Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Welcome to the Solar Interim Report for Q1 2023. For the first part of this call, all participants are in a listen-only mode. Afterwards, there will be a question-and-answer session. [Operator Instructions] This call is being recorded.Today, I'm pleased to present Jens Andersen, CEO; and Michael Jeppesen, CFO.Speakers, please begin.

[Jens Andersen, executive]

Thank you a lot. A warm welcome to this first quarter webcast for the Solar Group. Together with me here in our headquarter in Vejen, I have my colleague, CFO, Michael Jeppesen.The agenda for today is a general business update with some highlights here in the beginning of year 2023, presented by me. Then I will give you some insight about our Climate and Energy segment, but also our latest acquisition of ThermoNova. Mike will then present our first Q results, including a higher level cash flow statements and naturally some comments to our guidance for year 2023. And finally, we will have a Q&A session.Next slide, please. Highlights. Revenue increased to DKK3.7 billion, up from DKK3.5 billion last year. Adjusted organic growth at group level amounted to 6.7% with especially Solar Norge and Solar Nederland posting double digit growth rates. Climate and Energy, one of our four strategic focus areas delivered very strong growth rates corresponding to revenue of almost DKK400 million. This was despite a very unexpected slowdown in demand for smaller heat pumps in Denmark in Q1. We expect this to be temporary due to uncertainty among [indiscernible] how and when the financial government support for pacing up of course our energy sources [indiscernible] will be relaunched. But so far, we have heard there will be a relaunch in June, but we haven't got the date yet. The industry segment post 10% in adjusted organic growth, while the installation and trade segments posted adjusted organic growth of 4% and 9%, respectively. A strong development in our underlying gross margin compensated for increased costs and we are therefore, satisfied with our EBITDA result of DKK280 million as it is on par with our [Technical Difficulty] last year. Our EBITDA guidance for 2023 is unchanged with the result of approximately DKK900 million, but our revenue was lowered with DKK200 million to revenue of DKK13,500 million, that is only due to FX headwinds from Sweden and Norwegian krona.Next slide, please. For the past two years, our Climate and Energy [Technical Difficulty] growth of 40%, achieving 10% of sales in 2022. With our acquisition of ThermoNova, we have now established an even stronger position within climate and energy and underpin the support we offer to our many installation customers specializing in green solutions.Next slide, please. ThermoNova adds an additional solution to our Climate and Energy assortment, and we are now able to provide our customers with energy-efficient high-capacity heat pumps for large buildings. It is our prediction that the increase in demand from high capacity heat pumps will mirror the development we have seen in the private market in recent years, a market that has been characterized by a strong demand for energy efficiency solutions to replace [Technical Difficulty]. So in order to meet the future demand, we are expanding the ThermoNova production significantly at least fivefold. Until the expansions is in place, we will only focus on the Danish market and then later start to introduce the ThermoNova assortment to additional markets, hopefully, that could be in the beginning of next year. Moreover, the opportunity within the industry will be driven by the general ambition to reduce CO2 emissions and will be further enhanced by the expected introduction of the CO2 tax in 2025.I will now give the word to Michael for some more insights to the financials. Please, Mike.

[Michael Jeppesen, executive]

