Solar A/S

CSE:SOLAR B

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Solar A/S Q3 Report 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jens Andersen, CEO. Please go ahead.

[Jens Andersen, executive]

Thanks, a lot. A very warm welcome to this third quarter webcast for the Solar group, Together with me here in Vejen, I have my colleague, CFO, Michael Jeppesen. The agenda for today is a general business update with some highlights for 2023, presented by me, then I will give you a short update on our ongoing work with operational excellence but also sustainability. Then I will hand over the word to Michael, who will present you for our 3Q results, of course, including a high-level cash flow status and some comments to our reconfirmed guidance for year 2023. Finally, we will have a Q&A session.

Next slide, please. As expected, we saw a decline in growth in Q3. Revenue decreased to DKK 3 billion, down from DKK 3.3 billion in the same quarter last year, and our adjusted growth were negative with minus 4.7%. MAG45 delivered, I would say, nearly as always positive adjusted organic growth. Climate & Energy, one of our strategic focus sales delivered below our expectations as revenue amounted to around DKK 295 million compared to DKK 325 million in same quarter last year.

A deep dive into the Climate & Energy category shows that our sales of high-capacity ThermoNova industrial heat pumps, delivered the expected growth rates, while sales of heat pumps for the residential market was extremely or very disappointing. The slowdown in Denmark since March this year continued in Q3. The new subsidy scheme for heat pumps was implemented in mid-Q3 or late September. But we haven't seen that sales have picked up yet. Therefore, uncertainty remains for Q4, but the potential for an autumn value for heat pumps is definitely in place if we see increasing gas prices.

Looking at our customer segments, the Industry and Trade segments posted adjusted organic growth of 0% and 9%, respectively. While the installation segment posted adjusted organic growth of minus 10%, mainly related to the disappointing development on Climate & Energy. EBITDA for the quarter, DKK 187 million, which was fully on par with our own expectations. And I think if you want to make a deep dive, please go to Page 7 in our Q3 report, if that could have your interest. Finally, I can say that we reconfirm our EBITDA guidance of DKK 900 million.

Next slide, please. Over the past years, we have carried out major investments in our warehouse in Denmark, Norway and the Netherlands. We have added 18,600 square meter of warehouses. We have merged 2 warehouses in Holland, installed Autostores, totaling 210,000 boxes, and that includes 215 robots. We have also made new cable cutters machine. Replaced 9 manual operated forklifts with self-driven AGVs. We have set up 3 high-capacity ThermoNova heat pumps at our own premises, and finally added around 2,700 solar panels on our roof. These investments, which include a substantial reduction of the noise level and installing adjustable workstation, have improved the work environment and lowered our energy consumption significantly.

By installing heat pumps and solar panels, we continue our journey towards net zero emission in 2030 in scope 1 and 2. And we continue to see opportunities for further automation across markets. Therefore, we also have taken maybe a big step, but at least decided to invest in a new modern warehouse in Kumla, that is close to Örebro where we are today in Sweden, and we expect that it will be operational in late 2026. Therefore, we also will divest Halmstad and Örebro over time. The net investment will be approximately DKK 400 million.

Next slide, please. Finally, yet importantly, Solar's ambition and target has been approved by the science-based target initiative, or SBTi, which is the world's most ambitious sustainability collaboration, supporting the Paris Agreement back in the old days, I would say. In all fairness, I believe that Solar again, goes above and beyond even the higher standards by focus not only on becoming CO2 neutral in our old Scope 1 and 2, no later than 2030, but also aims to improve biodiversity and help improve life on land by forestation. I will now give the word to Michael for some insights into the financials. Please, Michael?

[Michael Jeppesen, executive]

Thank you, Jens. Please go to Page 7. I Revenue in terms of DKK decreased by almost 10% as we faced substantial headwind from FX, but also a more challenged market. Despite this, we came out with almost DKK 3 billion compared to DKK 3.3 billion last year, equal to an adjusted organic growth of minus 4.7%. It should be noticed that it's a clear assessment that we maintain our overall market share. As expected, growth declined in the quarter further compared to what we have seen in Q1 and Q2. Looking at the only disappointment in the development we've seen so far has been the sale within Climate & Energy, mainly heat pumps for residential buildings. As mentioned, as Jens also mentioned, this is quite challenged and has come to an almost complete stop.

However, we still expect this to return to another and substantial higher level, but not before we start to see the full year effect of the new subsidiaries scheme. But it's, of course, a question when this will materialize, but we know this can happen very fast, in particular, if the gas prices start to increase. Regardless of the disappointing sales, we know that the underlying problem remains, meaning a lot gas and oil boilers needs to be replaced in the coming year, and heat pumps is the only viable solution to this challenge.

