Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Solar AS Q1 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 speakers today, Jen Andersen and Michael Jeppesen. Please go ahead.

[Jens Andersen, executive]

Thank you. Good morning, everyone. A very warm welcome to this first quarter webcast for the Solar Group. Together with me here in Vejen, I have my colleague, CFO, Michael Jeppesen.

The agenda for today is a general business update with some highlights from Q1 '24 presented by me. Then I will give you a short introduction how we want to work even closer with our customers with solution selling, one of the cornerstones in our new 3-year strategy called Solve. Mike will then present our first Q results, including a high level cash flow status. And then finally, and hopefully, we will have a Q&A session.

Highlights. As expected, all segments showed negative growth in Q1 '24. Revenue declined to DKK 3 billion, down from DKK 3.7 billion at the same time last year. Adjusted organic growth amount to minus 15.4%, which -- with March performing slightly better than January and February.

Especially, revenue from Climate & Energy, one of our strategic focus areas, remained at a low level in Q1 and amounted to around DKK 200 million, down from nearly DKK 400 million.

The Industry segment delivered adjusted organic growth of minus 10%, with MAG45 delivering positive organic growth of more than 6%. The installation and trade segments delivered adjusted organic growth of approximately minus 17% and minus 22%, respectively. Around 50% of the decrease in the installation segment can be accounted by lower Climate & Energy sales.

EBITDA of DKK 88 million compared to DKK 280 million last year was totally on par with our expectations, and we reconfirm -- or confirm our '24 EBITDA guidance of DKK 600 million and the revenue guidance of DKK 12.5 billion.

Next slide, please. The devil always lies in the details, so if I elaborate on our operational performance and try to adjust for the negative one-off impact from special costs amounted to DKK 25 million in Q1 '24. But even more importantly, the early timing of Easter, which calculated amount to at least an EBITDA reduction of DKK 40 million in Q1 compared to last year, our real, or should I call it, normalized EBITDA is DKK 150 million in Q1 compared to last year.

In other words, we are performing totally in line with our own expectations and guidance of DKK 600 million in EBITDA and a margin of 4.8%.

Next slide, please. Solutions sales. With our new strategy Solve, we combine our concepts with Solution sales competencies, especially within opportunities that emerge from the green transition. We actively promote products and solutions that accelerate the green transition, not only for the benefit of our industry, but also for the wider world.

Solutions sales covers a diverse range of customers, including architects, advisers, builders and, of course, installers, customers who are specialists in their fields, but also who can nonetheless benefit greatly from Solar's competencies. Solution sales currently operates within the area of tools, fastening and consumables, like one of our big categories, Climate & Energy, security, data and communication and also cables.

With Solution sales, we aim to increase our share of revenue to 20% of our total revenue. Denmark is, I would more or less say, again, our guiding start with Solution sales already having reached this benchmark. So with Solve, it's our ambition to get even closer to the decision makers and the customers, but also specify on architects to focus on our concept strength, which also will drive overall profitability and enhance our position in the value chain, to deliver Solution sales where we aim to increase the share of wallet with existing customers and attract new B2B customers.

And finally, to maximize the growth potential in Climate & Energy with the newly established Industrial solutions, where we offer Climate & Energy turnkey solution for our industry customers. I can inform you that we have closed orders in ThermoNova for DKK 25 million in the first quarter of this year.

I will now give the word to Michael for some insights to the financials. Please, Michael?

[Michael Jeppesen, executive]

Thank you, Jens.

Please turn to Page 7. Now revenue in terms of DKK decreased with 17%, which is equal to an adjusted organic growth of minus 15.4%. As also pointed out by Jens, Easter is actually quite a factor. Our adjusted organic growth reflects an adjustments for the early timing of Easter when compared to Q1 2023. However, the effect from the working days leading up to Easter, which traditionally see substantially lower business activities, has not been adjusted in the organic growth.

And if we purely look at the activity level, on these 3 respective days, they should be seen as maximum 2 days. Consequently, even though we adjust for the number of working days, we do not take this fully into consideration, the actual impact of the Easter. Regardless of this, the last 2 quarters do bring resemblances to what we did see during the finance crisis in terms of headwind. We do still believe that this is to be short lived.

Looking at the segments. Similar to what we saw in Q4, we saw a negative organic growth, not only in our main segments, Installation, Industry and Trade, but also in the subsegments where MAG actually being a notable exception to this, and this was completely as we expected.

