Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Solar A/S Second Quarter Report Conference Call. At this time, all participants are in a listen-only mode. After speaker's presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, CEO, Jens Andersen. Please go ahead.

[Jens Andersen, executive]

Thank you. A very warm welcome to this second 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 and some highlights for Q2 presented by me. Then I will give you a short introduction to how we work in our solar industrial solutions team that is within industrial heat pumps, and it's a cornerstone in our new 3-year strategy called Solve. Michael will then present our second Q results, including a high level cash flow status. And finally, of course, a Q&A session.

As expected, all segments showed negative growth in Q2 2024. Revenue declined to DKK 3.1 billion compared to DKK 3.3 billion last year. Adjusted organic growth amounted to minus 7.8%, up from minus 15% in Q1 2024. Revenue from planned energy a strategic focus area remained at a low level in second Q amounting to DKK 234 million. But compared to Q1 '24, this is an improvement of almost 18%. Heat pump sales remain at a low level. However, as the order pipeline is still increasing and now exceeds DKK 300 million. That's also why we remain confident of the potential for high-capacity ThermoNova pumps despite the current low sales level.

Looking at the segments. Our Industry segment delivered adjusted organic growth of approximately minus 2% with MAG45 delivering positive adjusted organic growth of more than 8%. On the other hand, the Installation and Trade segments delivered adjusted organic growth of approximately minus 11% and 14%, respectively. Half of that decrease in Installation can be accounted for the reduction in heat pump sales. Our assessment remains led in all respect of the market share, we believe that we have maintained our share, both within installation and industry. Looking at the results. EBITDA of DKK 137 million compared to DKK 240 million last year, that was totally on par with our own expectation, and that's also why we reconfirm our guidance of an EBITDA of DKK 600 million.

When adjusted for one-off price effects in Q2 2023, the underlying EBITDA margin amounted to 4.4% compared to 6.3% last year at the same period. If you want, there is an individual market update for per country on Page 24 in our quarterly accounts. It must be noticed that the recovery is taking root in Denmark with an adjusted organic growth of minus 1.9% in Q2 against minus 10.5% in Q1 2024. On top of that, our project pipeline in Denmark is positively piling up with an increase above 30% compared to last year's product pipeline. So the uncertainty that remains for year 2024 is not when we will start to deliver the progress -- it is when we should deliver, and not if we should deliver the progress. Another positive case in Q2 is the winning of a 200 million PV project to a big Danish industry customer in our subsidiary, Solar Polaris, a project that now will start.

Next slide, please. Solar Industrial Solutions, there is a growing focus on CO2 emissions, reduction by our customers, resulting in an increased interest in our customized high-capacity heat pumps and inflected in our order pipeline exceeding DKK 300 million. To meet the increasing interest, we have set up a new team called Solar Industrial Solutions, a dedicated sales unit that works with design and sale of energy-efficient solutions. Solar Industrial Solutions support our customers by providing expert knowledge within areas such as project management, sales, planning, recording, implementation, technical support, subsidy application and also authorization within [municipalities], et cetera.

To summarize, Solar Industrial Solutions help our customers throughout these projects, including technical support. While retaining our focus on ventilation batteries, EV chargers, solar panels and heat pumps for the residential markets, solar industrial solution extend our services to also include industry customers. The high-capacity heat pumps are developed and manufactured by our latest acquisition, ThermoNova. They deliver a new and different type of modular heat and that supports the EU Green deal as one of the main drivers of the presentation towards climate neutrality. A transition that is supported by Solar Industrial Solutions. Business update, pump enabling large and energy-efficient heating solutions, especially for the industry, but also warehouses, production facilities and large office building and even also smaller utility companies.

Solar Industrial Solutions is a central element of our sales strategy where we aim to maximize the growth potential in climate and energy in the years to come. I will now give the word to Michael for some more insights to the financials. Please, Michael?

