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 2024 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. Please go ahead.

[Jens Andersen, executive]

Thank you. Thank you. A warm welcome to this third quarter webcast for Solar Group.

Together with me here in Vejen at our headquarter, I have my colleague, CFO, Michael Jeppesen and our Investor Relationship Manager, Dennis Callesen.

The agenda for today is a general business update with some highlights for Q3 presented by me. Then I will give you a short introduction to how we work with NIS2, which is cybersecurity, but also ISO 27001, which is about data security. Last but not least, I will make a short introduction to our brand new AI tool which we call Solar Assistant. Then I will leave the words to Michael, who will present our 3Q results, including a high level of cash flow status and then, of course, finally a Q&A session.

If you will take the next slide, please. As expected, all segments posted negative growth in Q3 and our revenue declined to DKK 2.9 billion, down from DKK 3.0 billion last year. So, our adjusted organic growth amount to minus 5.3%, up from minus 7.8% in Q2 and minus 15.4% in Q1 2024. In September, adjusted organic growth amounted to minus 0.6%, showing that recovery continues to take root, especially in Denmark. But we also see the other markets slowly start to recover, but at a slower pace than we expected.

Revenue from Climate & Energy, one of our strategic focus areas, remained at a low level in Q3, amounted to DKK 212 million, down from DKK 295 million at the same quarter last year. As regard high-capacity heat pump sales, we are now really starting to see an increase in our conversion rate, which resulted in an order intake of DKK 40 million, which we had to deliver within the next 6 months. We still have unresolved offers in the market above DKK 200 million, and we are pretty sure and confident that our high-capacity ThermoNova heat pump offers the potential we seek for. If we turn back to the segments, the industry segment delivered an adjusted organic growth of approximately minus 0.4%, with MAG45 delivering positive adjusted organic growth of almost 7%.

Turning to the installation and trade segments, they delivered organic growth of approximately minus 6% and minus 10%, respectively. If we look a little bit deeper into those figures, around 50% of the decline in the installation segment can be accounted for the fall in heat pump sales. And EBITDA of DKK 202 million compared to DKK 187 million last year was totally on par with our expectations. And that's also why we reconfirm our guidance of DKK 600 million for 2024. Adjusted for non-recurring income, Q3 showed an underlying EBITDA margin of 5.7%, down from 6.3% at the same period last year.

Next slide, please. NIS2 and ISO 27001 maybe not the most exciting topic, but anyway, it's extremely important because we consider NIS2 and ISO 27001 beneficial for many reasons, including a strong risk management and mitigation methodologies that enable to identify and assess our own risk, as well develop risk treatment measures that minimize potential threats. These tools help foster a security culture within Solar, supporting employees as they develop better awareness of security practices and hopefully, also reducing the risk of potential breaches.

If we look into our infrastructure business, which is around DKK 1 billion, it's simply a need to be NIS2 certified. So it's also commercially extremely important. It's our firm conviction that our customer relations make us stronger with ISO 27001 certification as it benefits customers by providing assurance and reducing risk, while promoting trust in our commitment to customers and their data security. The certified is also a requirement, as I said before, for operating critical infrastructure, but we are pretty sure that we, over time, will see more and more big industry customers with the same needs.

Next slide, please. On our mobile app, we introduced Solar Assistant last week, which is a new AI tool. Solar Assistant works 24/7, 365 days. It's super fast, and it knows the entire range of hundreds of thousands of products for industry and construction. You simply just have to ask the chat box. Solar Assistant is particularly helpful when customers are looking for products outside of their usual field of application. It browses through our entire product catalog and can answer all kind of questions about the products.

It is also connected to the shopping basket and can thus also perform actions such as adding items to the basket, replacing items to the basket if you need another color or maybe another measurement instead. It can tell you which items that are already in the basket, as I said before, find other items that fit and remove items from the basket. Solar Assistant also help you to provide a favorite list if you want to. As a bonus, you don't have to worry about typing. You can talk to Solar Assistant and you will have the answers read loud. It is faster. It's helpful. And if you have difficulties by seeing, writing or reading, it understands all languages and can also translate for you. So together with our customers, I believe that we, for real, have started the AI journey in our industry.

And with those words, I will hand the word over to Michael. Please, Michael.

[Michael Jeppesen, executive]

Thank you, Jens.

