Earnings Call: Q1 2021

May 6, 2021

Ladies and gentlemen, welcome to the Solar Quarterly Report q one twenty twenty one. For the first part of this call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Today, I'm pleased to present CEO, Jens Anderson. Please go ahead with your meeting. Thanks a lot. A very warm welcome to this first quarter webcast for the Solar Group, which is also the first quarter in our new three year strategy, Core Prosperity. Together with me here in Bayern at our headquarter, I have my colleague, CFO, Michael Jebisen. The agenda for today is a general business update presented by me. Then I will give you some insights in our focus area with industry. Then Michael will take and present our first two results, including a high level cash flow status, and, naturally, some comments to the recently revised guidance for year 2020. Then finally, we will, of course, have our Q and A session. Next slide, please. With a good start of year 2021, our first Q EBITDA increased by $62,000,000 year over year to DKK $2.00 4,000,000 and exceeded our expectations. In fact, our EBITDA increased by 44%, and the EBITDA margin went up to 6.8% and increased 2.1% year over year. And it makes me particularly happy that all markets and segments contributed to this overall positive development. As a good example, solar Holland or Sola NL more than doubled their EBITDA in Q1. The recipe for the positive development is more or less the same in all markets and segments. First of all, the needed courage to make necessary product proven for business or low margin business. Secondly, to accelerate and focus on our concepts. Thirdly, to be in control with cost. And finally, to accelerate growth on the various numbers of specialty sales data that we have, ED, tools and baskets. Next slide, please. Consequently and due to the good start in Q1, we increased our guidance for year 2021 to a revenue of 11,750,000,000.00, up to DKK 200,000,000 and our EBITDA to 400 $7,725,000,000 DKK, up at 75,000,000 DKK. And as the news of the day, we also this morning announced that the Board of Directors had decided to distribute an extraordinary dividend of 15 per share. Our core plus strategy has shown its first effect on our business, and I'm very delighted and humbled to see how efficient we execute cross border. I'm also 100% sure that our regionalized setup within commercial market, operations, finance and industry, in combination with local market knowledge, are doing what is needed to execute as well as we do. Simply because strategy is, of course, one thing, but it's even more important that we are able to execute. So in my words, it's everything to execute. So again, a very big thanks to all Solariums in all countries. Luck can or will never be a long lasting strategy, but it surely helps. And at the moment, we see extraordinary price increases on certain products due to increasing commodity prices. A part of these price increases will, for sure, materialize in one off fluctuations on stocks over the coming quarters. And for good reasons, we have been cautious when calculating into our rebar scatters simply because they are very difficult to track and trace. Next slide, please. Focus area industry. As you may recall, solar's industry segment are divided into four vertical, which are OEM, MRO, infrastructure and finally, marine offshore. But I think even more important, we have also organized our sales force as such in a regional setup cross border. With this regional structure, we have set the goal that the industry business should be at least 30% of our total revenue stream by the end of year 2023. The sharp eye can also see that the profitability in the industry segment is close to be double as high compared to the installation segment, primarily because the cost reserve is much lower. Everything equal, it is normally also less cyclic than our installation and trade segment. So the rationale for industries as an important focus area in our core plus journey should be more than clear. Besides deep technical knowledge, a wide product assortment, different unified, but sometimes also custom made services, Solar also support a digital and green industry. With this winning formula or aspiration, we will do our utmost to convince our customers and new customers that we both can increase the productivity by delivering the right product at the right time and in the right quality by use of digital enrichment and at the same time reduce waste and CO2 emission in our corporation. In our first Q report, we have included two I think, very interesting customer cases that are perfect describing that. But I will also allow myself to let you read them on your own. I will now give the word to Michael for some more insights to the financials. Please, Michael. Thank you, Jens. Now turning to Page seven. In a nutshell, Q1 reflects the preceding three quarters where we see lower revenue that was more than compensated by increasing gross margin, combined with lower costs, hence leading to increased earnings. In terms of DKK, revenue declined slightly. We came out just about 3,000,000,000. If we adjust for a number of working days, the organic growth ended at minus 0.6% a positive organic growth last year of 1.4 If we take a closer look at the segment's development in Q1, we did see a flat growth within the Installation segment, with Denmark being a notable exception where we did see growth rates. Both installation segment and the trade segments, there is substantial effect of pruning products, which is one of the initiatives in our better business projects. And this actually explains part of the negative growth, particularly if you look into The Netherlands. As