[Michael Jeppesen, executive]

Thank you, Jens. Please turn to Page #6. Revenue in terms of DKK decreased with almost 5%. Despite this, we came out with DKK 3.1 billion compared to the DKK 3.25 billion last year. This is equal to an adjusted organic growth of minus 7.8%, meaning we just for the record, adjusted organic growth means we adjust for the number of working days. This means that we now see the sequential improvement compared to previous quarters, as we anticipated. If we take a closer look at the 3 main segments, similar to what we saw in previous quarters, have a negative growth in all 3 installation, industry and trade. This is as expected. However, it's notable that where we, in last quarter, also in all subsegments saw negative growth, we now see the first green touch, meaning we see that the recovery starts to take root.

If we look into industry, we, of course, have MAG45, who continues to deliver strong growth, but also Marine/Offshore actually delivered strong growth rates and utility almost edged into positive territory as well, whereas OEM and MRO remained below last year. Regardless, it's clear improvement compared to last quarter. As mentioned also by Jens, our strategic focus area, Climate and Energy delivered sequential improvement, where we're up from DKK 200 million to DKK 234 million in Q2 versus Q1, still below last year, but it should be noticed here that a part of this is due to the fact that PV panels reduced to approximately 50% of the price we saw 1 year ago.

In March, we did see the first sign of beginning recovery in Denmark. This has continued throughout Q2 with the Solar Denmark almost etching into positive territory. And as also mentioned by Jens, July, we actually delivered the first positive growth rates for more than a year, albeit it's a very small growth. We continue to win projects, as also mentioned by Jens. This is why we are convinced that we now have seen a shift in the trend that started late last year, and we continue -- we are convinced that this will continue throughout the year. And in that respect, it should be noticed that approximately 50% of the group's earnings originates from Solar Denmark, meaning this is really a notable event. So overall, the development in Q2 was as we expected.

Please turn to Page 7, where an EBITDA of DKK 137 million, Q2 was on par with our expectations, of course, below last year. If you look at cost of goods sold, we saw an underlying -- a decrease of 2% in the underlying margin when adjusted for the one-off price effects we had last year, which basically means that the margin is more or less in line with what we started -- what we saw in Q1. A substantial part of the drop compared to last year is a less favorable mix, but of course, also continued suppressed gross margins, amongst other relating to our Climate & Energy products and also increased cost to improve our delivery services.

As expected, our initiatives regarding cost containment process optimization and staff reduction has paid off successfully, meaning that despite the headwind, the cost doesn't really dilute the margin. Regardless of this, we'll continue to have a strong focus in order to secure that the cost development remains on the downward trends and well on the control. Same can be said about loss on trade receivables, where we have not seen any pickup, meaning our capabilities in managing credit risk is still performing very satisfactory.

Please turn to Page 8, and let's have a short look at H1, when EBITDA of DKK 225 million, H1 came out as expected. Again, if you look at cost of goods sold, the underlying development is down with 1.9%, which was exactly as expected. The explanation is the same as given in Q2. It's a less favorable mix, but also suppressed gross margins, particularly within Climate & Energy, but also cost for the improved services.

As expected, we have seen some headwind from costs, which, of course, if you look at H1 as a total, we have a negative organic growth of minus 11%. And this has had a negative impact on the underlying margin, diluting it, of course. To conclude, H1 in line with our initial expectations with Q2 clearly being stronger than Q1.

Please turn to Page 9. Operating activities came out with a plus of DKK 202 million. And if we take a closer look at it, we can see that there is a flat development in the inventory, which is slightly less than we anticipated. However, the main reason is we did some tactical purchases in late Q2. Consequently, you should also see this together with the liabilities, which increased by DKK 191 million. So they are kind of linked because we stepped up on purchases, which has been subdued due to the fact that we, during the preceding quarters has been reducing inventory quite substantially. Receivable is slightly up. It is the normal seasonality that got spread out over 2 quarters because normally we will see the full impact of seasonality in March, but since March was -- March was impacted very much by Easter, we've not seen the full impact, and this is what materializes here. So it has nothing to do with that our debtors ability to pay has worsened. Definitely not. I would now almost say on the contrary.

