Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Welcome to the Solar Quarterly Report for Q2 2023. [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 warm welcome to this second quarter webcast for the Solar Group. Together with me, I have my, as always, CFO, Michael Jeppesen. The agenda for today is a general business update, with some highlights from first half year of 2023 presented by me. Then I will give you a short update on our CORE+ strategy that soon will come to an end. Then Michael will take over and present our second Q results, including a high-level cash flow statement and naturally some comments to our guidance or reconfirmed guidance for year 2023. And then finally, we will have our Q&A session.

Next slide, please, highlights. As expected, we saw a slight decline in growth in second Q. Revenue decreased to DKK 3.3 billion, down from DKK 3.5 billion, and adjusted organic growth at group level amounted to minus 1%. Solar Norge and MAG45 delivered positive adjusted organic growth.

Especially within Climate & Energy, one of our strategic focus areas, we delivered very strong growth rate, corresponding to a revenue of almost DKK 375 million, even though that we saw a substantial slowdown in the Danish market, which already started in March Q1. We expect that sales of heat pumps in Denmark will pick up as a new subsidy scheme to private households is just announced and will be implemented mid-September Q3. If we look at Industry and Trade segments, they posted adjusted organic growth of 1% and 8%, respectively, while the Installation, as expected, posted adjusted negative organic growth of minus 3%.

EBITDA of DKK 214 million in Q2 was totally on par with our own expectations. And if we adjust for the very strong one-offs we had last year, the underlying EBITDA margin improved slightly to 6.6% this quarter compared to 6.4% in the same quarter last year. We have made an illustration in absolute figures on Page 9 in our second Q report, if that could be of your interest. The slightly improved EBITDA level was supported by improvements across all our strategic focus areas but also the measures we took in Q1, including cost containment, process improvement but also staff reduction.

We reconfirm our revenue guidance of DKK 13.5 billion and EBITDA guidance of DKK 900 million.

Next slide, please, CORE+ update. The introduction of several initiatives with -- in our 4 strategic focus areas is paying off and will not only support our ambitions for 2023 but also for the years to come. We launched our CORE and, later, CORE+ strategy in 2018 and 2021, respectively, largely targeting concepts and industry as well as efficiency in general. All in all, we have managed to boost our EBITDA from, at that time, DKK 360 million, and that was back in 2007 (sic) [ 2017 ] to now a projected DKK 900 million in 2023.

If we take a look at concepts, we have strongly focused on driving our concepts here, and we have achieved a share of revenue well above 23%, which corresponds to a 2% [ per change ] growth in the last 2 years. We are, therefore, well on our way to receiving or reaching our target of 25% share of revenue even in a period with high revenue growth in areas where our concepts are not available or even very low.

If we turn to Industry, the Industry segment, as you might remember, compromises of 4 subsegments, that is Infrastructure, MRO, OEM and, finally, Marine & Offshore. We have seen strong growth in all our 4 customer segments, boosting the share of revenue by 2%. And at the moment, as we speak, we are 34% of our total revenue. In the strategy period, we have significantly increased our segment profit to a level above 17%. I dare to say that we still have a huge [ on-road ] market potential in the years to come, especially in the Dutch and the Swedish market.

Climate & Energy. For the past 2 years, our Climate & Energy focus area has posted EBIT growth of 40%, and we are confident that our investment in ThermoNova will enable us to generate future growth and support the industry in general ambition to reduce CO2 emissions but also enhance the expected introduction, at least in Denmark, of a CO2 tax in year 2025.

If we talk of efficiency in [ journey ], that's pretty complex, but I will try to explain. But in the last years, we have made automation in nearly all our warehouses. And we have installed out of store in Norway, Denmark, the Netherlands in order to improve both customer experience and, of course, also efficiency. In this year, we have started to analyze our Swedish warehouse, but it's also important to state that no decision about our future central warehouse set up in Sweden have been taken yet.

As a leading digital company, we will invest in the continuous improvement of our business by developing tried and tested technologies now also including AI tools. With a price winning award from the Danish Chamber of Commerce here in 2023, we were externally recognized as one of the best B2B e-commerce platforms in Denmark. The award really makes me proud because we were up against other strong players from all kind of industries. But digitalization also covers the complete installation of SAP across all our main entities, which have increased the insights and control of our local warehouses, enhance customer understanding but also sharpen our ability to adapt to different market situations significantly fast.

