Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the Solar Quarterly Report Q3 2021. [Operator Instructions] Today, I'm pleased to present CEO, Jens Andersen and CFO, Michael Jeppesen. Speakers, please begin.

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

Thank you, Sarah. First of all, a very warm welcome to this third quarter webcast for Solar Group. We are here in our headquarter in Vejen, and together with me, I have my colleague, CFO, Michael Jeppesen. Please go to Slide 2. The agenda for today is a general business update with highlights presented by me. Then I will give you some insights about the important Concepts, Climate & Energy and our recent CV expansion here in Vejen. Michael will then present our 3Q results, including a high level cash flow status and naturally, some comments to the recently revised guidance for the year 2020. And of course, finally, we will have our Q&A session. Please go from Slide #3. On Friday, the 15th of October 2021, we published yet another positive profit update. Guidance for year 2021 is now an EBITDA of DKK 900 million, up from DKK 845 million. Moreover, we also increased our revenue guidance by DKK 200 million to DKK 12.3 billion upfront, which was DKK 12,100 million in a the background for the profit update is that we in Q3 has seen a continuation of this long growth rates we saw in Q2, which we expect will continue in Q4. Part, it has to be mentioned that supply and demand on certain product catalysts are creating short. That is also why we have increased our stocks to secure our service degree towards our customers. Besides that, we see our core growth strategy continues to achieve our own expectations by some of the other things, increasing our Concepts, Climate & Energy. With industry delivering all-time high growth in September. In all fairness, it has to be emphasized that we are estimating with one of the price increases of approximately DKK 100 million, which is on an installed high growth. Firstly, in particularly very satisfied to see that the positive performance growth for all our legal institutions or strategic growth. Furthermore, we are preparing an update of our '23 financial targets as they already have been there. Finally, I want to thank my colleagues for their continued efforts and dedication that have resulted in 12 straight quarters of EBITDA. Next slide, please. Private home installations, carrying for the environment is utmost important to Solar and for our customers. Environmental regulations have become stricter and national and supernational goals to reduce CO2 emission has been announced. Our Climate & Energy strategic focus area ensures that our customers have actually to correct the assortment and receive a relevant trading guidance. and technical support. Climate & Energy compromises a diverse customer base that includes industrial enterprises, public buildings and private home installations. Our starting point in 2021 was a DKK 600 million of our total revenue deriving from private home, and our ambition is to grow the area by 5% in corresponding 2022. Now in Q3, we are on track to deliver the targets presented in the 2020 annual report. Based on our experience of expertise and customer requirements, we have divided Climate & Energy into four main areas: that is solar panels of roof top, heat pumps, EV Chargers and ventilation. Next slide, please. For us, warehouse expansion in Vejen is beginning to shape DKK 250 million has been earmarked for the Trade. Some 11,000 square meters will be added, and the new halls will compromise the semi-automatization, all with strict focus on reducing energy and consumption. The expansion project will also include a high warehouse for pallet handling a building for an AutoStore robot-controlled picking system to handle 108,000 boxes. The system is much more energy-efficient than the previous systems and will mean a significant reduction in the electrical consumption. Moreover, we will install our cells, solar panel roof tops solution and do our leading with heat pumps but also make biodiversity landscaping around the buildings. AutoStore has already been installed at Solar's warehouses in Norway and the Netherlands with great success. The new warehouse in Vejen is expected to be completed in the spring of 2022, and we look forward to increased capacity and also, last but not least, better working conditions for our employees. I will now give the word to Michael for some more insight to the financials. Please, Michael.