Please turn to Page 7. With a revenue of DKK 2.9 billion, we saw a loss of approximately 3% compared to the DKK 3 billion we did last year. This is equal to an adjusted organic growth of minus 5.3%, meaning that the sequential improvement continue as you can see in the figure in the middle of the slide. It's actually -- if you look into the Q3, isolated, you'll see exactly the same picture where the first month came out substantially worse, and then we saw a gradual improvement, ending up in September of minus 0.6% in organic growth.

If you look at the segments, similar to the preceding quarters, we saw negative organic growth in all main segments, insulation, industry and trade. This was as we expected. It is, however, notable to see that -- to notice that we do see improvement. If we look at installation, for instance, Denmark actually managed to move into positive territory for Q3, which is a clear improvement compared to what we've seen previously. And we also see similar patterns in the other main countries.

If we look at industry, MAG45 is an important driver. Also, Marine & Offshore & Utility delivered growth rates. But I would say, as we have seen in the preceding quarters, OEM and MRO remained in the red territory, and this is pretty much the same pattern as we've seen throughout the year. So overall, the development in Q3 was as expected despite this slightly slower recovery.

Please turn to Page 8. Then EBITDA of DKK 202 million. Q3 was on par with our expectation. If you look at the underlying EBITDA, it's DKK 163 million and was, as expected, slightly below last year. If you look at cost of goods sold, we saw that the margin was diluted by 0.8% compared to last year. The margin is consequently more or less in line with what we've seen in Q1 and Q2 this year. If we compare to last year, the drop of 0.2% -- 0.8%, sorry, can be split more or less equal into increasing costs for improving our services as we also guided for '24, but of course, also continued price pressure from a market. As expected, our initiatives on cost containment and process optimization and staff reduction successfully managed to ensure that despite the headwind, costs did not dilute the margin further. Regardless, we'll, of course, continue to have a strong focus in order to secure that the cost development remains in control.

Please turn to Page 9. If we take a short look at year-to-date, Q1 to Q3, the EBITDA was DKK 427 million, as we expected. If there were some positive one-offs in '23, as if you look at the margin, they had an impact of 0.4%. We see a drop in the margin of 1.5%. Again, we did expect this, and it can be explained by the same reasons as I mentioned in Q3, but also a less favorable mix had an impact. In particular, if you take out the product, Climate & Energy products, mainly within H1 had a negative impact on the margin. It's wearing off, but not because margin as such has improved. But more or less, if you look at the comparison, it was mainly in Q3 where we really started to see Climate & Energy margins being squeezed. As expected, we did see a headwind from the costs, but diluting the margin slightly. But it should also be noticed that year-to-date, we've seen a negative organic growth of minus 9% and that there also are restructuring costs within the costs. So to conclude, year-to-date, the development is in line with our initial expectations in terms of EBITDA, but of course, slightly below in terms of revenue.

Please turn to Page 11. Operating activity for the quarter came out with minus DKK 196 million. If we take a closer look at it, we see a flat development within inventory. It's up with DKK 41 million. This is in line with what we saw the quarter before, but it's actually a trend shift compared to the preceding quarters. There is no doubt that we expected a slightly better revenue and a part of the disappointment we see here is stranded at the inventory, meaning that the current inventory level is above what we would say would be the optimal point. So, we have consequently in the quarter started to reduce the inventory to the demand that we do see for the remaining part of the year.

Accounts payable is also reducing quite substantially to June -- compared to June. But as you may remember, we did quite some tactical purchases in June. This is now, of course, reversing, meaning what we acquired additional there has been paid in Q3. Of course, also that we see the effect of less purchase due to the fact that we've started to hit the brakes slightly in order to balance the inventory more to the demand we see for the remaining part of the year. Short on the investments, DKK 82 million. Of this, DKK 40 million relates to our new central warehouse in Kumla, where things are progressing according to plan. And we will gradually see that the investment here will build up.

Please turn to Page 11. If we look at net working capital, as an average for the last 4 quarters, we see a continued reduction from 15.8% to 15.5% despite the headwind in the market. Of course, if you look at it at the end of the quarter, it is up compared to the quarter before, and this is mainly due to the fact that the inventory is slightly too high. We're still comfortable that we will continue to gradually reduce this to a normal level. Looking at the gearing, we see a minor increase from 2.2 to 2.6, which still is within our range. We, of course, expect this to change in Q4, where we expect to be closer to 2 than 3 at the end of the quarter, partly because of normalization of the inventory, partly because we expect the proceeds from the Duiven sale will hit our books, but of course, also due to the normal seasonality in Q4.