Please turn to Page #10. This, of course, also reflects in the net working capital. We see it as an average over the last 4 quarters, we now see a clear reduction from 16.7% to 15.8%, [Indiscernible] more what is probably even better is if you look at the end of the quarter, we narrowed down to 14% compared to the 15.4% we had last quarter, and this is despite the headwind we still see in the market from revenue, which basically means that currently, networking capital is reducing more than the headwind we have faced. We're very happy with this. We are regardless still slightly above our long-term target, and we of course, expect further improvements going forward.

Taking a look at the gain, it's slightly up. We see a minor increase from 2.1% to 2.2%, but still well in within our range. Please turn to Page 11, guidance 2024. We reconfirm our guidance with a revenue of DKK 12.5 billion and an EBITDA of DKK 600 million. We still expect the market to be unpredictable due to macroeconomic uncertainties. However, we are still convinced that it will be a gradual recovery. And we are, as stated also by Jens, we think this has already taken root in Denmark, and we expect this gradually to gain traction also in other markets. Regardless, we are convinced that 2024 as a whole will be negative still, but on a much better trend than what we have seen.

During the latter part of 2023, we did see a set back in gross margin within several categories. And this is the development we expect to continue throughout 2024. So you can say the margin we've seen so far very much reflect the expectations, and we expect that this will remain a challenge throughout the year. Cost and wage inflation increased substantially in 2023. We expect this trend to persist throughout H1, meaning the remaining part, we expect this to wear off. So in particular, we have said this before, I'm going to repeat myself now. We are very, very pleased with the development we've seen in Denmark, and we are convinced that we have seen a trend shift. Of course, you can say the -- in particular, the Swedish and the Dutch market are probably not out of the wood yet. But it was also in Denmark, we saw the headwind first and the others came in typically 2 quarters later, and we expect something similar to happen with the recovery.

So to summarize, so far, in all material aspects, development has been as expected. We're pleased to see that we are gradually moving towards better market conditions. So we reconfirm our guidance. Thank you.

[Jens Andersen, executive]

Thank you, Michael. Now it's time for Q&A. So please.

[Operator]

[Operator Instructions] And the first question comes from the line of Kristian Tornoe from SEB.

[Kristian Tornøe Johansen, analyst]

Yes. Thank you. I have a couple of questions. First of all, this outperformance of Denmark compared to your other markets? Why do you think that is? I mean, is there any fundamental drivers in Denmark, which deviate from what you see in the other markets?

[Jens Andersen, executive]

I would say they came into a negative or even a recession 2 quarters earlier than the other countries. So I think it's a matter of timing more than it's a matter of that we still see that the market is doing particularly well. I would say, what really makes me positive is that we are gaining projects like we have never seen in our history. So the market is starting to recover. But of course, there is still a way to go.

[Michael Jeppesen, executive]

But you could add to that, Kristen, that the Danish operation has also proved to be more resilient and simply because it's much more diversified than what we have in the other countries. And if you look at our strategy, and we will not be able to get the other to the same level as a Danish within this strategy period, but this is exactly why we have solution selling and concepts as one of our key strategic enablers and this is mainly in the other countries to get them to look more like Denmark.

[Kristian Tornøe Johansen, analyst]

One of the things which seems to drive, I mean, activity in Denmark is the pharmaceutical sector and -- do you have any numbers to how much of the sales in Solar Denmark relates to the pharmaceutical sector?

[Jens Andersen, executive]

No, we cannot -- it's simply not possible for us. We can see, of course, in our projects that one of the names that often comes up is Novo Nordisk, but that's not accounting for all, but of course, that's also an important part for Solar that they are extending their facilities as much as they are doing. So yes, it's a part of it, but it's not all.