Similar to what we have seen in the preceding quarters, price increases now only constitute a neglectable part of the growth we see. If we take a look at the different -- the 3 main segments, installation faced clear headwinds. And this goes for all subsegments. Of course, it's also hit by the lack of sale of heat pumps. Industry were stagnant, where particularly Marine & Offshore was actually delivering very positive growth rates, whereas infrastructure probably was the most negative. This is not such a big surprise as the rollout of fiber is coming to an end. So we did expect this to happen.

If you look at trade, DIY continues to face headwind as we've seen in previous quarters, but this was more than offset by other subsegments. So to conclude, with the exception of the model less complete stop in Denmark in sale of heating pumps for residential buildings, the development is fully in line with our expectations, including both the trend and the mix.

Turning to Page 8. When EBITDA of DKK 187 million. Q3 was on par with our expectations. Albeit it's now below last year, even when we adjust for one-off price effects. We did see the underlying cost of goods sold increased slightly by 0.6% when adjusted for one-off effects compared to last year. This can mainly be explained by the development within Climate & Energy but particularly PV were a challenge. We saw during the quarter, prices dropping with more than 40% in a very, very short time frame, and this led to a drop also in the price with our -- in the market. So this explains more than 50% of the 0.6% drop we saw.

As expected, we faced headwinds from costs. In total, this had a negative impact of 0.4%. External operating cost remains unchanged, relatively speaking, whereas staff had a minor negative effect. In absolute figures, both external operating costs and staff costs are now below last year, also when adjusted for FX, despite the inflation pressure, meaning both salary and cost inflation is under control. Regardless, we will continue to have a strong focus on initiatives, including cost containment, process optimization and staff reductions to secure that the cost development remains well below the inflation. I think it's particularly important to note is that loss on trade receivables remains under control with a very strong performance within the quarter.

Turning to Page 9 with a quick look at year-to-date with an EBITDA of DKK 681 million year-to-date. The underlying EBITDA margin is slightly below last year when eliminating one-off effects. Gross margin still remains slightly above last year when adjusted for one-off effects despite the recent development within Climate & Energy, and we are absolutely convinced that our strategic focus center will continue to support this. As expected, cost has a negative effect, particularly soft, cost was 0.4%. But to conclude, year-to-date, the development is in line with our initial expectation with a continuous weakening during the quarters as we go down the year.

Turning to Page 10. Looking at cash flow, we see a positive impact from operating activities of DKK 190 million, which I'll comment on shortly. Investing activities of DKK 102 million, of which the main part of PPE can be referred to the expanding of the central warehouse in the Netherlands. We are very pleased with the progress that we see there, and we're actually slightly ahead of schedule, enabling us to close down and spin off the central warehouse in Duiven.

If we take a closer look at the operating activities, we see that the main negative changes, liabilities of minus DKK 93 million, which mainly can be explained by less purchase, but of course, also is impacted by the Climate & Energy products, which had a substantial lower payment terms compared to what we normally see. Receivable is slightly down, but this can be explained by lower revenue in September compared to June.

The positive impact of DKK 116 million from inventory is due to a focused effort. Even though we have a disappointing sale of Climate & Energy products, we are very pleased with the development, albeit the inventory still remains too high. Consequently, we expect inventory lever to continue to reduce throughout the remaining part of this year.

Turning to Page 11. If we look at net working capital as an average, we do see an increase from up to -- from 16.2% to 16.7% in Q3. However, if we compare quarter Q1, Q2 and Q3, at the end of the quarter, it remains more or less unchanged despite the negative growth. Looking at gearing, it has increased slightly from 1.4 to 1.5x.

Turning to Page 12, guidance for 2023. We reconfirm our guidance of an EBITDA of DKK 900 million. In both '22 and '21, we had substantial positive 1 year one-offs of DKK 215 million and DKK 112 million, respectively. We do not expect this to happen in 2023, meaning we do not assume any significant one-off effects. Looking at the markets where we operate, our assessment remains unchanged. In general, we do expect a [ stagnant ] of negative development in all segments, even though there is an effect from price well over.

There's no doubt that uncertainty is increasing also throughout the remaining part of the year. If we look specifically at the Danish market, we expect an effect of the government support for heat pump to residential buildings to start to materialize during the remaining part of Q4. And this, as Jens also mentioned, we can also catch up for some of the lost revenue in Q3, in particularly, if the gas prices start to increase, you can say we are able to deliver quite a substantial number of heat pumps and we can get more available should the demand be there. However, the impact will be more material on the revenue than on the EBITDA.