you may remember, we started off in The Netherlands focusing on gas boilers, amongst other things, last year. But we did encounter a setback due to there were quite some contracts that it took some time to terminate, meaning the initiatives did not gain full impact before H2. Regardless of the negative growth the flat growth in installation and negative growth in trade, we did see an increase in the earnings. If you look at industry, we did face some headwinds within infrastructure in Denmark, but this was mainly due to weather conditions where everything came to a halt for quite a part of February. And we expect, of course, this to normalize going forward. We're particularly pleased to see that the activities within OEM MRO seems to be picking up, and we do expect infrastructure to return to strong growth rates going forward. However, Marine and Offshore were unfortunately still in the negative territory in Q1. Turning to the next slide, eight. When EBITDA of $2.00 $4,000,000 Q1 was actually the tenth consecutive quarter of year over year growth in EBITDA and at least, therefore, to us in solar, quite a milestone. The main growth driver was the increase in the gross margin, which delivered an astonishing 1.4% increase. This was driven by our core plus strategy, focusing on concepts but also on better business. We did, in addition, see a more favorable mix, particularly in the Danish business. If we look at the cost in absolute terms, we can see that they're down with €32,000,000 despite a negative impact from exchange rates of €4,000,000 If we normalize the cost last year, we did actually encounter quite some SAP rollout cost, 9,000,000, and AlphaStar implementation in The Netherlands of $8,000,000 So the underlying, really, cost savings are 19,000,000 If we take a closer look at the cost lines, it's the items we've seen deliver results in the last quarters. It's travel, it's entertainment, it's cost on cars. That is the single main contribution within external operating costs. Please notice that the reference point going forward will no longer be pre COVID cost level, but we'll start to get a quite different point of reference in Q2 in terms of cost. If we take a look at loss on debtors, it's actually one midsized installer that accounts for approximately 20% of the loss that we did see in this quarter, so it's definitely not a general trend. And this loss has nothing to do with government support packages being reversed. So for the time being, we do not see any concerning trends there. Turning to Page nine. Looking at the cash flow. We did, as expected, see a negative impact from operating activities of 88,000,000 which I will comment on shortly. Investing activities were $10,000,000 positive, impacted by the sale of a building, 18,000,000. It should be noticed that the expansion and the upgrade of the central warehouse here in Lyon has not yet had any impact on our cash flow in Q2. But going forward, we will start to see an impact on it. It will start here in Q2. In total, we expect to invest DKK $250,000,000. Financial activities, 71,000,000, mainly the payment of dividend of DKK $2.00 4,000,000, but also installment of interest bearing debt and lease liabilities had an impact on this. But if we take a closer look at the operating activities, we do have quite some noncash items, 61,000,000. Inventory were actually slightly negative. As you may remember, one of the drivers for the improved net working capital during 2020 was that we reduced our inventory. Part of it has simply to do with the fact that we did see this unexpected stop in sale of infrastructure, which meant that we there was a less and there's quite some lead time on these products, so we cannot adjust so fast. This will normalize over the years, so there's we don't see any concerning in it. Receivables increased with $354,000,000 This is the normal seasonality that we always see since the reference point here is December, where they are all time low. We managed to increase liabilities with EUR 143,000,000, leading to a net impact of EUR 88,000,000. Turning to the next page. Yes. Looking at the net working capital, there is a minor improvement in Q1 compared to Q1 twenty twenty, meaning we go from 12.2% to 11.8% at the end of the quarter. Or if we see it as an average, we came down from 12% to 11.4%. If you look at the right side figure, we can see the gearing and the net interest bearing debt. We see, of course, in Q4, quite a drop, which is above the normal seasonality. And here, we have the impact from the sale of our shares in Bimobject, which generated DKK $237,000,000. Normal seasonality, of course, has an impact in Q1. But still, we end up with a gearing of DKK 2,700,000.0 at the end of the quarter, which, of course, is also why there's room for the payment of the extraordinary dividend of the DKK0.50, as Jens mentioned previously. Turning to the next page, 11, guidance for twenty twenty one. We did revise our guidance the April 22 year. So the guidance is based on the assumption that we'll not see any significant lockdown in our business segments or any other knock on related effects from the COVID-nineteen. The guidance is DKK 11,750,000,000.00 in revenue, which is equivalent to an organic growth of approximately 1%. It should be noticed that our Better Business project, which is an integrated part of our Corners plus strategy, is expected to reduce revenue with approximately 200,000,000 compared to last year, meaning that the underlying organic growth is approximately 3%. If we take a look at the earnings, as illustrated here in the waterfall diagram, we disclosed SEK $637,000,000 last year. If we compare the nonrecurring income with the nonrecurring cost last year, then all this balance out. It did have some additional tailwind due to cost containment last year. So you can say a more normalized level. Last year is EUR $617,000,000, which basically means that the current guidance of EUR $725,000,000 means we need to deliver an improvement of EUR 108,000,000, which, well, the €725,000,000 is equivalent to approximately an EBITDA of DKK $540,000,000. That was the last part from here. Thank you, Michael. So now it's time for questions if there are any. So please, I will hand over to to our speaker or to our audience. Sorry. Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. Please hold until we have the first question. And our first question comes from the line of Aleksander Borreska from Carnegie Investment Bank. Please go ahead. Your line is open. Thank you very much. Hi, Jens, Michael Dennis. Just a few questions on my side. One, you mentioned sort of the continued improvement in concept sales share as a key driver of the gross margin improvement. This is a trend we've seen for a few quarters now. Could you maybe talk a little bit about where we are at in terms of the share of concept sales in Denmark and internationally? And and are you sort of beginning to to close the the gap internationally to to Denmark? And maybe a second part of of that question. Previously, you've you've said that your share was around, I think, 30%, and that was sort of a glass ceiling. Have you now broken that glass ceiling? Yep. Yes. Hello, Alexander. It's it's the situation right now is that Denmark is above 30, and as a group on group level, we are above 22%. So so we are definitely above the 20. So and our goal is still that we on group level at the end of twenty three should reach 25%. So a very good track record in the beginning of the year. So 22% on average, and and mainly Holland is improving a lot. That was Okay. That's very clear. Yeah. And and maybe just moving on, could you talk a little bit about what you've seen so far in the year in your your climate and energy segment considering strong interest there's been in sort of the energy efficiency subsidy schemes, we especially in Denmark that's focused on heat pumps. Is that something you've you've seen in the numbers yet? Or and when do you sort of ex if not, when do you expect that to to have an impact? Definitely. Especially in Denmark, we see it's it's a rapidly growing market, of course, also because it's subsidized. So so that helps that people like to be green when it's subsidized, honestly speaking. Yeah. Yeah. Now we really see the the effect of of the government subsidizing that. On group level, we are more or less flattish, and that's simply because we have been pruning a lot of of certain brands, which were where the where the market was simply too low. So but in the markets where we have, I would say, the right products, we have definitely seen a strong demand. And we also foresee that, that will continue over the coming quarters and years. So we are very satisfied with our climate energy efforts. That's for sure. EV charters, of course, is also growing rapidly. That's that's, I would say, more or a no brainer, but but it's really grown a lot. Yeah. Just for clarification, the flat growth you you mentioned, is that in on the on group level or on the energy? Okay. So you're you're growing in the energy part. We are growing I I I will not say the thing, but it's it's strong growth. Strong two digit growth, I would say, to be honest. Within energy and and climate? Yes. Yeah. Then just a final question for me, and I'll I'll let someone else And also if you look at it from another perspective, when we sell heat pumps, we also sell cables. So you have, like, a parallel positive situation. So I think don't underestimate the the effect on on cable sales when you grow on the planet. It just should be should be shows it's transparent. Okay. Thank you. Then just a a final question for me on on industry. I I see you do a a deep dive in in your quarterly report on on on one of and, yeah, one of these four key enablers of your your 2023 strategy. But but just to to get a sense, are you seeing improved momentum and sort of less hesitancy from industry customers in general? I know that they've been quite impacted quite a bit by by COVID nineteen. What should we sort of expect for for the remainder of 2021? I mean, we did see this setback on infrastructure here in Denmark. We'll think that that that is a temporary thing clearly. And and I think also stated that marine offshore is still being challenged, at least it was in in q one. But but the good news is that in general, OEM MRO are starting to pick up and gain momentum again. And if we compare to last year, because if you look at the top line last year in the industry, you didn't really see that much, but there were quite some changes within the subsegments where we did see OEM MRO, software and, of course, offshore to some extent. But the top line, we managed to keep due to a very, very impressive growth within infrastructure. But now it looks like that they are starting to gain momentum. It's still early days, Alexander, but but but it looks like it's really gaining momentum. Yeah. If you look at the PMI figures, they look really strong. Yeah. In all markets. In all markets. Yeah. That's very clear. Thank you. Yeah. Okay. Thank you. Sorry. That's that's all for me. But, yeah, thank you so much. Thank you. Thank you. The next question comes from the line of Michael Peterson from SEB. Please go ahead. Your line is open. Hi, thank you for taking my question. I have a couple as well. First, we start in The Netherlands. It was down around 8% organically. Can you try to come