[Kristian Tornøe Johansen, analyst]

Sure, okay. And then just a follow-up. I think, Michael, you mentioned that you've done some tactical purchases at the end of Q2. Can you just elaborate a bit? I mean, what is that, that you have purchased and why?

[Michael Jeppesen, executive]

It's simply to count expected price increases, and it was mainly within cable and supporting systems to -- cables was the main part of it. So it's business as usual, you can say, we always do that. But this time, the timing was just that it hit June, and therefore, you saw the full impact both on accounts payable, but also on the inventory value. We did not see the downward trend that we expected due to these purchases. As fast runners, we always buy. So it's not that we have increased the risk. But it's simply it's in our DNA to do...

[Jens Andersen, executive]

Yes, it's a tactical move.

[Michael Jeppesen, executive]

Is a purely tactical move.

[Kristian Tornøe Johansen, analyst]

That's quite clear. And then just a couple of questions to Climate & Energy. So as you mentioned, your Climate & Energy sales grow from [DKK 199 million] to DKK 234 million in Q2. What has driven the sequential increase? I mean what product is behind...

[Jens Andersen, executive]

Yes, it's mainly, of course PV panels. It really starts to materialize. And then air-to-air heat pumps, air to water is still underwater, I would say. And then, of course, we also see that the interest and also the order conversion on ThermoNova is starting to increase, even though that the level is still below what we expected, but we really see a huge interest for ThermoNova, and it's ongoing every day. And we are now starting also to introduce ThermoNova in the other markets. So the DKK 300 million we have in our order portfolio that is for Denmark, more or less for Denmark only. So we are quite confident, even though we may have lost 1.5 years due to the market conditions, but we have the right product which can support a lot of industry companies to reduce the CO2 emission. And we look forward to the new regulations that will hit many of those customers already this year. So it's moving in the right direction, still from a low level.

[Kristian Tornøe Johansen, analyst]

And then you actually almost touched upon my last question here because the DKK 300 million or more than DKK 300 million in order pipeline, which is up from DKK 250 million in Q1. How do you define that? Is that firm and on traditional orders? Is it a potential orders or exactly what's the definition here.

[Michael Jeppesen, executive]

It is potential offers, this is where we do not have any single where we have been requested to come up with an offer for our customer. So this is how we define it. So it's -- as Jen said, the problem is still the conversion rate. It's increasing, but it's still too low. But I can give an example because there's apparently quite a lot of time lag in here. The customer that we gave an offer 1.5 year ago contacted us last week just to check at how the price was because now they wanted to sign a contract. And here, we're talking someone who will buy 16 of these heat pumps, which is, I don't know, DKK 12 million, DKK 14 million or something like that. So the lead time here has been 18 months where they did nothing and now suddenly they are interested.

And it's actually one of the small -- we have in Denmark some small district heating companies. It was one of the customer segment that we actually didn't expect this was relevant too, but apparently, it might be -- let's see, they haven't signed yet, but certainly out of the blue, they came back just now in...

[Jens Andersen, executive]

The lead time is long at the moment. There's a lot of resistance in decision-making when we talk, I would say, larger or mid large CapEx investment. I think that is the situation at the moment. The interest is huge. The conversion rate is too low. We work with the conversion rate, and we are sure that it will come up. But at the moment, it's still too low.

[Kristian Tornøe Johansen, analyst]

So if we look at the first half of the year, how much revenue related to the terminal products that you actually had.

[Michael Jeppesen, executive]

Honestly speaking, I can't remember, it's too low that much I do know. But it's paying -- but what we also can see now is that some of the orders we actually managed to close. That's for 2025 now that people want -- that our customers first want them delivered in 2025 -- so in all, I simply can't remember the figure, but it's too low that much, I do know.

[Operator]

Thank you. As there are no further questions on the phone lines, I would now like to hand back to the room for any questions on the webcast.

