Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Welcome to quarterly report Q3 2022. [Operator Instructions]

Today, I'm pleased to present CEO, Jens Andersen; CFO, Michael Jeppesen. Speaker, please begin.

[Jens Andersen, executive]

A very warm welcome to this third quarter webcast for the Solar Group, together with me here at our headquarter in Vejen, I have my colleague, CFO, Michael Jeppesen.

The agenda for today is a general business update with some highlights presented by me. Then I will give you some insights about our second largest customer segment industry. Then Michael will present the 3Q results, including a high-level cash flow status and that's with some comments to our guidance for year 2022. And finally, we have our Q&A session.

Next slide, please. If we start with the highlights. In Q3, we delivered an EBITDA increase compared to last year of DKK 64 million, up DKK 301 million, reaching a 9.2% EBITDA margin. The positive development resulted in a return on invested capital of 25.3% compared to last year, 23.6%.

The positive development was a high organic growth of 14%, combined with a positive gross margin development.

On group level, our main segments, Installation, Industry and Trade delivered strong organic growth of 13%, 17% and 9%, respectively.

Especially our strong focus area, Climate & Energy supported the strong performance by delivering an organic growth of slightly more than 100% in Q3.

In that respect, we predict that demand for Climate & Energy products and solutions will accelerate even further going forward.

Up until now, our main concern for Climate & Energy is still how we can handle the supply and demand issues that we are dealing with as we speak. That partly also explains why our inventories has increased to an all-time high level as we commercially did some giant purchase orders within heat pumps and PV panels, simply to secure our sales degree towards our customers, but Michael will later give you some comments to that.

Already this year, I can disclose that we expect Climate & Energy to reach a 2022 revenue of approximately DKK 1.2 billion with pretty good earnings.

Just as a simple comparison, the annual revenue in year 2022 from project sales, which is mainly related to new construction. This is expected to be around DKK 2 billion and that is even with slightly lower earnings than the average gross margin in our Installation segment.

In all fairness, I think that the success with Climate & Energy and other similar special sales areas or niche areas also shows that we have successfully diversified our business during the last years by focusing on areas not directly related to new construction.

With our strong Q3 performance and our Q4 expectations, we have positively adjusted our 2022 guidance to a revenue of DKK 13.7 billion and an EBITDA of DKK 1.17 billion, up from DKK 13.45 billion, and DKK 1.1 billion, respectively.

Next slide, please. industry. As specialists, we have profound understanding and insights into providing the right products, solutions and support as well as the necessary supply chain solutions. To deliver this special combination, we are organized in cross-border verticals across our 4 subsegments. And the first one is OEM or Original Equipment Manufacturer. Then we have MRO that stands for Maintenance, Repair and Operations and then infrastructure that is mainly to utility companies and finally, Offshore and Marine.

With a broad product assortment of 260,000 products in stock and a diverse service offer within technical support and supply chain, we strive to improve industry processes with our commitment to sustainability and productivity to more than 20,000 actively buying customers.

As a spin-off with our success on Climate & Energy to residential buildings, we have added high-capacity heat pumps to our industry product assortment. The heat pumps are constructed for larger buildings such as smaller production facilities, big offices and also big warehouses, and will of course, contribute to lower our Q2 emissions together with our customers, but also with a very good solid return on the investment.

As mentioned last time, we have already installed 3 new large heat pumps at our 60,000 square meter central warehouse in Vejen. The interest for the solution is huge among customers and even 2 ministers at during the election campaign been around our facility to see both our new outsource solutions, but also our new industrial.

And honestly speaking, it was my feeling that they were simply impressed by both solutions. So we and that [indiscernible] strongly believe that we, together with our industry customers can open the market for these green installations going forward. At least now we have a proven showcase to show these customers.