During the last year, we managed to be ahead of inflation. But through the late quarters in 2022, we've started to see cost inflation accelerating, and this as expected have continued into 2023. We expect this to continue in the remaining part of '23 as well on, albeit we clearly see the effect of our initiatives now bringing costs below 2022 level despite the effect of both salary and cost inflation in general. Regardless, we'll continue to implement mitigating activities through this development. Thank you.

[Jens Andersen, executive]

Thank you, Michael. Now it's time for Q&A, and I think we'll start if there are someone on the line who wants to raise a question, please?

[Operator]

[Operator Instructions] Our first question comes from the line of Kristian Tornøe Johansen from SEB.

[Kristian Tornøe Johansen, analyst]

A couple of questions for me. We have seen a couple of companies across Europe exposed to construction, talk about a slowdown in September or probably rather that the normal seasonal pickup in September didn't really materialize as it used to one of them being one of your close competitors in Denmark. So can you just speak about the demand pick you saw sort of throughout Q3?

[Jens Andersen, executive]

I would say it's -- I support the problem that September was extremely disappointing. On the other hand, if we look at our pipeline for projects coming in, it's still positive despite the market situation right now, but September were definitely not as expected.

[Michael Jeppesen, executive]

But it should be noticed also that September last year was when the sale of heat pumps peaked. And that is a part of it, but it doesn't explain everything. So we fully agree with what others have said about September. And you can actually also see it in the cash flow because -- and -- because normally, traditionally, September revenue will be above June revenue, all other things that was not the case this year.

[Kristian Tornøe Johansen, analyst]

And has the momentum coming to September continued into October. Is it the same picture you saw in October?

[Michael Jeppesen, executive]

I was expecting that question to materialize. It's clear that we are still going down in October, but again, that was expected in our guidance, it actually goes back to the first time we gave the guidance back in [indiscernible]. We did expect growth to well and the pattern, I would say, continue down. But of course, in mid-October last year, we did not sell that many heat pumps. So because we simply couldn't get them. That was probably -- so it's still -- it's trailing well below 0 as we speak. And we've not seen any real effect yet on the sale of heat pumps in Denmark, even though the new subsidy scheme is in place. But I would say now we are in the traditional season where you would buy a new one. And then also, we know it takes some time to get a project and so forth. There was some limitation to how much you could do before you apply it. So I would say September is plus/minus as expected -- October, sorry.

[Kristian Tornøe Johansen, analyst]

Understood. And then Jens you also briefly mentioned your sort of project orders. So I think last time you reported, you were a bit more optimistic on the development in orders, that's increasing. So just to clarify, this increasing trend in orders, has that continued throughout Q3?

[Jens Andersen, executive]

Yes. Strange enough, I would say, but it looks like we -- otherwise, we're winning more than the market. But of course, you have the Novo effect also in our industry. So if you take that out, I would say that the market is lower than -- much lower than last year. But all in all, there's still a pretty good activity within the big projects. I think the main problem is residential market and maybe also partly our daily service, it seems like the need for products are going a little bit down.

But I still expect -- or I know that the installers have a lot to do, but the tasks are smaller, but there are a lot of them. But I think the main problem remains, as we have said, hundred of times that's heat pumps. That's really the main problem at the moment also for the installers. I think the market is down 50% compared to last year.

[Kristian Tornøe Johansen, analyst]

But obviously, what I'm trying to get here is sort of what to put in on the growth for next year, and I know I'm probably not going to get you to give me a number. But obviously, based on what you talked about for the project segment, it seems that, I mean, looking for '24 over '23 that there should be some sort of support. And obviously, the comparison next year on heat pumps will be much more benign than the one you have this year? Is that the way to think about...

[Jens Andersen, executive]

I would love to give you some clear answers, but I can't at this moment. But of course, we are working on it as we speak, and we'll come out with the guidance for 2024 in February. And then, of course, you will see the picture that we expect will be the situation. I still believe in electrification, but of course, our dependency on the building sacks is still there. But of course, we hope that the current energy market will regain again, and that will support solar in a strong way in all markets, by the way.