up with a figure how much of that is due to better business or maybe give a figure out around the organic growth excluding the better business for Netherlands? I think I don't have the exact figure present here, Michael, but but it is I would say the the entire drop can be referred to pruning and probably also off because we actually are going to see some underlying growth if you take that one out. And so they're really doing all the right things in the middle of the exact rate. All right. So that's fine. And then you mentioned some contracts that you're supposed to Well, that was last year. So this is why and now that is out. It's all out. Okay. That part. So that is why the reference points here in Q1 and Q2 will be very different. And then you certainly see a drop in the revenue in The Netherlands last year. So when you measure the organic growth, you measure up towards last year. Okay. That makes sense. Then my next question is in terms of the installation market, it's been going quite well in especially Denmark the recent course. Do you see clients having capacity constraints? Or do you still see that potential, let's say, like 5% growth the next two coming years? Or do you think that the market is stressed in terms of capacity right now? I I think you have a point. The capacity is it's more or less it's it's the market needs more skilled workers, and there will be a capacity problem. That's for sure. So and I would say definitely the inflation market, it's not only to from from the COVID parts, also the renovation market. That's just the renovation market is in fact bigger than the the part of the new facilities. So there will be a need for hands. So so maybe there will be, again, people from Poland, etcetera, who will who will join the workforce in Denmark. But so far, it's it's not a possibility due to COVID nineteen. But there's definitely a problem. Okay. And then I have another question relating to the core plus strategy. You say it's progressing well. Can you try to mention some of the things that have been successful during the first quarter in particular? Yes. As said before, our concept is really moving in the right direction. Climate and energy might not be on the top line as we have said. We want to grow 5% on average per year. That has not been the case on the top line. But but on the gross margin, we have grown much faster than than expected. So it's still a matter of proving, and and we're still working with that. Within the industry, as Michael stated, it's starting to we need to move in the right direction. So so everything is starting to opening again. So we we also see that So and our trade segment, of course, we are not delivering direct directly to b two c. So the lockdown, for instance, in Denmark in in January and February were were hitting us partly. So but we saw in in in March when the with with the DIYs retailers start to get there. And the market were there, so so also there, we we are quite positive. That was Denmark, Sweden. Holland is also there. We have been improving some customers and some product areas. And in Norway, we have started to build up the trade off decision. We never had one. So there we are on, I would say, it's more or less a turnkey situation we had in. But we are quite positive about the trade segment going forward. See a lot of new interest in customers. And also the way we work as a team post quarter is is quite impressive. So I think that will that will come over over the coming quarters, so to say. Okay. Thank you very much. Then maybe a final question. You mentioned before, like, the heat pumps and the cabling, where the cabling is a part of the whole contract value as well. Can you try to split up the cost for, let's say, heat pump and the cabling, like, total total value? So heat pump's, like, 70% of the total value? Or how would the split be? It's more. It's more. But if you if you then take the EV chargers, they they really need heavy cables. So then you have a more balancing situation. But heat pumps versus the cables, I think that's the 10% of cable from 90% to the heat pumps, and then you go for EV charge, might be thirty seventy. But it's it's any man's guess. It's my guess. So so don't put too much into that. It was just Congratulations from my head to Westango. Yeah. Alright. Well, thank you much for for great great great answers. Okay. Thank you. Thank you. I remind you that if you want to ask a question, you will have to press 01 on your telephone keypad. And we have a follow-up question from the line of Alexander Boryska from Carnegie Investment Bank. Please go ahead. Your line is open. Thank you. Just one quick one for me. Previous I think last year, you mentioned that that you only have this contract with GlobalConnect in in Denmark and Norway, and they did an acquisition in Sweden. I was just wondering if if you have an update on has there been a tender on on their cable business in Sweden and and or do you still see that as an opportunity for for you? Yeah. What we see definitely as opportunity, but the tender will I think that will be that will be in the autumn as far as I remember. So far, that will not come anything out of that this year, at least, like, I can say. So I think that their agreement with the with the recent distributor is is running out at the end of the year. So we will see a tender maybe soon or at least in the first quarter. That's that's my best guess. That's very clear. That was all for me. Thank you very much. Thank you. There are no further questions at this time. Please go ahead, speakers. Okay. Thank you for listening. And, of course, have a nice day despite the rains. So we will say goodbye here from Shoreline. Bye bye.