Our strategic focus area of Climate & Energy also continued to perform below last year with DKK 200 million versus almost DKK 400 million last year in terms of revenue. It should be noticed here that a part of this is attributable to -- I got that wrong. It can be referred to the fact that PV panels in terms of pricing has reduced approximately 50% of the price we saw 1 year ago. It's not the entire explanation, but you do have to explain a part of the drop.

We're particularly happy that we in March saw the first signs of a potential recovery beginning in Denmark. This has continued into April, with Solar Danmark's growth almost edging into positive territory.

Given that we also continue to win more and more projects in Denmark, the trend shift that we saw starting late last year, we are convinced that this trend will continue. In that perspective, it should be noticed that approximately 50% of the group's earnings originates from Solar Danmark, meaning this is a notable event. Overall, the development in Q1 was as expected.

Please turn to Page 8. When EBITDA of DKK 88 million, Q1 was on par with our expectations but, of course, substantially below last year. Looking at cost of goods sold, we saw a decrease in the margin of 1.8% when adjusted for one-off price effects.

[ Margin ] is consequently more or less in line with what we did see in Q3 last year and partly also in Q4, if we adjust for the last year -- if we had the last year figures, if we adjust them for the year-end, activities, we would have a positive impact in Q4, meaning there is not really anything new here to us.

A substantial part of this is, of course, due to a less favorable mix, but also continued suppressed gross margins, among other things relating to Climate & Energy products, but also, and we should note, remember this, coupled with increase in cost to improve the delivery service, which was an intentional decision from our side.

As expected, we did see headwind from costs. In total, this had a negative impact of 1.5% on the recurring part and 0.8% on the nonrecurring part. This is despite the initiative carried out throughout last year, but also in Q1 this year, where we have actually reduced the number of FTEs rather substantially.

Regardless, we will continue to have a strong focus on initiative, including cost containment, process optimization and staff reductions in order to secure that the cost development remains well under control.

We are particularly happy to notice that our debt to management -- credit management is still performing very well. So loss on trade receivable remains absolutely under control.

Please turn to Page 9. Looking at the cash flow, despite the normal seasonality in accounts receivable, operating activities came out with 0. During Q1, we invested DKK 57 million in total. It should be noticed, we have not seen any substantial impact from the projects regarding our new [ sensor ] warehouse in Kumla. But as also mentioned in the report, we have now initiated the process of selling the buildings -- the current buildings.

Taking a closer look at the operating activities, we're particularly pleased with the continuation of inventory reduction totaling DKK 112 million in Q1. Looking ahead, we expect this trend to slow down, among other things, because we now start to see a trend shift in the revenue. The increase you see in accounts receivable reflects the normal seasonality between Q4 and Q1, so there is no reason to concern over the increase.

Please turn to next page, Page 10. Looking at the net working capital as an average for the last 4 quarters, it appears as if the development is flattish, relatively speaking, despite net working capital in terms of DKK is clearly reducing, as shown in the figure.

However, if we look at net working capital at the end of the quarter, we are actually down to 15.1% versus 16.7% last year Q1. And this is actually despite the negative growth we have seen. This basically means that we're currently is reducing the investment in net capital more than the headwind we are facing from the declining revenue.

Looking at gearing, it's increased from 1.3 to 2.1. Of course, part of this can be referred to the payment of dividend of more than DKK 200 million.

Please turn to Page 11, guidance 2024. We confirm our guidance of a revenue of DKK 12.5 billion and EBITDA of DKK 600 million. The market, in general, we think that the outlook remains unpredictable due to heightened geopolitical and macroeconomic tensions. However, we still expect a recovery in the situation towards the end of the year.

In total, we still expect all markets to be negative for the year in whole. In general, we also expect all segments to show negative growth in 2024, but that they'll start to recover at the end of the year. And our recovery, by the way, are convinced already has started in Denmark.

During the later part of '23, we saw that the gross margins in several product categories, despite the positive impact from concepts, actually were reducing. We expect the development we saw there to continue in 2024. And also you should notice that we have taken a decision to increase our service levels by -- which will drive higher freight costs. So consequently, for 2024, we expect a lower gross profit margin than what we saw in 2023.

We would say, given the latest development seen in Denmark, we are now convinced that there is a trend shift, at least in Denmark. You could argue that for the other main markets, Norway, Sweden and the Netherlands, we may still not be out of the woods yet.

But to summarize, so far, the development in all material aspects is as expected, and we're pleased to see that we now can see the first signs of potential turning, which confirm the underlying assumptions for our guidance. Thank you.

[Jens Andersen, executive]

Thank you, Michael. Then it is time for questions if there are any on the line. Otherwise, we have received 3 questions -- written questions, but let's start if there's someone on the line who wants to raise a question, please.