Next slide, please. Talking about green or green together, we have worked a lot with sustainability. And I think -- and finally, before I leave the word to Michael, I think that what we have done with 38 hectares of agricultural land, we have made that into a new forest in Vejen, where we have planned 116,000 trees. In all fairness, I believe that Solar again goes above, even beyond, even the higher standard by focusing not only on becoming CO2-neutral in our Scope 1 and 2 no later than 2030 but also aimed to improve biodiversity and help improve life and land by afforestation.

I will now give the word to you, Michael. Please, Michael.

[Michael Jeppesen, executive]

Thank you. Turning to Page 7. Revenue in terms of DKK decreased by almost 6% as we faced substantially headwind from FX. We came out with -- despite this, we came out with almost DKK 3.3 billion compared to DKK 3.5 billion last year, equal to an adjusted organic growth of minus 1%. Contrary to what we've seen in the preceding 5 quarters, price increases now only constitute a neglectable part of the growth.

Our strategic focus area, as Jens also mentioned, Climate & Energy, continued to deliver strong results, reaching almost 12% share now in -- of the revenue in Q2 despite the headwind we've seen in Denmark with negative growth in the entire quarter, very similar to what we actually experienced in March. Particularly heat pumps, as Jens also mentioned, came to almost completely stopped. We are still convinced that the market and the underlying demand for this remains intact, and we expect this to return again when the new subsidy schemes will be implemented, which is expected to take place late Q3. Of course, it's an open question when this will start to materialize in our figures. We'll probably only see a limited impact in September.

As expected, if we look at the 3 main segments, Installation faced headwinds from the market, whereas Industry and Trade continued to post positive growth rates. If we take a closer look at the 2 ladders, starting with Industry, we can see that particular MRO delivered very positive growth rate, whereas as expected, Infrastructure was below, mainly due to that the rollout of fiber is coming to an end in Denmark. It was not a surprise to us. It was as expected. Trade continued to face headwinds in the DIY segment, but the other subsegments more than offset this development.

So with the exception of the stop in Denmark of sale of heat pumps, which is basically a continuation of what we saw in late Q1, the development is fully in line with our expectations, including the trend and the mix.

Turning to Page 8. When EBITDA of DKK 214 million, Q2 was in line with our expectation and actually also with last year when adjusted for one-off price effects. Actually, we did manage to strengthen the underlying margin slightly from 6.4% to 6.6%, a development we are very pleased with given the headwinds we've seen in the market. Albeit the COGS only -- or the cost of goods sold only decreased with [ 0.2% ], the underlying gross margin actually improved with 1.1% when adjusted for one-off price effects.

During Q1, we saw as anticipated, price increasing starting to normalize, and this has continued into Q2, meaning one-off price effects now are completely neglectable. Our strategic focus areas was the driver of this strong development. We did, as expected, face headwind from cost. This had, in total, a negative impact of 1%. Compared to last year, it's particularly external operating costs that gives us some challenges, where salary inflation is firmly under control. Regardless of this, we'll continue to have a strong focus on initiatives, including cost containment, process optimization and staff reduction in order to secure that the cost developments remains well below the inflation.

We're very pleased also to see that loss on trade receivables are developing very, very well. Managing credit management is a core skill within the Solar Group, even though times may be slightly more challenging.

Turning to Page 9. If we take a very quick look at H1, when EBITDA of almost DKK 0.5 billion. The underlying EBITDA is on par with last year when adjusting for one-off effects. Despite a drop in one-off price effects, the GM remains almost on -- meaning the gross margin remains almost unchanged. Consequently, the underlying gross margin has been improved with 0.7%. As expected, the H1 figures are also influenced by the headwinds from cost inflation. And again, it's particularly the EOC, which had a negative impact of 0.4%. To conclude, H1, the development is in line with our initial expectation, where Q2 was slightly weaker than Q1.

Turning to Page 10, looking at cash flow. We had a positive impact from operating activities of DKK 78 million, which I'll comment on shortly. Investing activities of DKK 54 million, of which the main part of the PPE related to the expansion -- the ongoing expansion of the central warehouse in the Netherlands. This is progressing according to plan, and we expect the buildings to be ready to be handed over late this year. If we take a closer look at the operating activities, we see the main change is liability, with minus DKK 303 million, which is basically turning back liabilities to level the head at the beginning of the year but also, of course, due to less purchase and -- as we are gradually reducing our inventory level and, of course, also additional purchase of Climate & Energy products, which has a substantial shorter payment terms compared to what we see on average.