Please turn to Page 12. We reconfirm our EBITDA guidance of DKK 600 million despite the headwind on the top line. We do change our revenue slightly downwards from DKK 12.5 billion to DKK 12.3 billion due to that the recovery is slightly less than we initially expected. We are still convinced despite the uncertainties that they are, that the recovery has taken root not only in Denmark, but we actually also start to see it in the other main markets. Despite this, we, of course, still expect, if we look at the full year, that all countries will be negative and also all main segments will be negative.

Regarding the gross margin, we did during the latter part of 2023, saw a drop in gross margin in several categories despite the positive impact from concepts. We expect this development to continue for the remaining part of 2024. And of course, we decided to elevate our delivery service level, which, of course, also had a negative impact on the margin. Consequently, we do expect a lower margin for 2024 compared to what you did see in 2023. Regarding costs and wage inflation, we saw a hike in this in 2023. We expect this trend to persist at least throughout H1, which it has and now to wear off and start to normalize. So all in all, same EBITDA despite slightly less revenue.

Thank you.

[Jens Andersen, executive]

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

[Operator]

[Operator Instructions]

[Dennis Callesen, executive]

Should we go with the written questions?

[Operator]

Yes. There seems to be no questions from the phone lines at this time. Please proceed with webcast questions.

[Dennis Callesen, executive]

Okay. I think previously, you have stated that your business is driven on an economy of scale and that your margins will increase as revenue increases. This quarter, we see a raise in EBITDA margin, while revenue falls. Can you put some words to this? What has changed during the quarter to make this happen? And do you expect to be able to see this also in the next quarters? And is the increase -- or is the increase only attributable to non-recurring income?

[Jens Andersen, executive]

You take that?

[Michael Jeppesen, executive]

Yes. I'll take that. Yes. Of course, the non-recurring income or the profit on the sale of the former central warehouse in Duiven, of course, plays a role in it. But it's also important to be aware that in Q3, we see typically a substantial drop in costs. And that compared to what you would see in Q4, but also in Q2, and that has to do with the fact that most people take out vacation in July and August, meaning we released quite some provision for holiday allowance. So, there is some seasonality in the costs, and I think that more or less explains it.

[Dennis Callesen, executive]

Number two, according to your guidance of DKK 12.3 billion in revenue for the year, are we right to assume that you expect growth in Q4? Will this growth be evenly distributed across your categories? Or do you see any of them performing better than others?

[Michael Jeppesen, executive]

It's a spot-on observation. We are guiding with an expected full-year negative organic growth of approximately minus 6%, given that we are year-to-date on minus 9%. If you want to make sure that the math kind of balances out, you need positive organic growth in Q4. We are convinced that if you look at the segments that we will see more and more places where installation become green. We also expect that what we've seen in the preceding quarters within industry that will remain green. We could be more in doubt with OEM and MRO, which seems to be the main challenge in the industry would move into positive territory. I think that's the overall picture as we see it.

[Dennis Callesen, executive]

Third question. Can you comment more on the industrial heat pumps? Do you expect significant growth in this segment in '25 with increased conversions?

[Jens Andersen, executive]

Yes. I cannot comment on the guidance for 2025, but at least I can say that the interest for ThermoNova heat pump is huge. And it's mainly big companies, which are affected by CSRD legislation, but also companies that have committed themselves to science-based target or even own goals on Scope 1 and 2. So, we work with the order pipeline. We see an increased order conversion. And I can only say that we are optimistic about the future also for 2025. But, again, the guidance will be in the market in February 2025.

[Dennis Callesen, executive]

Next question. With falling interest rates and improved inflation in EU, how long do you usually see it takes for the industry to go back into growth territory? Or when do you expect it to happen at this time? Will '25 be a year of growth? Or do we need to look further ahead?