[Unknown Executive]

We currently got 10 questions online. First one is, are you experiencing any positive effect or customer feedback from your increased delivery level.

[Jens Andersen, executive]

I'll take that. Mid-June, our implementation were finished, and we now, I would say, have more or less stabilized our night distribution service. So -- and of course, we expect that to continue. So yes, it has been a huge investment, but we are sure it will pay off in the coming quarters and years to go. So definitely, we assure it is the right choice we did.

[Unknown Executive]

Second question, can you put some words to the fact that gross profit margin declined in Q2 compared to Q1, while EBITDA margin increased. What makes the difference?

[Michael Jeppesen, executive]

Yes. It's correct that the gross margin decreased slightly, but the real explanation to the increased margin is simply lower cost. Of course, supported by the fact that we in Q1 had DKK 25 million restructuring cost wise, we were down to DKK 2 million in Q2, but also on the underlying costs are simply lower. So that's the explanation.

[Unknown Executive]

Third question, do you think gross profit margin around the current level will be the future level in the next few years? Or do you expect to go further down or increase again in '25?

[Michael Jeppesen, executive]

It's very difficult to predict how 2025 will look, but if we look at the current run rate on the margin, there is a negative impact from mix, which of course, is quite important. Also, we know that there has been some sale off, not just from us, but also from our competitors, which has forced us also to follow [Indiscernible] but we expect these things to gradually wane off. And I would say we still have a strong focus on increasing our concept share and also, of course, our solution Solve is a part of our strategy. And these things will all are things equal, increase the margin going forward.

[Unknown Executive]

In the last few years, revenue has been lower in Q2 compared to Q1. This year Q2 is better. Is that because Q1 this year was worse than usual? Or is it Q2 see an improvement -- improved market conditions that surprises you.

[Michael Jeppesen, executive]

First of all, I would say the market conditions were worse in Q1, I would say definitely. It was not a surprise to us because the guidance whether we gave is build up on things will gradually start to improve over the years, I would say things are trending as we expected. What is important to notice is that this is a day-to-day business. And Easter was in Q1, the full impact of Easter was in Q1 this year and you need to go back, I think, to 2018, don't -- back before you have a similar comparable situation.

So what is important is that when you look at the organic growth, you should look at the one adjusted organic growth where we adjust for a number of working days that gives a much better and much more transparent picture of what is going on. And there you can see that we moved from the minus 15% to slightly better than minus 8%. So it is improving clearly, but -- is something we should take into consideration here.

[Unknown Executive]

Would you say that focus on web sales served Solar Denmark well, wouldn't it make sense to have more physical stores like many of the smaller competitors have solar also have more physical stores in other countries than Denmark. Why does Solar Denmark differ.

[Jens Andersen, executive]

Yes. It's a typical move, you can say, over the years. Back in the old days, we had a lot of branches. Now our competitors are taking over that part of the business or at least -- on the other hand, we are above 80% on web services with our customers. So either you can choose to have all kind of cost or you need to have a strategy where you focus in on being the best within. In our case, digital services. And that's what we believe in. Some competitors are doing differently, which I fully respect, but our strategy, at least for Denmark, because it's a small country is that we want to be the best on digital services, and we want to increase productivity, not distribution but also Fastbox as one of our cornerstones in increasing the productivity among our customers.

Now that more and more dollars belong to groups with both electricity and plumbing, wouldn't it be wise to expand your Plumbing segment to have both like many of [Indiscernible] competitors and so in Netherlands.

[Michael Jeppesen, executive]

I would say our assortment within HWS in Denmark, if we look at Denmark is, of course, not as broad as some of our competitors. But you also need to know if you want an assortment, you have to take the market share from others and you really need the right people. So it's a move we are always considering. And if there's an M&A possibilities shows up, we will, of course, be interested in increasing our assortment with it. But honestly speaking, we believe that Climate & Energy is our way into HWS. We want to be the best with ThermoNova. We want to be the best within PV panels and EV chargers.

