Good day, and thank you for standing by. Welcome to the Solar A/S Q3 Report 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. If you wish to ask a question via the webcast, please use the Q&A box available on the webcast link anytime during the conference. 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.
Thank you. Thank you. A warm welcome to this Q3 webcast for Solar Group. Together with Mia here in Vejen at our headquarters, 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 Q3 results, including a high-level 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. Our adjusted organic growth amounted 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. We also see the other markets slowly start to recover, but at a lower pace than we expected. Revenue from climate energy, one of our strategic focus areas, remained at a low level in Q3, amounting to DKK 212 million, down from DKK 295 million at the same quarter last year.
As regards 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 six months. We still have unresolved offers in the market above DKK 200 million, and we are pretty sure and confident that our high-capacity turnover 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.
A bid of DKK 202 million compared to DKK 187 million last year was totally on par with our expectations, and that's also why we reconfirmed 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 us to identify and assess our own risk, as well as develop risk treatment measures that minimize potential threats. These tools help foster a security-conscious culture within Solar, supporting employees as they develop better awareness of security practices and are 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 certification 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 kinds 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 helps 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 aloud. 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.
Thank you, Jens Andersen. Please turn to page seven. 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 continues, as we can see in the figure in the middle of the slides. 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 with 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: installation, industry, and trade. This was as we expected. It is, however, notable 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 and utility delivered growth rates, but I would say, as we've 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 eight. An 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 0.8 can be split more or less equal into increasing cost for improving our services, as we also guided for 2024, 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, cost 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 nine.
If we take a short look at year to date, Q1 to Q3, the EBITDA was DKK 427 million, as we expected. There were some positive one-offs in 2023, so 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 we take out the product climate, energy products, mainly within H1, had a negative impact on the margin that's wearing off, but not because margin has so much as 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 headwind from the cost, but diluting the margin slightly.
But it should also be noted that year to date, we've seen a negative organic growth of -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 -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's 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 uncertain , 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 these DKK 40 million relates to our new central warehouse in Kumla where things are progressing according to plan. 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 four 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 normalization of the inventory, partly because we expect the proceeds from the Dagrofa 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 despite the headwind on the top line. We do change our revenue slightly downwards from DKK 12.5 to DKK 12.3 due to that the recovery is slightly less than we initially expected.
We are still convinced, despite the uncertainties that there 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 see a drop in gross margin in several categories despite the positive impact from concepts.
We expect this development to continue for the main 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.
Thank you, Michael. Now it's time for questions. If you have any, so please.
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Should we go with the written questions?
Yes, there seems to be no questions from the phone lines at this time. Please proceed with webcast questions.
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 always only attributable to non-recurring income?
Should we take that question?
Yeah. Okay. Yes. Of course, the non-recurring income or the profit on the sale of the former central warehouse to Dagrofa 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 cost, 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 will release quite some provision for holiday allowance. so there is some seasonality in the cost, and I think that more or less explains it.
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?
It's a spot-on observation. We are guiding with an expected full-year negative organic growth of approximately -6%, given that we are year to date on -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 becomes 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 whether OEM and MRO, which seems to be the main challenge within industry, would move to positive territory. I think that's the overall picture as we see it.
Third question. Can you comment more on the industrial heat pumps? Do you expect significant growth in this segment in 2025 with increased conversions?
Yes. I cannot comment on the guidance for 2025, but at least I can say that the interest for high-capacity 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 targets 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.
Next question. With falling interest rates and improved inflation in the EU, how long do you usually see it takes for your industry to go back into growth territory, or when do you expect it to happen at this time? Will 2025 be a year of growth, or do we need to look further ahead?
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 have 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 positive top line in 2025. That's for sure.
Next question. The tax in Q3 is relatively low. Would that continue into Q4?
It can always, particularly within a quarter, be some ups and downs, and it is an estimated amount. It can have to do with, among 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. In most countries, it 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 it's a fair jump, and that is 24-ish.
The next and final question consists of a number of questions. So, I'll read and then we'll take one by one. To reach -6% organic growth for 2024, you need a positive organic growth of 4.6% in Q4 2024. What makes you confident in such an improvement for Q4 2024? And what have you seen in Q4 so far? First question. What level of price?
Should we take it?
Let's take it.
I can answer that one. Yeah. 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 -6.4%, or it could be -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 trend we have seen 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 that been 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.
What level of price pressure are you seeing, and what relief on gross margin do you expect when volume growth returns?
Yeah. I think I can say like other companies in the industry that the price pressure has 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 thing 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'll see a normalization of the price level and hopefully thereby also a decent gross margin development. But it will take time, that's for sure.
Looking at your external operating costs 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?
The last part of the question is the easiest one to answer, and it's clearly no. The new central warehouse will not come online before 2026, so there will not be any impact whatsoever. We have done quite some initiatives both in 2023 and 2024 in order to adjust to the current level, but I mean, most of it was done in Q1 and to a lesser extent in Q2. So the full-year effect of the initiative carried out in 2024 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.
The last question. Can you give us an update on the ERP implementation project in MAG45?
Oh. It's an ongoing project, and it works accordingly 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 Baan 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.
Yeah. So yeah, 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 that.
Exactly. Yeah. But it takes time.
Yeah, and it tends to get delayed, these projects as well.
Okay. Okay. Thanks for listening in, and I wish you all a very nice day. Bye-bye.
Thanks.
This concludes today's Conference Call. Thank you for participating. You may now disconnect.