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

Thank you, Jens. Turning to Page #7. As in Q2, we saw a clear trend ship in the growth rates where we get from negative area and it is not delivering 8.6%. Here, in Q3, we managed to keep the momentum with an adjusted organic growth of 8.8%. This, combined with increased gross margin more than outweighed the increase in farm cost and thereby led to a substantial increase in our earnings. If we look at the revenue in terms of DKK, we came out almost DKK 3 billion compared to DKK 2.6 billion last year. If we take a look at the different segments in Q3 and see growth in all the main segments. Installation and Trade should have been noticed is still affected on the growth of product, which is one of ready initiatives in our Better Business project, which basically means that the underlying growth is higher than what has been disclosed. If you look into the industry segment, we're particularly happy to see that the growth will lead to OEM, MRO will be high and that it should be supported by strong growth rates ensuing in this quarter as well. But in the offshore, we see the same pattern as in Q2 actually, Norway delivered solid growth rates, whereas Denmark continued to experience negative rates. Finally, at a plant, we should forget to mention that in '25 delivered establishing 23% organic growth and thereby continuing the strong improved track rate that they have delivered us on long quarters. Turning to the next slide, with EBITDA of DKK 237 million Q3 was, as Jens, the 12th consecutive quarter with year-over-year growth of EBITDA. The main growth driver was the increase in the gross margin, which in total delivered 1.5% increase. This was driven by our CORE+ strategy focus on the Concepts and Better Business, but we also delivered a one-off positive impact, which had a net impact of DKK 14 billion, meaning DKK 15 billion this year compared to DKK 10 million last year, which equals 1.2%. If we take a look at the cost growth, and please notice that the reference point here in Q3 is still the core customer that we have invention against. Starting with external operating costs. Some of the main contributions within this category is travel, entertainment and cars, the increase we have seen here compared to the improving level is in line with our expectations and is still below the pre-COVID line -- at pre-COVID level. So we are following exactly the plan and as we expected it to. If you look at staff costs, first of all, it was more than outweighed by the increased margin. And if I take a closer look at it, the main drivers of increasing in staff cost is the incentive schemes, but also additional cost in handling the growth. And it is no secret that in our -- in a situation where we are undergoing capacity, hence the expansion in central warehouse that we are providing is most needed. Look, I have lost our debtors, they remain on track. So in absolute terms, we increased the cap from DKK 177 to DKK 200 of these DKK 11 million. Turning to Page 9. If you look at the year-to-date, because we actually see a similar pattern as we saw for H1, with a margin expansion from 5.2% to 7.23%, of which 0.7% can be directed with -- explained by the result of our more core strategy, delivered very strong results. This in combination with cost containment and it actually 0.2% for external operating costs and start, respectively. But of course, it was also supported by one-off remains for price increases of 0.8%, consulting in a total gross margin of 2%. If you turn to the next slide. We can also look at this from another angle. If we decompose the improvements year-to-date, we can see that DKK 118 million can be referred to increasing to revenue of DKK 63 million from gross margin increase and DKK 17 million from one-off price increases while cost increased was DKK 14 million. So we delivered a total increase of DKK 206 million or establishing to 46%. Turning to Page 11. Looking at cash flow, we actually see a negative impact from operating activities of minus DKK 38 million, which I'll comment on shortly. Investing activities of DKK 65 million, it should be noticed that the investment in expansion and operational as the central warehouse, this line is ongoing. But so far, it importantly had an impact of DKK 36 million, but this will increase cost. Financial activities amounted to DKK 77 million, which mainly related to repayment of note worthy interest-bearing debt of DKK 55 million installed in the lease liabilities were DKK 29 million and finally, changing current interest bearing debt to DKK 161 million. But if we take a closer look at the operating activities, we see a substantial change from last year where we had a positive impact of DKK 142 million to minus DKK 38 million this year, despite the improvement in the profitability. Part of this ratio is a force that we are moving into a growth scenario, where we had organic growth of 8.8% versus minus 0.8% last year. But the main reason is that the inventory, which last year had a positive impact of DKK 6 million this year had a negative impact of DKK 198 million, meaning a delta of more than DKK 200 million. As Jens has mentioned, we are now seeing a deteriorating effect with global suppliers. And there's no doubt that supply chains are being stretched. So in order to secure our performance towards our customers, we have decided to increase the inventory. However, it's very important to notice that approximately 95% of this increases can be referred to AI, meaning the faster growth. Or by, we have increased the inventory value. We do, therefore, not seen any increase in the risk, since it is must ones we are investing in. Of course, this means that we will see an increased net working capital at least until things get more normalized. But it's an clear assessment that in the current environment as those who have the goods that will end up with the order. Turning to our next page. You can see that here on the networking capital, that there's a minor increase, which reflects the increase in inventory. There's a temporary impact in total on our interest-bearing debt of DKK 114 million of support packages. They don't have any impact on the net working capital but of course, they have an interest-bearing debt. Bear in mind that the majority of this will be repaid during H1, as mentioned here. But if you look at the Q2, actually there's a minor increase despite the improvement in profitability, which brings us now to 0.5%. Bear in mind here that there remains approximately DKK 118 million regarding the expansion in line, which have not been paid yet. Then which also have a substantial impact in Q2 and also in Q1. Turning to Page 13. As Jens mentioned, we operated -- we announced the new guidance early in October. We now expect the revenue of DKK 12.3 billion in corresponding to organic growth, almost approximately 6%. Our Better Business project which is a part of the four strategies expected to reduce our revenue by approximately DKK 200 million compared to 2020, which basically means that the organic growth that we are expecting is not 6% but actually 8%. Shorter data some of the Better Business projects at the end of Q3 have approximately, taking out DKK 150 million, meaning we are on track within our own expectations here, it's mainly the element which is here. If you look at the EBITDA, compared to 2020, we see a one-off income of DKK 106 million and underlying improvements DKK 187 million, which brings us from the DKK 637 million to DKK 900 million that we are guiding. This actually equals an EBITDA of approximately DKK 750 million, which even when adjusted to one-off is all time high. Thank you. That was the last one. Jens.