[Operator]

[Operator Instructions] There seems to be no questions from the phone lines at this time. If you want to proceed with the webcast questions.

[Unknown Executive]

Yes. We've got one from Alex. The recovery you experienced in the end of the period in Denmark, is this surprising you positively and giving you optimism for the rest of the year?

[Jens Andersen, executive]

I would say it's in line with our expectations. On the other hand, we have seen our product pipeline increasing more than expected. So at least there are some signals, as also stated by our peers, by the way, that we see a decent recovery in Denmark.

Of course, you also have to bear in mind that the reference part in the second half of 2023 was easier in the first half of 2023. So yes, indeed, we see a trend shift.

[Unknown Executive]

Besides the recovery in Denmark, how do you see demand develop for the rest of the year? Is there any division and/or geography area that is beginning to look more positive for you than expected in the beginning of the year?

[Michael Jeppesen, executive]

I would say, in general, as I also mentioned during my comments to the guidance, we can say that both Sweden and Netherlands and Norway are not yet out of the woods, but it's not worse than we anticipated. It -- but it's not getting better either.

We know that both Norway and Sweden potentially can historically move out very fast, whereas also historical experience have shown that Netherlands can be a more slow starter.

I would like to point out that as Jens also were saying about our strategy and special sales, if you look at the performance -- the financial performance of the different units, and bear in mind that in Denmark, special sales, amongst other things, is the leading star, the guiding star here. And you can see it's reflected in the earnings.

It's simply a much more diversified business. It's much more resilient. So I would say, at least if you look at the figures, I think they confirm that our strategy is the right one, that we're doing the right things now. But to come back to the questions, I know I disagree now here, but I digress, but I would say it is more or less as expected, and they're not out of the woods yet.

[Unknown Executive]

Can you comment on medium- to long-term growth targets?

[Michael Jeppesen, executive]

We haven't really established any, so the short answer is no.

[Unknown Executive]

Would the pressure within the Climate & Energy and the market for heat pumps, our guest competitors have also experienced a difficult market. But are you in this difficult market gaining or losing market share? And if there's anything you can do internally to gain market share during this decline.

[Jens Andersen, executive]

I would say, of course, it's very different from market to market. But if you take Denmark as a leading star, I would say, at least technique, that is the union for the installers. They just had an article where they were written at least that the heat pumps were down with 81%.

That is, of course, the windows figures and not the wholesaler features. And we are down with close to 50%. Looking at that, we are gaining, I would say, huge market shares on PV panels in Denmark as we speak. But heat pumps is still on the water, but not as much on the water as technique are stating.

[Michael Jeppesen, executive]

We can add a bit more to this that in terms of air-to-air heat pumps, we actually are seeing that is gaining more and more traction. But they are substantially lower in terms of pricing compared to a much more simple installation compared to an air to water heat pump. So they remain suppressed. I would say air-to-air is starting to gradually gain more traction.

[Jens Andersen, executive]

And we also see that district heating in some rural areas are now starting to be stopped. At least, we saw that the municipality of [indiscernible], they just stopped the district heating because the price per unit were way too high. So at least that also gives some comfort that maybe the price for district heating per unit will be too high, and that will be over time normalize. And hopefully, that will be a heating solution coming out of heat pumps.

[Unknown Executive]

Can you remind us of your governance regarding net debt to EBITDA?

[Michael Jeppesen, executive]

It's very easy, we don't have any.

[Unknown Executive]

Can you comment on your current M&A strategy and pipeline?

[Jens Andersen, executive]

I think that we cannot disclose that on this call, sorry. We are always looking and interested, especially now our special -- or our solution sale. That's where we see that we need to do even more. And of course, if we find attractive companies out there, we will always have an eye open on that.

[Unknown Executive]

How do you think about buybacks, short to medium term?

[Michael Jeppesen, executive]

First of all, it's a Board of Directors decision. But it is a tool we have available. I would, however, be surprised if it was in the cart, at least short term. I don't see it happening. Also because Solar is mainly a dividend share.

[Unknown Executive]

Do you have any questions online? Or should I keep going?

[Operator]

We have no questions from the phone lines at this time.

[Unknown Executive]

And we have additional 3 here. With the pressure within the Climate & Energy -- and let me see here. Looks like one we had before. Beside the recovery in Denmark, how do you see demand develop? I think we've gone over everything.

[Jens Andersen, executive]

Okay, okay. So no more. That concludes the session for today. Thanks for listening in. Have a very nice day. Bye-bye.

[Operator]

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