Receivable is reducing, but this is the effect of the revenue -- mainly the effect of the revenue in June being slightly lower than the revenue in March. Inventory has actually decreased with DKK 65 million despite that we still see a growth in the value of Climate & Energy products. We'll continue to focus on reducing the inventory level during 2023 and expect by the end of the year that this will more or less reach a normalized level.

Turning to Page 11. If we take a look at the net working capital, we can see an increase in Q2 when we calculate the net working capital as an average of the last 12 months. However, if we compare it by the end of the quarter, meaning Q2 versus Q1, it's basically unchanged, the net working capital. If we take a look at the gearing, it increases slightly from Q1 to Q2. It increases from 1.3 to 1.4 but slightly below our own target.

Turning to Page 12. Our guidance for 2023. We confirm our guidance of a revenue of DKK 13.5 billion and an EBITDA of DKK 900 million. Both in 2022 and 2021, we had substantial positive one-off price effects of DKK 215 million and DKK 112 million, respectively. We do not expect this to happen in 2023, meaning our guidance do not assume any significant one-off income. And given what we have seen, the development we've seen so far in H1 supports this completely.

If we take a look at the markets we operate, it is -- our assessment of the market remains unchanged. In general, we expect a stagnant or negative development in -- within Installation and Industry, with uncertainty increasing, particularly here in H2. During the last years, we have managed to be ahead of inflation, but the late 2022, we started to see cost inflation accelerating, which continued in H1. We have implemented and will continue to implement mitigating activities, and we can see now a clear effect of the initiatives we have implemented. So we expect this to wear off gradually.

So to conclude, H1 was in line in with our expectations, with the exception of the development within Climate & Energy in Denmark. We will continue to focus on normalizing the inventory level, but we'll also do the necessary investments within Climate & Energy products in order to meet the demand, which we expect will pick up. Cost inflation and debtors are in control. Regardless, we will, of course, continue to implement the necessary mitigating activities to ensure that it stays like this. Thank you.

[Jens Andersen, executive]

Thank you, Michael. So now let's turn for a Q&A session. So please.

[Operator]

[Operator Instructions] The first question is from the line of Kristian Johansen from SEB.

[Kristian Tornøe Johansen, analyst]

Can you hear me?

[Jens Andersen, executive]

Yes.

[Kristian Tornøe Johansen, analyst]

I've got a couple of questions. Maybe first on Climate & Energy, you disclosed the revenue number. Do you have a rough estimate of the growth rate in the quarter for Climate & Energy is?

[Michael Jeppesen, executive]

I simply can't remember rate. Kristian, it's a substantial growth, but the growth is driven out of the Netherlands, Sweden, Norway, whereas Denmark is negative.

[Jens Andersen, executive]

I would say, in round figures, it's about 30% compared to [ one to one ] last -- the same quarter last year. I think it's, of course, [indiscernible] and that's the problem we are facing right now for [indiscernible].

[Kristian Tornøe Johansen, analyst]

And obviously, that's what you expect to reverse in order to reach the 40% growth for the full year?

[Jens Andersen, executive]

Yes, it's on average in the whole strategy period. And so that's the way we have given our guidance for our strategic goals.

[Michael Jeppesen, executive]

But it's clear, Kristian, if Denmark remains at -- and we are tracking very substantially below last year. If that continues, which we do not anticipate, we will be a bit more challenged in reaching say 40%, that's like -- and it might end almost at the current level roughly.

[Kristian Tornøe Johansen, analyst]

Okay. Understood. So maybe along that line, you're keeping your guidance for 0% organic growth. Implicitly, that means around minus 3% for the second half of the year. If -- I mean most news flow around your end market is currently somewhat negative, I would claim. So how confident are you in this 3% -- minus 3%? And what have you assumed specifically for Climate & Energy in your guidance in the [indiscernible].

[Jens Andersen, executive]

As we also stated, of course, the uncertainty. And we have assumed that it includes a level, very strong growth rate in H2, but I would say, even though we agree with you, we'll analyze. These signals are also -- it's quite mixed. If we take Denmark, for instance, TEKNIQ just disclosed and [ based ] its survey they've done among heating and plumbing and electrical installers, and their order book is building up quite strong now. So meaning they have quite a lot of work to do. We can also see it on the number of projects we are winning. This is basically in Denmark. I think more or less exactly the same level as [indiscernible]. It's exactly the same level [indiscernible] the last couple of months.