[Michael Jeppesen, executive]

But in all fairness, to get a more complete picture, you also need to look at other segments. And I would say that the -- it's really mixed. If we start to look at the industry in Germany, for instance, although we're not directly exposed to Germany, we are indirectly for Danish industry and Dutch industries and Polish in particular industry because our customers are sub-suppliers to the German industry. So I say uncertainty, as we see it right now, at least for next year is very high. It's very unclear. So there are mixed signals, I would say. And as Jens said, a main part of it will depend on what happens within the Climate & Energy part of it, which has become a substantial part of our business. We're absolutely concerned that this will bounce back, but the question is when. We don't know.

[Kristian Tornøe Johansen, analyst]

All right. That's clear. And then just my last question. So the investment in Sweden, you mentioned a net investment of DKK 400 million. So can you help us a bit on sort of the CapEx profile of this because I assume that there's going to be a gross investment and you are dependent on some divestments, which will come in a later stage. So essentially, what would be the CapEx distribution in the coming year for this project?

[Michael Jeppesen, executive]

It's still very early days, and we just start the project. It's a little bit difficult to give any clear answer. You should not expect it to have any major impact in 2024. It will start to gain traction there in '25 and is expected to profile in '26, where you also then will see the sales -- cost structure. You're right. You'll have an impact that is above the DKK 400 million that will start to reduce. We'll try to be more transparent about it when we start to get more information about it.

We can put some more information to the ongoing investment in Alkmaar. As far as I remember, we are meets approximately DKK 50 million to be paid, of which roughly half will be paid this year, maybe a little bit more on the remaining part in Q1. And there you can also expect in Q1, maybe in Q2, but expected to be in Q1, the sale proceeds for Duiven to kick in. And that was disclosed last year, so it's going to be approximately DKK 75 million, as I remember it.

[Kristian Tornøe Johansen, analyst]

But can you give us the gross figure for the Swedish investment? So the DKK 400 million...

[Michael Jeppesen, executive]

We don't have -- it is an approximate figure. So I can't give you any solid figure on that yet. But we simply -- it's best guess right now.

[Kristian Tornøe Johansen, analyst]

All right. Fair enough, I will do my best to bring it forward in next meeting.

[Operator]

[Operator Instructions] The next question comes from the line of [indiscernible].

[Unknown Analyst]

I will be asking some questions on behalf of private investors. And the first question here is when selling a ThermoNova solution, does it require any legal yearly inspection? And do you expect in that case to be the service/inspection provider on bigger or all projects and generate revenue from this?

[Jens Andersen, executive]

Yes, you're fully right. Anders, that is a yearly sub screening that's required. Some of these services we'll do ourselves or ThermoNova will do that ourselves and some will be done in close collaboration with the certified installers. So it's kind of a mix, but that's, of course, a revenue stream for ThermoNova but also for our loyal customers within installation. But at the moment, we are talking about Denmark. But I know that soon we will go out in the other markets and there might be a different situation when we enter into the other countries. But the situation in Denmark is that it's a mix.

[Unknown Analyst]

And the next question is also about ThermoNova. What is the market potential for ThermoNova and industrial heat pumps in the countries that you operate in today? And how is the competition in these markets? Do you, for example, see the Danish company [ Synergi ] that was acquired by [indiscernible] some years back as a main competitor?

[Jens Andersen, executive]

I'm totally honest, we don't have the overview per country yet, but that will be done on a later stage. But if you go into there's a website that's called European Heat Pump Association. And they predict an exponential growth in industrial heat pumps in the next decade, by the way, in whole Europe.

Regarding question about [ Synergi ], I don't see them as a direct head-to-head competitor because they are primarily working with higher kilowatt solutions than we do. But of course, there will be a situation where we bid on the same projects. But so far, they are mainly connected to district-heating solution and cooling solutions.

Our target group for Solar or ThermoNova and Solar that will be industry companies that will also be public buildings, sports facilities. So I think in that place, we have enough to do for many years. But of course, sometimes, there will be a head-to-head competition, and that could be potentially be [ Synergi ]. And we'll take that as it comes.

[Unknown Analyst]

And then the last question here from a private investor is with the decreased share price and a quite low valuation, are you considering initiating a share buyback program.

[Michael Jeppesen, executive]

It is a tool that the Board of Directors have in their toolbox. And at every Board of Director meetings, the capital structure of Solar is discussed. So it's a part of the agenda every time we meet with the Board of Directors. But as you can see right now, it's not input into operation, but it is available should the need arrive.

[Operator]

There seems to be no further questions. I would like to hand back to Jens Andersen for closing remarks.

[Jens Andersen, executive]

Thanks for helping us through this call, and thanks for the questions, and have a nice day out there. Thank you. Bye.

[Operator]

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