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

Thank you, Michael. Now it's time for questions and answers. So, please, if you have any.

[Operator]

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

[Kristian Tornøe Johansen, Senior Analyst]

I have 3 questions. So first of all, in terms of the 2023 targets, which you are planning to update, when will you publish the new targets? And what sort of considerations do you have since you are now seeing that you updated?

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

The expectation is that when we disclose our Q4 positive and in-debt status of key strategy executions so far, i.e. within all of our focused areas, but at the same time, we can update on the targets we have set for the financial targets. So you shouldn't expect that.

[Kristian Tornøe Johansen, Senior Analyst]

All right. Quite clear. Then in terms of the 13% growth in industry in Q3. Obviously, to -- I mean, you cannot open any kind of newspaper or the likes about -- without reading about the congestion and shortage of supply and so on. So to what extent are your customers sort of buying more than they actually need just from the simple theory, but not being able to get products?

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

I would say that, of course, a big part of the growth is also price increase, as mentioned by Michael. But that being said, I think it's about having the products on the sales. So it's about availability. And that's also why we increased our sales security and availability also in Q4. So -- and then, of course, we also are not going off -- due to the way we are working forward to no questions. So I think it's a combination of the 3 things I just mentioned. Our Sweden is doing very well. Normally, we have been very small on the industry in Sweden and our key reason for growth is very positive. As we invest in Sweden in 2 years ago, now we see that is paying off.

[Kristian Tornøe Johansen, Senior Analyst]

Okay. So it's obviously what I'm trying to get to here is whether we should fear an effect of, I mean, headwinds on revenue next year because your customers go into 2022 with a high level of inventory than they usually do. So assuming that the things normally...

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

Of course, we'll disclose our guidance for 2022, early part of 2022. My own expectation, so far is that, of course, the growth will be more normalized at a reference point, but I still believe that the market is out there. And in some countries, especially Holland, they are very small. So taking only a minor market share. We also see -- I mean as you know, we have a fall in our focus areas than we on to net interest would be 30% of our total margin or below. To go for that goal, mainly by increasing our revenue share in Holland.

[Kristian Tornøe Johansen, Senior Analyst]

Okay. That makes sense. And then my last question on the gross margin potential. So obviously, as your waterfall illustration for Q3 illustrates the effect on gross margin in Q3, excluding the one-off prices were more limited compared to what you've seen in the first half. So how much more underlying potential for gross margin improvements do you see when looking ahead?

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

It is still about decreasing our company share, and that is still -- we're doing well in Denmark. As many know, but we still have a lot of attention, especially Holland, but also no that we still need the same ingredients to want to work with towards our marginal strength. They still part of what we have been doing in Denmark in the other markets just that's where it's organized, as you know, in 1 or it's driven by our SVP, P2P just. So that's the way we want to work. And it works, honestly. And then we are measuring that follow-up the everyday ending month. So it's an integrated part of our growth.

[Kristian Tornøe Johansen, Senior Analyst]

But is there any reason to expect a deceleration of the penetration? So I mean, are the low-hanging fruits gone? And is it more difficult to increase the penetration further. Or is the potential leading into next year?

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

I think it's up to us to execute on the potential. Potential is definitely there. We have like 3 sales channels. We have our e-commerce, which, of course, would be, I would say, we want to lift our Concepts share in the e-commerce shares, then we have our branches, which are up for sale, what do we sell. And then we have our manual sales and processes, of our alternatives, the guys and late. And then they also been incentivized in to more Concepts than they did in the last service. Better Business has improvised to where we come from at the potential risk.

[Operator]

And as there are no more questions that you said, I'll hand back to our speakers for closing comments.

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

Okay. Thanks for that. Thanks for listening in, and have a very nice day. Bye-bye.

[Operator]

This now concludes our conference. Thank you all for attending. You may now disconnect your lines.