Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Hello, and welcome to the Solar 2020 Report Q3. [Operator Instructions] Today, I'm pleased to present CEO, Jens Andersen. Speaker, please go ahead with your meeting.

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

Thank you very much. A very warm welcome to this third quarter webcast for Solar here in Copenhagen. Together with me, I have my 2 colleagues: CCO, Hugo Dorph; and Michael Jeppesen, now CFO. The agenda for today is a general business update from my side, and then Hugo will go in to make a deep dive on our sustainability activities and also our digital business. And finally, Michael will present our third quarter results and our increased outlook for 2020 before we go to the Q&A session.In next slide, please. In third quarter, we delivered an EBITA increase of more than 25%, and this is now the eighth quarter in a row where we delivered year-on-year growth on EBITA. During the quarter, we also managed to sell our shareholding in BIMobject for a total cash consideration of DKK 237 million. We confirm our newly revised 2020 EBITA guidance of DKK 435 million, including one-off cost of DKK 25 million relating to our sub-EBM rollout. This supports our strategic target of a 4% EBITA level on group level. We owe this to a very -- or we owe this to a very -- or we owe this positive development to our gross margin initiatives, efficiency gains and also our cost structure. Michael will later give you some more detailed insights to our financial figures. Next slide, please. I will now give you a short update on our strategic focus areas. If we start with the -- a very important one, our strategic suppliers. During the second wave of COVID-19 pandemic, we have succeeded in maintaining our deliveries performance. The combination of well-known brands and Solar concepts makes us reliable and a robust company when it comes to our sales degree. We are highly committed to increase our share of concept sales across markets, and we are making very good progress in this regard. At group level, our current share of concept is now close to 21%, and that is still the ambition to reach 30% over time, but it is an ambition. But at the moment, we are 21%. We collaborate with our suppliers on exclusivity rights. And just as an example, during our strategic period from 2018 to '20, we have increased our exclusivity share of revenue from our Solar Light concept from nearly nothing to now around 70%. Industry focus, also one of our very important strategic focus areas. At the beginning of this year, our Scandinavian industry business extended its agreement with Copenhagen Airport. The agreement is based on a TCO approach, a common understanding of process optimization, supplier consolidation, and of course, strong logistics services. Our industry team also have strengthened our position within Infrastructure a lot. And in this quarter, again, we saw 2-digit growth despite COVID-19 within Infrastructure. On the other hand, we have also seen a declining demand from especially the OEM industry and even a harder decline on Marine, Offshore, and it is partly due to COVID-19, but of course, also declining oil prices. If we then turn to our operational excellence. As I said before, we are steadily growing our concept share, and we do it with our new customer experience platform, our e-commerce platform, where we're onboarding a lot of new customers at the moment. As I said before, Hugo will give you a small update on our digital business in a few minutes. We still expect to implement SAP eWM extended warehouse management system in Solar Holland in early 2021. And this will finally complete the implementation of SAP eWM through Solar -- or throughout Solar, and remind you that the journey started back in June 2018. Furthermore, we are right now preparing a business case on our central warehouse in Denmark. And this is, of course, to analyze opportunities and hopefully also further optimization of the very important Danish central warehouse. I will now give the word to Hugo. Please, Hugo.

[Hugo Dorph]