So -- and this is what disturbs the picture a bit because there's no doubt there's been a shift in what our customers, if you look at the Installation segments, are working with. So there is more service compared to projects, which means that our, the consumption of material is, all other things equal, lower. And it's unfortunately not been possible for us to find out any tangible information, I would say, about their expectations from the industry association, TEKNIQ, on the split between what is expected to be [ laid ] and what is expected to material in this order buildup. But at least we can see that they are accelerating. So you can see that's a positive news.

On the other hand, you know that you can see that the German industry is gradually slowing down. That can potentially have a run-on effect in Denmark, which will be negative to us. On the other hand, we still have a huge potential in Sweden within Industry because we're so small. We're doing very well. But there is still a lot to do. I would say it is really the impact of confusion and conflicting [indiscernible] that we are looking into, but there are definitely also some green areas that we are facing. But also, as you said, some more [indiscernible].

[Kristian Tornøe Johansen, analyst]

Okay. That's quite interesting. So just to clarify your comment on the project wins. So when you say that's on the same level, that's sort of a year-on-year comparison over the past couple of years where you're winning the same level of projects as you did in the same month last year, right?

[Jens Andersen, executive]

Exactly. So it started at least in the last couple of months. Seems like it's starting to normalize. It's not there yet. Truly, there are a lot of concerns, but this starts to normalize.

[Michael Jeppesen, executive]

But bear in mind that the projects, that's a main part of our revenue. Just remember that. But it's a good indication, at least, I would say.

[Kristian Tornøe Johansen, analyst]

Sure. I would assume it's also the most cyclical part of your revenue?

[Michael Jeppesen, executive]

Correct.

[Kristian Tornøe Johansen, analyst]

So reflecting over the sort of development in your project wins over the year, does that mean that there's been a pickup in the last couple of months compared to what you had earlier in the year?

[Jens Andersen, executive]

Yes, we had at least March and April, they were pretty low, and then we start to see a pickup from May, and it always continued from since May.

[Michael Jeppesen, executive]

But traditionally, you should also -- there are some time lag. So the drop we saw in the beginning of the year, that's what we'll be facing at the end of this year, whereas the pickup we're seeing now is probably not going to get much of an impact this year. That's going to be for the next year. You need to add that twist in mind. And this is also why we convinced that our guidance is the most qualified estimate on how things will look.

[Kristian Tornøe Johansen, analyst]

Okay. That makes good sense. And my next question is just on gross margin, which is obviously extremely strong given the underlying year-on-year improvement as well as we should also highlight. I think in your presentation, you mentioned that it is the strategic core drivers, which is leading to this level of gross margin. Maybe if you can elaborate a bit further, whether there are any mix effects also and whether this level is sustainable. So is that a fair estimate for gross margin for the coming quarters as well?

[Michael Jeppesen, executive]

I would say if we start to try to decompose it, I mean, the increased share of concepts, and as Jens also mentioned, and that has picked up well. I think [ 3% ] points is a part of the explanation. The mix also has an impact because when you have less projects, you have a higher gross margin. You typically have a higher gross margin on the service sale compared to when you have your projects. And that also plays a part of it. So when project starts to pick up again, you will, all other things equal, see a gross margin being reduced in percentage at least.

[Jens Andersen, executive]

And also the Industry share is increasing. That helps a lot, I would say. So if you look at the segments' [ logic ], you can see more details about the -- especially Industry, and the pickup, they have done very well for the last couple of years.

[Kristian Tornøe Johansen, analyst]

Okay. That makes great sense. Then my last question is around net working capital and maybe inventories more specifically, just sort of your optimism for -- to what extent you're actually able to lower your inventory for the rest of the year. And more specifically, where should that working capital to sales be by the end of the year? It reached above 60% now. So where do you expect that to be year-end?

[Michael Jeppesen, executive]

You can say, given the current revenue, our inventory level is at a level DKK 200 million to DKK 300 million too high. So -- and that's what we will gradually reduce, but it will take time. And bear in mind, when we start to reduce, you do not -- and then everyone [indiscernible] we don't really see any impact because your accounts payable, they drop simultaneous. And we're going to do this in a controlled way. So -- and then it simply takes some time. We could, of course, have wished that this was done in a much faster way, but we are convinced that by the end of the year, things will look substantially better compared to how they are now.