[Jens Andersen, executive]

It's a complex question. I think at least what we see is that we expect growth to continue also in 2025. There will be some maybe minor price increases that has to be taken into consideration. But the uncertainty still remains. Normally, we say that installation is very late cyclic, and I think that's the case again. But on the other hand, we also have seen that we have won really a lot of projects, especially in Denmark. But all in all, back to what I said before, guidance will be official in February 2025. But of course, it also has to be said that we expect a positive top line in 2025. That's for sure.

[Dennis Callesen, executive]

Next question. The tax in Q3 is relatively low. Will that continue into Q4?

[Michael Jeppesen, executive]

It can always, particularly within a quarter, be some ups and downs, and it is an estimated amount. It can have to do with, amongst others, the tax that falls on the profit. If you look at it on the long term, you should expect an effective tax rate around 24% approximately. Most countries varies in the early-20s and then you typically have 1 to 2 percentage non-deductible costs. But there is a very fine bridge actually on how the tax looks. If you look into the Annual Report, I cannot remember the page, but there you can see in detail how it looks. And you will see over time that it's a [ fresh option ] that is 24-ish.

[Dennis Callesen, executive]

And the next and final question consists of a number of questions. So, I'll read it and then we'll take one by one. To reach minus 6% organic growth for '24, you need a positive organic growth of 4.6% in Q4 '24. What makes you confident in such an improvement for Q4 '24? And what have you seen in Q4 so far? First question. What level of price,,,

[Jens Andersen, executive]

Should we take it?

[Dennis Callesen, executive]

Let's take it.

[Michael Jeppesen, executive]

I can answer that one. Yes. Well, first of all, you should notice it says approximately. So it's not correct until the last digit. So basically, what the 6% means is that it could be minus 6.4% or it could be minus 5.9%. But having that being said, we do need organic growth in the range of at least, I think, 3.5-ish or something like that in order to make sure that you end on 6%. I would say, if you look at the trends we have seen in the last couple of months, it clearly points in that direction. And also bear in mind, if you look at -- it has also to do with that it was in Q4 that we really started to see the headwinds and the point of reference is becoming a lot easier. We are also having being said in most countries, trending slightly better over time. And I think what we've seen so far, there's always some ups and downs in it, but we are reasonably comfortable with it.

[Dennis Callesen, executive]

What level of price pressure are you seeing? And what relief on gross margin do you expect when volume growth returns?

[Jens Andersen, executive]

Yes. I think I can say like other companies in the industry that the price pressure have been extremely hard, especially within products on Climate & Energy. We expect that price will -- of course, it's a hard industry, that's for sure. But at least, we expect that things will normalize during 2025. That being said, you never know, but at least that's our prediction so far that supply and demand is not in balance. And when it will come back to balance, you will see a normalization of the price level and then hopefully, thereby, also a decent gross margin development. But it will take time, that's for sure.

[Dennis Callesen, executive]

Looking at your internal operating cost and staff costs run rate, are there any factors which we should be aware of looking into our 2025 assumptions? In particular, should we be aware of any impact from your central new warehouse in Sweden?

[Michael Jeppesen, executive]

The last part of the question is the easiest one to answer and declare no. The new central warehouse will not come online before '26. So, there will not be any impact whatsoever. We have done quite some initiatives both in '23 and '24 in order to adjust to the current level. But most of -- I mean, most of it was done in Q1 and to a lesser extent in Q2. So the full-year effect of the initiatives around '24 are not 100% factored in, but I would say fairly close. But we'll, of course, continue to monitor this very closely to see how things develop. And if we see things are not developing the way we expect, of course, we'll take the necessary actions.

[Dennis Callesen, executive]

And the last question. Can you give us an update on the ERP implementation project in MAG45?

[Jens Andersen, executive]

Yes. It's an ongoing project, and it works according to plan. But, of course, it's also a big project. So at least from my side, that's my comments to that. But it will take some time before we are in the air, so to say, but we also need to switch to another system because we are running on an old BOM platform, which is not supported anymore. And now we are going into Microsoft Dynamics. So, I think that's the key takes you can get from us at the moment.

[Michael Jeppesen, executive]

So yes, of course, we expect when we close next year that it should be behind us. We should be up and running, I think we can say.

[Jens Andersen, executive]

Exactly. Yes. But it takes time.

[Michael Jeppesen, executive]

Yes. And it tends to get delayed these projects as well.

[Jens Andersen, executive]

Okay. Thanks for listening in, and I wish you all a very nice day. Bye-bye.

[Operator]

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