Thank you, Jens. So if we turn to the next slide, I just want to give you a small example from the quarter on sustainability. We have a highly efficient and very precise supply chain in Solar, which we've honed over decades. And efficiency has been achieved by driving standardization and lean processes. But as sustainability grows as a topic for our customers and for Solar, we also look at our supply chain operation with fresh eyes. We look broadly across our supply chain, starting with what we deliver to our customers, and working our way backwards to how we deliver, how we transport, how we package in our central warehouse, how we store, how we receive goods and how we work upstream with our suppliers to improve sustainability.For efficiency and standardization purposes, we've used air cushions to protect goods that don't fully fill up our standard boxes. But this is also excess waste that we send to our customers, so we wanted to reduce it. And with better knowledge of what we are packing, it turns out that we can. So we've cut out more than 75% of air cushion use through better data and better training of our employees on packaging, on handling and on product fragility. And that not only reduces waste, it also reduces time, both for us and for our customers, as well as costs. It's just a small example of how sustainability is also better business. And we are working on taking it even further. As part of our out-to-store implementation in the Netherlands, we are testing automated box raising, which builds the box on the flying to the specific height needed, reducing cardboard and shipping volumes with further sustainability, efficiency and cost gains. Let's go to the next slide. As Jens said, we had a very solid exit from our investment in BIMobject. We bought at DKK 172 million and sold at DKK 237 million. And we're obviously thrilled with that. If you go back to what we said when we made the investment, I want to also give you a sense of what we have achieved from a digital business development perspective with BIMobject. So BIMobjects run the world's largest and fastest-growing content management platform for BIMobjects, which are essentially digital twins of construction materials, complete with not only a 3D model, but also the specifications describing the product, which is used by digital construction tools. BIM is the standard for digital construction and sharing product specs across our value chain. And we believe that any major player in the future of construction needs to understand how to add value in the context of BIM. And with BIMobject, Solar has built competencies on BIM, which we couldn't have gained on our own. So today, we support our customers and projects with a BIM mandate by sourcing or even developing BIMobjects on supplied materials. Our customers, designers and even contractors can find a wide assortment of Solar concept articles on the BIMobject Cloud. And we've actually developed an entirely new concept assortment Solar Project, which is tailored for BIM-based design, estimating and sourcing. And finally, we have for some years now worked closely with our suppliers, really requiring them to supply BIM data for the products that we source from them. So with this, we feel well positioned for the growing significance of BIM in the products we supply. With that, I'll hand the word to Michael.

[Michael H. Jeppesen, CFO & Member of Executive Board]