Thank you, Jens. Please turn to Page 7. Revenue in terms of DKK increased almost 6% despite we faced some headwinds from FX. Even with the FX headwind, we came out with almost DKK3.7 billion compared to DKK3.5 billion last year, equal to an adjusted organic growth of 6.7%, similar to what we have seen in the preceding four quarters, price increases remain a substantial part of the organic growth we experienced. What we did actually see growth in volume in the beginning of the quarter whereas in March saw as expected, a negative growth in volume, but still positive organic growth. Our strategic focus area, Climate and Energy continued to deliver very strong results, as Jens mentioned, delivering DKK400 million. Despite this quite surprising negative development we saw in Denmark, it's particularly heat pumps, as also mentioned which came to a complete stop and we do still expect this to bounce back given that the underlying need for sustainable green solution remains unchanged. If we take a look at the three main segments, they all delivered growth rates, particularly the industry came out with strong two-digit growth rates. And looking at installation, there is no doubt that with the current growth level of around 4%, we do see a setback in volume. If we take a closer look at the industry, we saw solid growth in almost all sub-segments, particularly Marine and Offshore and MRO came out very strong, but also OEM, whereas utility was slightly more challenged. All-in-all, with the exception of the full stop almost in Denmark of sale of heating pump, the development is fully in line with our expectations, including the trend that we are seeing.Turning to Page 8, with an EBITDA of DKK280 million, Q1 was on par with last year. If you look at the underlying financial performance, eliminating one-off effects, we did actually see a minor improvement albeit cost of goods only improved the margin with 0.1%. The underlying margin actually improved with 0.4% when adjusted for one-off price effect. So we do still see a positive effect of our strategic focus areas they continue to deliver. During Q1, we did, as anticipated, see that price increases from suppliers are starting to normalize. We still face a lot of price increase, but at a substantial lower level compared to what we saw last year. As expected, we faced headwinds from costs, in particular, our external operating costs, EOCs. Consequently, we have launched quite a lot of initiatives, which includes cost containment, process optimization, but also staff reductions in order to secure that we can keep the cost development well below the inflation.Turning to Page 9. Looking at cash flow, we see a positive impact from operating activities of DKK101 million despite the normal seasonality [indiscernible] and DKK162 million, mainly, of course, the acquisition we did of ThermoNova. But if we take a closer look at the operating activities, we see the main change is within receivables, which added DKK304 million, which is the normal seasonality. This was, however, offset with the increase in liabilities. Inventory did however increase with DKK122 million, but this was driven by the increased Climate and Energy products where we are building inventory, In all fairness, it has to be said that, of course, the slowdown in sale in Denmark we did see at the end of Q1, of course, also had a negative impact on the development of the inventory. We do still expect the inventory level to reduce during 2023, despite the investments we need to do in our growth area of Climate and Energy.Turning to Page 10, looking at the net working capital, we see an increase in Q1, where the average increased from 14.5% in Q4 to 15.3% in Q1. The main driver being the increased inventory value, as mentioned at the previous slide. However, compared to the end of the quarter in Q4, the net working capital level remains more or less unchanged. Despite the increase in net working capital and thereby also the invested capital, we actually managed to deliver 23% in ROIC after tax, which still is a very satisfactory level. Looking at the gearing level, we see the normal seasonality kicking in, combined, of course, with the payment of dividend, investments of DKK162 million, and of course, also the increased net working capital, [indiscernible] to 1.3 from the starting point of 0.9 at the beginning of the year.Turning to Page 11. We now expect a revenue of DKK13.5 billion versus previously DKK13.7 million. The reason being the headwind from FX. Consequently, this unchanged correspond organic growth of approximately 2%. Now despite the headwind we face from FX, we reconfirm an EBITDA of DKK900 million. In both '22 and '21, we had substantial positive one-off income of DKK215 million and DKK112 million, respectively. We do not expect this to happen in 2023, meaning that our guidance do not assume any significant one-off income, which also is in line with what we mentioned in the beginning, but we see that the number of price increases that are coming through are slowing down for the time being. If you look at the markets where we're operating in, in general, we expect them to be stagnant or even negative in all segments despite the effect we see from price rollover from last year and with particularly increasing uncertainty in H2. Now during the last year, we have managed to be ahead of inflation, but as you may remember, the last quarters in 2022 we did see an accelerating cost inflation, and as expected, this continued into Q1. We expect this to continue during the remainder of 2023. But as mentioned previously, we will continue to implement the necessary mitigating action.Thank you.

[Jens Andersen, executive]

Thank you, Michael. And now it's time for questions and answers or the Q&A session. So please.

[Operator]

Thank you. [Operator Instructions] The first question will be from the line of Kristian Johansen from SEB.

