Solar quarterly report, Q3 2022. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question and answer session. Today, I'm pleased to present CEO Jens Andersen, CFO Michael Jeppesen. Speaker, please begin.
Thanks a lot. A very warm welcome to this third quarter webcast for the Solar Group. Together with me here at our headquarters in Vejen, I have my colleague, CFO Michael Jeppesen. The agenda for today is a general business update, with some highlights presented by me. I will give you some insights about our second-largest customer segment, Industry. Will Michael present the 3Q results, including a high-level cash flow status, and naturally some comments to our guidance for year 2022. 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 explain why our inventory 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 sale, which is mainly related to new construction, 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 four sub-segments, and the first one is OEM or Original Equipment Manufacturer. We have MRO, that stands for Maintenance, Repair and Operations. Infrastructure, that is mainly to utility companies. 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 a 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 CO2 emission together with our customers, but also with a very good solid return on the investments. As mentioned last time, we have already installed three new large heat pumps at our 60,000 sq m central warehouse in Vejen. The interest for the solution is huge among customers, and even two ministers have, during the election campaign, been around our facility to see both our new AutoStore solution but also our new industrial. Honestly speaking, it was my feeling that they were simply impressed by both solutions. We 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 this to customers. I will now give the word to Michael for some more insights to the financials. Please, Michael.
Thank you, Jens. Please turn to page six. Now, revenue in terms of the DKK increased by almost 14%, meaning we delivered DKK 2.3 billion versus DKK 249 l ast year, or an organic growth of almost 14%. Although 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 three main segments delivered strong growth rate, and especially within the industry, which came out with 17%. If we take a closer look at Industry and the sub-segments within, we can see that there's solid growth in all sub-segments. Although MRO came out slightly below the average segment, it still delivered solid growth rates. In all fairness, we're firing on all cylinders within industry.
Trade actually returned to growth, mainly driven by DIY that's 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. At least here in Q3, we managed to deliver strong growth rates. Turning to page seven, 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% 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 points compared to 2021. 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 costs and cars 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 absolute 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 eight, 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 had delivered strong results throughout the year. Also an impact from pricing, one-off price effects of 0.5%.
Also on the full year, we see the impact from inflation on our external operating costs, but this is more than offset by lower staff costs due to more efficient operation. In total, the costs are as we expected it. In absolute terms, EBITDA increased to DKK 849 from DKK 652 or equal to 30%. Again, if you look at the EBITDA adjusted for one-off effects, we see an underlying improvement from DKK 572 to DKK 704 or 6.4% to almost 7%. Turning to page nine, cash flow. We actually saw a slightly negative impact from operating activities of DKK 14 million, despite the improved profitability, which I'll comment on this shortly.
Investing activities of DKK 37.7 million. It should be noticed that the investment in the expansion of our 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. 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 be referred to A-articles, which is the fast runners. Again, it's within Climate & Energy products also, meaning we are securing the future growth we do anticipate within this area. 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 going forward will see an increased net working capital, or at least until things get more normalized within the supply chains.
Again, it's the availability that is key to us, and basically it boils down to that to a large extent, it's 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 zero at the beginning of the year to now 1.1x here at the end of Q3. If we adjust for one-offs, the gearing is approximately 1.3x. Turning to page 11, our guidance for 2022. As mentioned, 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 our previous guidance of DKK 13.45 billion.
If you look at the EBITDA, we now expect DKK 1.17 billion compared to previous at the 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 we, for this year, expect an underlying performance of the business of a total of DKK 945 million. Thank you.
Thank you, Michael. Now it's time for questions. Please, speaker, if there are any questions.
Thank you. If you have a question for the speaker, please press zero one on your telephone's pad. Please hold until we have the first question. The first question comes from Christian Johansen from SEB. Sir, please go ahead.
Yes, thank you. Couple questions from me. Firstly, thank you for finally giving us the transparency into Climate & Energy. Obviously, quite interesting numbers you present to us here. 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?
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. It is about demand and supply, and PV panels is same problem as with the heat pumps. Sorry, we cannot disclose what will go on in Q4 yet. Let's see how it goes.