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

[Michael Jeppesen, executive]

Thank you, Jens. Please turn to Page 6. Now revenue in terms of DKK increased to almost 14%. Meaning, we delivered DKK 3.3 billion versus DKK 2.9 billion last year or an organic growth of almost 14%. While our price increases are a substantial part of the growth. We do actually still see growth in volume. So it's not all driven by prices. We're particularly happy that all 3 main segments delivered strong growth rates, especially within the industry, which came out at 17%. And if we take a closer look to Industry and the subsegments within, we can see that there's solid growth in all subsegments.

Although MRO came out slightly below the average segment, it still delivered solid growth rates. So in all fairness, we are firing in all cylinders within the industry.

Trade actually returned to growth, mainly driven by DIY that returned to positive territory. It is still, we say an open question. If this level can be maintained or in the coming quarters, we'll see a return to the pre-COVID level, similar to what we did see in Q2. But at least in Q3, we managed to deliver strong growth rates.

Turning to Page 7. With an EBITDA of DKK 301 million, Q3 was the second consecutive quarter of year-over-year growth in EBITDA. The main growth driver of the margin expansion was the increase in gross profit margin, which delivered astonishing 0.8 percentage increase. This was mainly driven by our CORE+ strategy focusing on concepts, but also our better business project where we constantly reduce low-margin business.

We did also realize a positive one-off impact from price increases of DKK 65 million compared to DKK 50 million last year or equal to 0.3 percentage point compared to 2021.

But basically, the main improvement is driven by our strategy. If we take a look at the cost level, we see that external operating costs are diluting the margin slightly as a lot of other companies, we are starting to see an impact from inflation on our cost -- energy cost and cost are some of the main single contributions within external operating costs. The increase we have seen is, however, more or less in line with what we expected.

Staff cost remains under control, meaning we constantly make the business more and more efficient. In cost -- in total cost, we are more or less on par with last year, relatively speaking. In absolutely terms, earnings thereby increased from an EBITDA of DKK 237 million to DKK 301 million, equal to 27%.

If we look at EBITDA adjusted for one-off effects, meaning if you look at the underlying operational performance, it increased from DKK 187 million to DKK 236 million.

Turning to Page 8. If we take a look at the full year, we see a similar pattern as what we saw in Q3 with a margin expansion from 7.3% to 8.3%, of which 0.5% can be explained by our CORE+ strategy that has delivered strong results throughout the year, but also an impact from pricing -- one-off price effect of 0.5%.

Also on the full year, we see the impact from inflation on our external operating -- external operating costs, but this is more than offset by lower staff costs due to more efficient operation.

In total, we are as -- the cost is as we expected it. In absolute terms, EBITDA increased to DKK 849 million from DKK 652 million or equal to 30%. Again, if you look at the EBITDA adjusted for one-off effects, we see an underlying improvement from DKK 572 million to DKK 704 million or 6.4% to almost 7%.

Turning at Page 9, cash flow. We do actually saw a slightly negative impact from operating activities with DKK 14 million despite the improved profitability, which I'll comment on this shortly. Investing activities of DKK 37 million. It should be noticed that the investment in the expansion of the central warehouse is the main part of the investment in PPE. There remains approximately DKK 25 million of the total investment of DKK 250 million. We're very pleased with the way this project has been managed, and we are seeing the results we expected. We see a constant improvement of the new initiatives and also that quality is improving even further. If we take a closer look at the operating activities, we can see that the main change is within inventory and to a lesser extent, receivables. The latter is easily explained by the fact that the revenue is slightly higher in September than compared with the one in June.

Now in order to secure our performance towards our customers, we stick to the increased inventory level we built up. It's important to notice that the development we see is similar to what we saw in Q2, meaning approximately 85% of the increase can [indiscernible] referred to [indiscernible], which is the fast runners. And again, it's within Climate & Energy products also. Meaning we are securing the future growth, we do anticipate within this area. So it all sums up to that despite the increase in inventory value, we do not see an increased risk.

This means, of course, that we can or we'll see an increased net working capital or at least until things get more normalized within the supply chains. But again, it's the availability that is key to us. And basically, it boils down to that to a large extent, those who have the goods that eventually will get the order ultimately.