Thank you, Hugo. Turning to Page #7. We can say that, in essence, Q3 reflects the same development as we saw in Q2, where the revenue was slightly down, but this was more than compensated by increasing gross margin in combination with lower cost, leading to an increased earning. But if you focus on the revenue, we came out with DKK 2.6 billion, down from almost DKK 2.8 billion. This is equal to a negative organic growth of 4.8%. Looking at the segments in Q3, it's very much in line what we also have seen in Q2. As Jens were mentioning, there are very different developments within the segments. Industry OEM is facing headwinds, the same Marine, Offshore, it's down 21%. But we do see growth with Infrastructure and also our new top segment, Trade, continues to deliver solid growth rates. It should be noticed that a part of the negative growth can be explained by pruning of products, which is one of the initiatives in our Project Better business. Amongst other things, we see that the sale of boilers in Netherlands, but also in Denmark, where we stopped completely, continues to be reduced as initially announced also and as expected. If we now turn to the next page, Page 8. With an EBITA of DKK 132 million, Q3 was the eighth consecutive quarter of year-over-year growth in EBITA. The main driver is the increase in gross margin, which delivered an astonishing 1.8% increase. It should have been noticed that this was supported by a one-off income of approximately DKK 10 million related to extraordinary price increases. This action on group level has an impact of 0.4%. This mainly relates to our Norwegian subsidiary. If you look at the cost in absolute terms, we continued to see a drop similar to what we saw in Q2, it has a drop of DKK 13 million, of which there is a positive contribution of FX of DKK 7 million and general cost saving of DKK 11 million, partly countered by additional cost for the SAP eWM rollout of DKK 5 million. But if we look at what type of cost is that we see this reduction, it is, amongst others, it's travel costs, it's entertainment cost and it's also car -- cost on running cars, showing that we are becoming a more and more digital company. Looking at the next page, Page 9, the year-to-date performance. Well, in total, we spent DKK 21 million on SAP eWM, DKK 8 million on restructuring and auto store. This is partly offset by the DKK 8 million we got in other income. So in essence, core business compared to last year have delivered DKK 73 million increased earnings or DKK 63 million if we adjust for the one-off due to price increases and related has increased with DKK 13 million. So in total, we managed to increase the earning with DKK 65 million from DKK 245 million to DKK 310 million or astonishing 27%. Looking at the next page, cash flow. We see a positive impact from operating activities of DKK 142 million, which I'll comment on shortly; investing activities of DKK 8 million; financial investments of DKK 116 million, which mainly relates to repayment of short-term debt, with DKK 138 million repayment of long-term debt, installment of lease liability, but also a reclassification of non -- from noncurrent interest-bearing debt of DKK 43 million related to holiday allowance. But if we take a closer look at the operating activities, we're particularly happy to see that the improvement we have realized in Q1 and Q2 regarding inventory continue. We did see, despite we're entering the high season, a small positive impact from inventory. And this is done without jeopardizing our strong logistical performance, as mentioned by Hugo previously. The main single contributor is receivable, which is down with DKK 29 million. It should be noticed that September, of course, also were impacted by negative organic growth. We do not, this is important for us, see any delayed payments from customers. So our debt has remained strong and healthy. Liabilities was slightly negative with DKK 48 million, of which, of course, the reclassification is a part of it. Looking at the financial support we have received in deferred payments of VAT and tax, this now totals DKK 73 million. At the end of Q2, it was DKK 60 million. Of the DKK 73 million, approximately 50% will be repaid here during Q4 and the remaining 50% will be paid during early '21. Turning to the next page. Looking at net working capital, we see a continuous improvement compared to Q3 2019, going from 12.6% down to 11.9%. And this, of course, has a positive impact on the gearing, where we see a combination of increased earnings and reduced net working capital, bringing the gearing down to 1.2x. So within a year, we have reduced the gearing with more than 1x EBITA. It should be noticed that a part of this is due to the support packages, which will be reversed. And there's still a small impact from -- which is more technical due to the way IFRS 16 was implemented. But still, it's a strong performance. Turning to the next page. We revised our guidance the 21st of October, increasing the earnings from DKK 400 million to DKK 435 million. And this -- the main driver here is increased gross margin, increased efficiency in combination with cost containment. And as stated by Jens also, our guidance here on core is in line with our initial expectations to the strategy period, which come to an end here by the end of 2020. So we will deliver the 4% we announced when we started this strategy period. That was the last comment from me. Thank you.

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

Thank you, Michael. Yes. Now it's time for questions and answers. And hopefully, there will be some on the phone. So please?

[Operator]

[Operator Instructions] Our first question comes from the line of Mikael Petersen from SEB.

[Mikael Petersen, Analyst]

The first question is relating to the revenue generated through the BIMobject collaboration. You talked about like the impact going forward from the Solar Project concept. Maybe can you try to quantify that, how large that is or could be.

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

So we don't disclose that at this point.

[Mikael Petersen, Analyst]

Okay. Then maybe through another question then. In industry, you talked about the Infrastructure performing well. You mentioned double-digit growth. What should we expect going forward? Is this some kind of like new markets that you guys are tapping into? And what is driving this?

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

The market is definitely growing. We see 5G also coming now. The expectations is that we will still see 2-digit growth, at least for a period. But then, of course, the reference point is also getting higher and higher, but the market is growing all in all. It's -- the market is owned by a few players. It's also our ability to win those players. And we have good cooperation with Fibia in Denmark and with Telenor in Norway, and also now Global Connect in whole Scandinavia. So I think we are tracking well, and we believe that the market will still be pretty solid in the coming years. But of course, one day comes to an end, the structure will definitely, maybe in 2024, be ended in Denmark, but then we see other markets where we can support our customers. So it's a very exciting journey we are on.

[Mikael Petersen, Analyst]

Okay. And then maybe to my second question. I see that Sweden is down quite a lot here in Q3. Can you maybe try to describe why that is? Is it driven by Onninen? Or what was the main reason for the large decline?

[Michael H. Jeppesen, CFO & Member of Executive Board]

Yes. You mean revenue-wise?