[Kristian Tornøe Johansen, analyst]

A couple of questions from me. Maybe first of all, in regards to heat pumps in Denmark. So in your annual report, you disclosed climate and energy revenue to be roughly DKK1.3 billion, how much of that heat pumps in Denmark [Technical Difficulty]

[Jens Andersen, executive]

I think the fair answer here Kristian is we simply don't remember the figure. The main part of the sale we did see in Denmark during last year was driven by heat pumps because a substantial part of it, but to give you an exact figure, we simply don't.

[Michael Jeppesen, executive]

We need to investigate that, but I have a feeling, but I won't say a figure, which I'm not 100%. So we need to investigate that.

[Jens Andersen, executive]

There's no doubt there's a shift happening right now because what drives the development in Denmark where we're gradually getting into speed again is the sale of solar panels, which were not really the case last year.

[Kristian Tornøe Johansen, analyst]

It would be nice just to have a sort of magnitude of the revenue at risk, so to say. But fair enough, let's get back to that once you have a chance to actually look at the right figure.Then to the net working capital development. So where should we expect the net working capital to sales ratio to be at the end of the year?

[Michael Jeppesen, executive]

All other things equal, it should improve compared to what we saw last year, but you should not expect a return to the levels you have seen in previous years, and this is simply because there is a structural change. Climate and Energy product to a large extent, unique [Technical Difficulty]. Secondly, there's quite a long lead time, which also means all other things equal that your investment in inventory will be substantial higher. If we kind of take the Climate and Energy products out of the inventory, remaining part should return to the levels we have been used to as our supplier's ability to deliver is -- assuming that continues to improve and gets back to the normal level. But expect for the time being at least that compared to the levels we've seen in previous year, we will be some percent points which is above simply due to the change that it's now Climate and Energy, which is the main growth driver.

[Kristian Tornøe Johansen, analyst]

That makes sense, although you didn't necessarily guide very exactly for where you expect it to be besides sort of at a lower ratio than last year.

[Michael Jeppesen, executive]

We are expecting improvements during this year in total despite the investments we do in Climate and Energy. It is at a too high level. We were, as I think I mentioned, also surprised by the sudden stop in Denmark and bear in mind, there's a lead time of four months, which means it takes quite some time for us to react on the changes that we see because, I mean, the goods are already in a container on a way up here from Japan, for instance, South Korea. So it reacts quite slow.

[Kristian Tornøe Johansen, analyst]

Then just to your cautiousness around growth for the second half of the year, which I fully understand why you expressed that. But maybe the question more goes to your actual visibility, so what can you actually see for the second half of the year and what's more sort of just a cautious view given the uncertainty out there.

[Jens Andersen, executive]

I would say the visibility is -- I mean, what we see right now is that it's fairly volatile, the development we are seeing. And traditionally, we know from experience that, that is a potential indicator. We also are aware of the fact that throughout the value chains inventory has been built up all over and they will probably sooner or later start to normalize if they not already start to normalize. We are very much aware of that our customers have a higher inventory level than what they traditionally have and they will start to normalize that as well. That's going to have a negative impact or it will be temporary. If you look at the projects that we are winning, there is a change in the structure, I would say. We're not -- it's related to industries investing. It's not residential building. I would say that part has more or less come to full stop, but we see industries investing in new buildings still and in renovation offering them as well and that's -- but it's still a very limited part of our revenues. So I would say transparency has not really changed much, I would say, compared to what we have seen before and the concern is this volatility we see in the revenue.

[Michael Jeppesen, executive]

What we can see is that the number of picking lines are lower than normal or at the same time last year and that is, of course, a clear segment that the market has slowed down, and we are measuring that every day. So the number of [indiscernible] are down, that is for sure in all markets.

[Jens Andersen, executive]

But it's not that we have gained any new insights since we came out with the -- I would say that everything is more or less playing out with the exception from heat pumps in Denmark, but we expect that to be temporary as we expected when we gave the guidance the first time. That's also why our guidance in volume is the same as the original guidance. I know the FX part, but in volume, it's based on the same assumptions.

[Kristian Tornøe Johansen, analyst]

Understood. And then just the last question to your ThermoNova acquisition. So a ballpark estimate for the revenue in ThermoNova 2024, what would that be?