Turning to Page 10. Looking at the net working capital, we see an increase in Q3, where the average now is up from 11.0% last year to now, 13.1%. The main driver is, as I mentioned before, the increased inventory. Despite the increase in net working capital and thereby also the invested capital, we still managed to deliver, as Jens mentioned, more than 25% in return after tax on the invested capital. If we take a look at the gearing, we see the impact from normal seasonality, payment of DKK 658 million in dividend plus investments of more than DKK 200 million. And of course, also the increase in net working capital. That basically is what increased the gearing from DKK 0 million at the beginning of the year to now DKK 1.1 million at the end of Q3. If we adjust for one-offs, the beginning is approximately DKK 1.3 million.

Turning to Page 11, our guidance for 2022. As mentioned, we have -- by end we have increased our guidance slightly. We now expect a revenue of DKK 13.7 billion, corresponding to an organic growth of approximately 12% compared to previous guidance of DKK 13.45 billion. If we look at the EBITDA, we now expect DKK 1.17 billion compared to previous as DKK 1.1 billion.

Compared to 2021, we see that one-off income has increased from DKK 112 million to DKK 225 million, meaning that we are for the year compared to last year, seeing an underlying improvement of the operation of DKK 146 million. This basically means that the underlying EBITDA last year was DKK 799 million, whereas for this year, expect underlying performance of the business of a total of DKK 945 million. Thank you.

[Jens Andersen, executive]

Thank you, Michael. Now it's time for questions. So please, speaker, if there are any questions.

[Operator]

[Operator Instructions]

Your first question comes from Kristian Johansen from SEB.

[Kristian Tornøe Johansen, analyst]

Couple of questions from me. And firstly, thank you for finally giving us the transparency into Climate & Energy, obviously, quite interesting numbers you present to us here. And to start with that, you are guiding for DKK 1.2 billion in revenue for the full year, what are you then implicitly assuming for Q4? Can you share that with us?

[Jens Andersen, executive]

No. I think that is not possible. I would say at least the same level as we have seen in Q3, and we're up with 100% or more than 100% in growth in Q3. Again, it's about the demand and supply. The demand is there, the supply is still under pressure because we are not the only one who needs heat pumps in Europe. So it is about demand and supply and PV panels is -- same problem as that with the heat pumps. So sorry, we cannot disclose what will go on in 4Q yet. Let's see how it goes.

[Kristian Tornøe Johansen, analyst]

Well, I wasn't asking for -- I mean, also going on more. I mean in your...

[Jens Andersen, executive]

If you ask for the index as we see exactly the same index. We are above 100% so far in Q4. That's excellent [indiscernible].

[Kristian Tornøe Johansen, analyst]

Excellent and then to the one-off price increases, it seems to be accelerating throughout the year as well. Is it possible to say at this point in time, whether there will be an effect in next year as well? I mean can you simply see based on the price increases you have that there will be effect in Q1 at this point?

[Michael Jeppesen, executive]

Most likely, there will be an impact because we now see price increases coming in that will have an impact from the 1st of January. So the short answer is clear, yes. The level is still very difficult for us at the current -- at this time to give any real indication on, but we are absolutely convinced that at least in the H1, given what we've seen now, we will see price increases above the level we saw in 2020, but probably the last year where they were kind of normal.

[Jens Andersen, executive]

Yes, as we agree what Michael is saying. We don't expect that the pricing increase will be 2 digits, but at least they will be 1 digit and maybe also bigger than we expected a few months ago. Simply because the input costs are increasing so rapidly. On the other hand, we see some raw materials is going down in price levels. So it's actually in the middle...

[Michael Jeppesen, executive]

Yes. We have seen examples of manufacturers where we know that the raw material that put in have gone down in prices, but the energy consumption they have more or less outweighed the savings on raw material, which meant at the end of the day actually came out the minor price increases despite the roaming raw material. So yes, we do expect it, but we can't put any figure on this right now.

