underlying organic growth of approximately 9%.

If we look at EBITDA compared to 2021, we have now a guidance of DKK 975 million. We do expect one-off income of DKK 80 million versus DKK 112 million last year, meaning that there is an underlying improvement of almost DKK 100 million included in our guidance.

Finally, as Jens also was mentioning the Annual General median -- Annual General Meeting authorized the Board of Directors' permission to pay out an extraordinary dividend. The Board of Directors has therefore decided to pay out DKK 45 per share equal to DKK 329 million, and this dividend will be paid out with the 13th of May. Thank you.

[Jens Andersen, executive]

Thank you, Michael. I don't know if there's any questions. So if there are any, please join in.

[Operator]

[Operator Instructions] The first question comes from Kristian Johansen SEB.

[Kristian Tornøe Johansen, analyst]

I have a couple of questions. Firstly, if we look at the margins on a geographical level, Denmark is the only market where you don't deliver an EBITDA margin improvement. I fully understand but that is also the market where you have the highest margin. But can you just elaborate on why you don't see any improvement in Denmark?

[Jens Andersen, executive]

There is one thing that needs to be mentioned very clearly, the expansion of the central warehouse makes it really difficult to be as productive as we normally are. And that is the main reason for that on the cost side. If you look at the margin side, we still see quite a lot of orders where we deliver later than expected due to shortage of products. And that also put some pressure on the price we can allow to take when it's delivered because it's simply orders in the month before delivered in the month later, and that puts some pressure to the gross margin. So that's the 2 main reasons.

[Michael Jeppesen, executive]

You can actually see that right now we have a negative leverage. So, growth actually doesn't give us any advantages here. It's really a challenge to be sure that the customers received what they have ordered. As promised, we are running now on, I think, 5 or 6 external locations right now. So it's really quite a puzzle that they need to solve every day on the -- and you know our customer promise actually requires a superb logistics. And we still deliver that, but there's a price to pay for it. And we are clear about it. It doesn't matter that in short term you have to pay additional as long as the cost, but doesn't experience anything.

[Kristian Tornøe Johansen, analyst]

Okay. That's very clear. And can you just remind us again, when do you expect that situation to ease?

[Jens Andersen, executive]

I would say the total expansion will be finished at the end of the year. That means that in 2023, we will have the capacity needed and also the appreciation needed. The AutoStore solution will be up and running in third quarter more or less. That depends, of course, the speed where we move the goods into the solution. But the planning now is that we are running on the AutoStore solution in the mid of the third quarter. So it would gradually be better and better the efficiencies and the cost will, of course, thereby go down.

[Kristian Tornøe Johansen, analyst]

Very clear. Then my next question is on the demand for renewable products. You highlight this as being extremely strong, which is not a surprise as such. But can you just talk about the exact exposure you have. So you're obviously disclosing the exposure to the climate in the energy segment. Is that entirely renewable products? Or does this also tap into some of the other segments?

[Jens Andersen, executive]

I think it's -- it will be effectful in all segments. Of course, the Installation segment is the first movers. And then hopefully, over time, industry with also do. As we have done in Denmark or Solar Denmark start to make PV solutions on flip-top, change the fossil fuel to a heat pump installations. So we think it will be a long last in market, starting with the private or the residential houses and then over time also industry companies where it's possible to get rid of the fossil fuel. But we have never seen an effect like we have seen in the last 2 to 3 months. Again, the shortage of special heat pump and PV panels is a huge problem.

[Kristian Tornøe Johansen, analyst]

Sure. But when you -- in your report state 6% of your revenue comes from Climate & Energy products, is that an industry exposure to renewable products?

[Jens Andersen, executive]

That was the baseline 2021. That will increase quite a lot. Definitely, we can say that.

[Michael Jeppesen, executive]

We will later give an update on our strategic focus areas.

[Jens Andersen, executive]

But there, we will see a strong development, that's for sure, despite the shortage problems.

[Kristian Tornøe Johansen, analyst]

All right. And then just to your guidance assumption on further price increases by your suppliers, what have you embedded? So the DKK 80 million, is that price increases you've already seen or are you assuming in that more will come from suppliers that you can pass on?

[Michael Jeppesen, executive]

It's very difficult to predict the impact of this, so I would say we've taken a conservative look at it. And so it's not that we've been looking too much into the crystal ball, because I mean, nobody really knows what will happen. But there are another side to this point as well, as we all also should remember.

In order to get any benefit of this, you need to be able to pass it on to the market and that's an open question to which extent you can do it so far, we've been very successfully in it. And we'll strive to make sure that it stays that way, clearly. But it is -- I mean, it's based on what we can see, and then we'll be leaning a little bit out of the window and that's it -- that's the way we can look into it.

[Kristian Tornøe Johansen, analyst]

So it would be fair to say that if we have scenario where there's going to come another round of price increases in the third quarter, that wouldn't really be reflected in your current guidance?

[Michael Jeppesen, executive]

I think that depends on the level of it, what is happening in Q2. So it's very difficult for us to have any firm -- I mean this is best minds' best guess on what we think is achievable here with the knowledge we have today. Of course, the world can change. And it is volatile, it has clearly become much more volatile, there's no doubt about it.

[Kristian Tornøe Johansen, analyst]

That make sense. And then just a clarification, Michael, you said that network capital should increase. Are you talking about absolute net working capital? Or are you talking about net working capital to sales ratio or both for that matter?

[Michael Jeppesen, executive]

In absolute terms, of course, you will see an increase. It kind of goes without saying when we're growing and if you give interest rates then it will increase. But there is also a risk that we will see an increase further compared to the percentage we've seen now, but I think it will be incremental in terms of percentage. But in terms of DKK you will see another impact.

[Kristian Tornøe Johansen, analyst]

Okay. That's clear. And then just my last question, then obviously, happy to see that you announced the extraordinary dividend. Would you then consider also to do share buybacks later in the year if your performance allow you to do so?

[Michael Jeppesen, executive]

No decision has been made about this, but the Annual General Meeting also gave the Board of Directors that tool in the toolbox. But I mean, let's wait and see how things are developing. And also bear in mind, we have quite some investments that are moving closer that we're still looking into. But the Board of Directors assessed the capital structure of the company at each meeting and discuss what we should do or not do. So it's another yes or no or no to the answer.

[Operator]

There are no further questions. I hand back to you speakers.

[Jens Andersen, executive]

Thank you. Thank you to all who have listened in and have a great day. Thanks from us in Vejen. Bye.