Well, I wasn't asking for, I mean, in your-
If you ask for the index, we see exactly the same index. We are above 100% so far in Q4. That's excellent the situation.
Excellent. 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?
Most likely there will be an impact because we now see price increases coming in that will have an impact from the first of January. The short answer is clear yes. The level is still very difficult for us at this time to give any real indication on. 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, which was probably the last year where they were kind of normal.
Yeah. I fully agree what Michael is saying. We don't expect that the price increase will be two-digit, but at least they will be one-digit and maybe also bigger than we expected a few months ago.
Yeah.
Simply because the input costs are increasing so rapidly. On the other hand, we see some raw materials is going down in price levels. It's up to the individual event.
Yeah. We have seen examples of manufacturers where we know that the raw material they put in have gone down in prices, but the energy consumption that they have more or less outweighed the savings on raw material, which meant at the end of the day, actually came up with minor price increases despite the drop in raw material. Yes, we do expect it, but we can't put any figure on it right now.
No, that's fair enough. It was more the direction I was looking for anyway. Looking at your growth guidance, just intrinsically calculating what you expect for Q4, I get to say 8%-9% organic growth, which is obviously impressive, but still, a sort of a step change down to the growth rate you've seen so far. Any considerations on what you're assuming for Q4?
I think we should note as we write approximately, and the problem is when you do the math the way you do it, you get quite a multiplier effect on the last quarter. We expect strong growth rates. We should be a bit cautious about just doing the backside-of-the-envelope calculation here because it's 12% approximately for the full year.
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?
Yeah, 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. We will see a small decline in Industry so far. Hopefully it will be offset with growth within Climate and Energy. It's again, as I said before, the supply situation is our biggest worry at the moment within the Climate. It's not the demand.
Understood. On the Concepts and Better Business, you say this keeps driving improved gross margin, underlying. How long can that continue?
At least, you know, we have a strategy until the end of 2023, and we have clear targets there. So far we are on top of that. 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 markets so far. We are focusing on that every day. We are also inventing new concepts. We just launched Solar Zero. That's a concept for Climate & Energy. It's brand new, and then we really predict that will give a lot of tailwind in the years to come.
We also test one for Trade that's called Solar Select. We are still moving on with new concepts that should support that the growth rate could be even higher than we have seen so far.
Also potentially after the strategy period. I'm not sure we have-
No, it's not a never ending story.
Much more potential in this than what we'll be able to deliver in 2023.
Yeah. It's a long journey, but it's a good journey.
It's fair to say that you have potential to further increase gross margin next year?
Yes, we hope. 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. We have the competition. Let's see how it will turn out. So far, we still believe that the underlying can do much more on concepts. It's a long journey, I have to say that.
As we say in finance, all other things equal, you're absolutely right.
That's clear.
Last question, the financial gearing, where do you roughly expect that to land at the end of the year?
Lower. Clearly, you will see a seasonality impact of ±DKK 400 million, which should bring the net interest-bearing debt down to, I would say, approximately DKK 800-something million, maybe slightly above. That's a normal seasonality. The right way of looking at this is more to look at it like an average, because there's quite some seasonality involved in this. I would say if you do the math on the three quarters you know, and we assume we see the normal pattern, you will end up around DKK 1 billion if you normalize it, at least for the one-off impact, I would say. That'll be the full year effect.
Okay. The question I always ask you're still committed to have this approach 1.5x over time?
Over time, yes. Over time. Bear in mind, I mean, if we normalize the gearing here, at the end of Q3, we're actually on 1.3x, so I would say we are fairly close to the 1.5x.
Also taking the market situation in consideration, I think it's fair to say that we are, you know, not conservative, but realistic. It's nice to be in the low end of our range at least. I think that's the way we think so far, at least.
Understood.
Yeah.
That makes sense.
Great. That was all my questions. Thank you.
Thank you a lot.
Ladies and gentlemen, I would like to remind you that if you wish to ask a question, please press zero one on your telephone keypad. There is no further question.
It's okay. Thank you for listening in. Have a very nice day. Goodbye.