[Kristian Tornøe Johansen, analyst]

No, that's fair enough. I was more the direction I would say, that economy wide. Then looking at your growth guidance, just interestingly calculating what you expect for Q4, I get to say, 8%, 9% organic growth, which is obviously impressive, but still sort of a step change down to the growth rate you've seen so far. Any considerations on what you're assuming for Q4?

[Michael Jeppesen, executive]

Again, you should notice we write approximately -- and the problem is when you do the math, the way you do it, you get quite a multiply effect on the last quarter. So we expect strong growth rates. So to be a bit cautious about just during the backside of the envelope calculation yet because it's 12% approximately for the full year.

[Kristian Tornøe Johansen, analyst]

Okay. Let me phrase it in a different way. I mean, are there any segments or product categories where you're seeing a deceleration of growth at this point?

[Jens Andersen, executive]

Yes. We see that at least within the industry, we see that it's partly declining simply because the local stock at our customers are lower as we speak. So we will see a small decline in the industry so far. But hopefully, it will be offset with the growth within Climate & Energy. But it's, again, as I said before, the supply situation is our biggest worry at the moment within economy, It's not the demand.

[Kristian Tornøe Johansen, analyst]

That's understood. Then on the concepts and Better Business, you say this keeps driving improved gross margin underlying. How long can that continue?

[Jens Andersen, executive]

At least we have a strategy until the end of 2023, and we have exceeded targets there. And then so far, we are on top of that. So I think there's still a lot of potential in certain markets. Of course, Denmark is the stretch target in the group. And we still believe that it might not be on the Danish level, but at least there's a lot of headroom in the other market so far. So we are focusing on that every day. We are also inventing new concepts. We just launched solarZero. That's a concept for time Climate & Energy. It's brand new, and then we really predict that, that will give a lot of tailwind in the years to come.

We also this one for Trade that calls for [indiscernible] . So we are still moving on with new concepts that should support that the growth rate would be even higher than we have seen so far.

[Michael Jeppesen, executive]

And also potentially half the strategy period, I'm not sure we have...

[Jens Andersen, executive]

No, no, its not a never-ending...

[Michael Jeppesen, executive]

There is much more potential in this than what we'll be able to deliver in 2023.

[Jens Andersen, executive]

So it's a long journey, but it's a good journey.

[Kristian Tornøe Johansen, analyst]

So it's fair to say that you have potential to further increase gross margin next year.

[Jens Andersen, executive]

Yes, we hope. And of course, if the project market or new construction is going a little bit down, that will, in itself, at least support that our gross margin will not decline. Then we have the competition. So let's see how it will turn out. But so far, we still believe that the underlying can do much more on concepts, but it's a long journey. I have to say that.

[Michael Jeppesen, executive]

But as we say in finance, all other things equal, you're absolutely right.

[Kristian Tornøe Johansen, analyst]

That's clear. Then last question, the financial gearing, where do you roughly expect that to land at the end of the year?

[Michael Jeppesen, executive]

Lower. Clearly, you will see a seasonality impact of plus/minus DKK 400 million, which should bring the net interest-bearing debt down to, I would say, approximately 800-ish-something maybe slightly above. So this is well -- but that's a normal seasonality. The right way of looking at this is more to look at it like an average because there is quite some seasonality involved in this. So I would say if you do the math on the 3 quarters, you know, and we assume we the see normal pattern. You will end up around one if you normalize it, at least for the one-off impact, I would say that will be the full year effect.

[Kristian Tornøe Johansen, analyst]

And the question I always ask you, you're still committed to have this approach 1.5x over time?

[Michael Jeppesen, executive]

Over time, yes, over time. But bear in mind, I mean, if we normalize the gearing here, at the end of Q3, we are actually on 1.3x. So I would say we are fairly close to the 1.5x.

[Jens Andersen, executive]

And also taking the market situation in consideration, I think it's fair to say that we are not conservative but realistic. So it's nice to be in the low end of our range please. I think that's the way we think so far.

[Operator]

[Operator Instructions]

There is no further question.

[Jens Andersen, executive]

It's okay. Thank you. Thank you. Thank you for listening in. Have a very nice day. Goodbye.