[Kristian Tornøe Johansen, analyst]

And the net working capital to sales ratio at the end of the year, what should that be?

[Michael Jeppesen, executive]

We haven't given any guidance on that, Kristian. And I didn't hear myself mentioned it either. I'm not going to, but you can say it will improve. But it's always difficult to forecast because it's a snapshot that you see. The balance sheet, with it -- it's very difficult to give you an exact effect, or say, for the sake of a rationale, that just for inflation purpose, that DKK 200 million of the inventory reduction is carried out in the last 2 months of Q4. Your accounts payable will drop at the same level, more or less, and then you have, in percentage, no effect. So that's why we are a bit unclear about this because we simply can't give an exact figure, yes. We can see that it's trending the right way now.

[Operator]

There will now be a brief pause while further questions are being registered.

[Unknown Executive]

We've got 2 online questions. We might take as well. First one, could you please quantify the benefits of the new warehouse in the Netherlands as well as give your assessment of the competitive landscape in the Netherlands after Rexel acquired Wasco.

[Jens Andersen, executive]

I would say the benefits -- the warehouse in Alkmaar is, as we speak, on an extension and will be finished at the end of the year. The first part we did, we had an internal interest rate around 20%. That was the payoff of the investment, the first half. The last part will not be as good as the first half. But on the other hand, we will only have one warehouse that means that we will leave Duiven.

[Michael Jeppesen, executive]

And we'll buy us additional capacity. So you can say it's also a ticket to grow. It is -- but it's true. If you do an internal rate on this, it will be lower. And bear in mind, the 20% just for the complete period was after tax, is very profitable in there, but this is lower.

[Jens Andersen, executive]

Yes. We also noticed that Rexel bought Wasco and, of course, also paid a high price. It is like it is in Holland that you are both certified e-installer and HWS installed. So normally, Rexel is only working within e-installers but now for the first time, have bought an HWS company. We have the same company mix in our Dutch operations. And we do not see that the competition will increase further because it's already there. It's a hot market. It's a tough market. It's also a huge market, and we have very strong expectations, especially within Climate & Energy in the Dutch market.

And I think that explains why Rexel was so interested in Wasco and also paid a very high price, but it's only my words on the case.

[Unknown Executive]

I hope that was sufficient. The next question is what do you think long-term sustainable EBIT margin is in a long business environment? And what is your CapEx needs under the same circumstance?

[Michael Jeppesen, executive]

If we start with the CapEx, previously, we have said that it would probably be around 0.8% of the revenue over time. I think this may probably have moved up slightly, so 1% is probably a better estimate with huge variances. But if you take a 10-year approach, you'll probably end up there when these huge investments that we are currently doing have been initiated.

We have a strategic target for this strategy period of an EBITDA margin of 6.5%. Plus, we will come up with a new strategy in the beginning of next year. And as a part of that strategy, there will also be an update on the EBITDA margin. So we'll come back with more information then the beginning of the new year.

[Unknown Executive]

And the last question, could you please elaborate on the plans for the acquired large heat pump business?

[Jens Andersen, executive]

Yes, there were like 2 waves. Everything started with air-to-air heat pumps. And then we saw the second wave that was air to water to primarily residential houses. And we believe that the third wave that will be big heat pumps to mainly big buildings or to the industry.

And it's early days, but we really believe that the third wave is well organized to Solar because we are servicing more than 20,000 industry customers, which will have a need for converting their heat from gas into, for instance, heat pumps, or if they could also, of course, potentially be within district heating, but in many areas, you only have gas, and there we see a huge market for converting that into large heat pumps. And that's why we bought ThermoNova. It's a small company. We have the customers. They have the technology, and they also have the software to assess the production of the heat pumps.

So I think we hope that [ one on one ] will be at least 3. So that's why we bought it.

[Unknown Executive]

No further questions online. Okay.

[Jens Andersen, executive]

Any more questions on the line?

[Operator]

As there are no more questions, I will hand it back to the speakers for any closing remarks.

[Jens Andersen, executive]

Okay. Yes. But thanks a lot for listening in, and have a nice day. Thank you. Bye-bye.

[Michael Jeppesen, executive]

Bye.