[Jens Andersen, executive]

See, that is still very early days. We're currently in the process of ramping up production. And at the same time, we are strengthening the organization with a focus on Denmark [indiscernible] where we have the best foundation. And so we are -- I think that's too early, right, to come up with anything firm on that.

[Michael Jeppesen, executive]

I think you will have the figure at the beginning of 2024. But of course, there will be solid growth in ThermoNova, that's for sure and we are very [indiscernible] in 2023, but of course, the production needs to be ramped up before we can start selling to other markets.

[Jens Andersen, executive]

We see a strong interest from our existing customers in this, I would say, I'd not say surprising because we were expecting something [Technical Difficulty] and we are starting to convert it into orders, but we also need to be a bit cautious because we can't simply so not manufacture and we don't want to disappoint. So the first step is strong focus on increasing the capacity, and that is they're working day and night on that as we speak.

[Kristian Tornøe Johansen, analyst]

Sure. [Technical Difficulty] My question more reflects the fact that I feel left a bit in the back on the revenue part here given the fact that you have not disclosed the revenue of the company. So we don't know how much revenue is generated when you acquired it? And if I understand you correctly, we shouldn't expect a huge jump here in '23, but obviously, with the investments you're doing, there should be some contribution to growth in '24, but [Technical Difficulty]

[Jens Andersen, executive]

It still on a basis of, well, okay, given the current FX rates, it's DKK13.5 billion, so it's not -- I mean, there is a limit to what can be done with the time frame of 1.5 years possible, I would say. But we'll make sure as this starts to materialize and become more and more significant, then it becomes more transparent to, that's a fair request.

[Kristian Tornøe Johansen, analyst]

All right. And just very low key reporting wise, where would ThermoNova, will it just be incorporated in the country revenue or would it be automatically [Technical Difficulty] or how will you template that.

[Jens Andersen, executive]

What will happen is that the revenue will go through, in first instance, the Danish unit, and that gets eliminated because it's internal revenue and similar if and when we start to sell in all the markets, then Denmark will be the first one. And if you look at the segments result, it's the end customer, so at the end of what we call end customers. If end customers is an installer, it will appear in the installation segment, if it's an industry customer, it will appear in the industry segment and it will appear there. This is how it will play out. So we can tell potentially, depending on which type of the segment you're looking at will be spread all over. But it will be in Denmark that -- because if you look at the geographic segment.

[Operator]

[Operator Instructions]

[Unknown Executive]

We have received two questions online in the polls, maybe.

[Operator]

Yes, please go ahead.

[Unknown Executive]

We received a question from Ingli. Can you quantify, if any, the positive support to the gross margin from inventory?

[Michael Jeppesen, executive]

We can actually. It's approximately DKK25 million in Q1 compared to DKK35 million last year. So it is as expected, reducing. And the major part of it being in January and February where it was neglectable in March, basically. So if you take out the one-off, the real gross margin or the operational gross margin is up [Technical Difficulty]

[Unknown Executive]

A second question from Daniel. Do you see growth in Poland, Netherlands and Norway and which potential do you see in these markets?

[Jens Andersen, executive]

Yeah. I would say Poland is like a rollercoaster economy. It has really slowed down in Poland temporary, but now we see orders and offerings are coming in again. So as I said Poland is definitely, but we're also pretty small in Poland. It's a very fragmented market. Of course, the war in Ukraine, if it ever lasts, but at least we all hope for that, that will give a really strong situation in Poland going forward. But at the moment, it has temporarily been down, and now it's starting to move in the right direction. Holland and Norway, it's mainly driven by [Technical Difficulty]. It's amazing how much they're investing in Climate and Energy in those two countries. So the rest is more or less a picture of what we have seen in Sweden and Denmark that the normal installer revenue is a little bit down, but then it's really compensated by Climate and energy in Norway and Holland. I hope that is sufficient.

[Operator]

There are still no questions. So I will hand it back to you for any closing remarks.

[Jens Andersen, executive]

Okay. Thank you for listening in, and have a really nice day. Bye-bye.