Then others can serve, I would say, another part of the market. We don't believe in gas boilers, et cetera. So we have chosen really to lean forward within climate Energy. At the moment, it's difficult -- but we are strong believers that it is only a matter of time, then we'll see the market regain into a really positive territory. And then with ThermoNova, we can offer services big industry customers to be green.

[Unknown Executive]

Can you please elaborate more on why you believe there will be a recovery towards year-end?

[Michael Jeppesen, executive]

I would say it's based on what we see. So I would say that's the main driver. We can see it now. Of course, Denmark is the only place where we really see it. I think also the figure has so far has proven us was right. So it's not like we have a special crystal ball that we can look into definitely not. But yes we see it's going in the right...

[Jens Andersen, executive]

And I know I've said it before, but the mega trend that everything will be electrified. That will maybe for a while be postponed, but look at the EV chargers or the installed base of EV chargers. That's not only EV chargers, it's cables, it's binders, it's everything. So the mega trend will definitely help our customers, and of course, both solar and our competitors within that area. Can you comment on M&A and broader capital allocation?

[Michael Jeppesen, executive]

We are not -- if we start with M&A, it's -- it's, I would say, a bit opportunistic. It's not that we're doing, we are knocking on those. If we should do M&A, it should be some bolt-on acquisitions that could fit into an existing. I don't expect us to start off in a new market that will be highly unlikely. So it would be bolt-on acquisitions that we immediately can click on to the existing where we already have a customer base and where we have a distribution set up. And I think that's -- but nothing is in the pipeline there. On the other hand, we are investing in making sure that we have low cost to serve, which means we need to automate the set. We have done it in Norway, in the Netherlands and Denmark, and we've started in Sweden. So that is the main focus, I would say, automated set is what we have so far to get that into a very high degree of -- high-tech central warehouses.

[Unknown Executive]

Next one, we already touched a bit upon. Can you comment on the percent of sales related to solar panels and the price deflation in the space?

[Jens Andersen, executive]

No. I will say that the problem with PV panels is not the number of orders. It's more that the prices have decreased 50% compared to last year. So looking at the figures, you have to remind yourself that we are doubling the volume only to have the same top line. Of course, that's hard, but it's a fact of life. I'm very happy that we won this DKK 200 million case in [Indiscernible] by a big industrial customers. And we are looking even more into those big PV solutions. So we are definitely there, and we have a certain setup in Solar Polaris who can make a turnkey solutions. So we are very interested in following the industry customers that not only want to have high-capacity heat pumps, but also want to support that with PV panels.

[Unknown Executive]

When do you expect the Novo contracts to go down again. When could this turn into headwinds?

[Jens Andersen, executive]

Honestly speaking, as far as I know, they will start off in [Indiscernible] soon. That is -- they are in the northern part of [Indiscernible] is the biggest project place, except from [Indiscernible] in Denmark by now. I see -- I would say, I think it would go years before we see a decline in there, but maybe I'm wrong. I don't know, honestly speaking. But I know [Indiscernible] will start up here in August.

[Unknown Executive]

And last question. Can you comment on operating cash flow generation for the full year?

[Michael Jeppesen, executive]

Normally we don't give guidance on cash flow. But if you look into this industry, it is a cash-generating business. And we expect this year to be no different. So we also expect a strong cash flow. Of course, we have some CapEx coming up, amongst other things, the Swedish investment. On the other hand, we have entered into a sales agreement on our central warehouse in Duiven, which also late this year will kick in. But all this is a cash-generating industry. And so this year will also be.

[Unknown Executive]

No further questions.

[Jens Andersen, executive]

Okay. Thank you. I don't know if there are more who wants to raise a question on the line.

[Operator]

There are no further questions on the phone line. I would now like to hand back to Jens Andersen for any closing remarks.

[Jens Andersen, executive]

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

[Operator]

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