[Mikael Petersen, Analyst]

Yes, revenue.

[Michael H. Jeppesen, CFO & Member of Executive Board]

Okay. Yes. Because, if I'm not mistaken, earning is up, but there was, of course, an impact from the Onninen acquisition. We did some heavy pruning after we took over Onninen. We simply had to close down some segments that were not profitable for us. So I would say a part of the negative growth that you see is simply due to the initiatives that were launched in Q3 and Q4 last year. Now we have a fairly high reference point which will balance out here during next year. So it's a fairly good explanation.

[Operator]

Our next question comes from the line of Simon Blok from Nordea.

[Simon Møller Blok, Analyst]

First of all, a question regarding the guidance. I was just wondering how much of the lower revenue expectation is due to lower overall activity and how much is a consequence of the better business activities.

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

Yes. It's a good question. But of course, the COVID-19 is still hitting us, mainly on the industry part, but of course, also the installers who are visiting industry customers. I would say maybe 1/3 is pruning, roughly speaking, and then 2/3 is coming from the COVID-19 situation. That is very roughly estimated.

[Simon Møller Blok, Analyst]

Okay. Perfect. And then I also had a question regarding the sales BIMobject. I was just wondering what your thoughts are about how the proceeds should be used, because it looks like your gearing is low and most of the warehousing business has been completed by now. So I was just thinking, yes, what your thoughts are, if it would make sense to pay out to shareholders, or if you have anything else you're looking into.

[Michael H. Jeppesen, CFO & Member of Executive Board]

First of all, we are not done with renovating the warehouses. We are currently looking at the central warehouse in Vine, which both needs to be expanded, but also to be optimized. And of course, when we have something more firm here, we will, of course, disclose it. So I'd say that we are not done on that journey. But it's -- regarding the proceeds, it is still too early to say. And of course, we are considering various ways. And I think it's fair to say, if you look at our track record, the Board of Directors has always been very firm on exercising the gearing, meaning in periods where we have been below, we have always sent the money back to the shareholders. There's no intention of trying to run a bank. So I would expect that things to come fairly soon. But I think as we also have said, we can in one single quarter to be below the gearing before we actually react. But the gearing guidance stands, the Board have always been very firm on that.

[Operator]

We have a follow-up question from Mikael Petersen from SEB.

[Mikael Petersen, Analyst]

This is relating to the Solar concept. You mentioned that the target is 30% over time. Have you made any initiatives in order to reach this? Or how do you expect to get there from the 21% to 30%?

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

Yes. It's a long journey. I said it was an ambition. It's not a clear target. It's more an ambition. And we have one country already delivered on that, that's Denmark. And the learning from Denmark is a course cascaded to the other markets and headed up by the same director as well. So the learnings from Denmark will be cascaded to the other markets. And of course, when we make exclusivity, as we have done on Solar Light, then you have your clear answer because then we are selling the same products across border. So -- but the 30% is an ambition. Maybe, Hugo, you can support me.

[Hugo Dorph]

Yes. I mean this is also -- this is daily business for us. This is daily -- there are daily activities in all markets on optimizing this. So for sure, there is a lot of very concrete steps underneath that overall objective.

[Mikael Petersen, Analyst]

Okay. And then maybe a follow-up in relation to the gearing. The financial target of the 1.5, is it likely to be the same going forward? Or is it subject to change?

[Michael H. Jeppesen, CFO & Member of Executive Board]

Well, I mean it's been like that for quite a while. So I would be very surprised if any changes came up on that. It doesn't really make any sense as we see it at least to change it. I assume you are here looking at to revise it in downwards direction. There's absolutely, as far as we know, no plans on doing that. It has been like this for years.

[Operator]

We have no more questions from the line. I will hand it back to our speaker. Please go ahead.

[Jens E. Andersen, CEO, MD of Denmark & Member of Executive Board]

Thank you. Thank you for the questions, and hopefully, also good answers. And have a very nice day here in Copenhagen. Bye-bye.