Earnings Call: Q3 2020

Nov 4, 2020

Hello, and welcome to the Solar twenty twenty Report Q3. Today, I'm pleased to present CEO, Jens Addison. Speaker, please go ahead with your meeting. Thank you very much. A very warm welcome to this third quarter webcast for Solar here in Copenhagen. Together with me, I have my two colleagues, CTO, Hugo Dorf and Michael Eppsen, our CFO. The agenda for today is a general business update from my side. And then Hugo will go in to make a deep dive on our sustainability activities and also our digital business. And finally, Michael will present our third quarter results and our increased outlook for 2020 before we go to the Q and A session. Next slide please. In third quarter, we delivered an EBITDA increase of more than 25% and this is now the eighth quarter in a row where we delivered year over year growth on EBITDA. During the quarter, we also managed to sell our shareholders in BIM Object for a total cash consideration of million. We confirm our newly revised 2020 beta guidance of DKK435 million including one off course of DKK25 million relating to our SAP EBM rollout. This supports our strategic target of a 4% EBITDA level on group level. We owe this to a very or we owe this positive development to our gross margin initiatives, efficiency gains and also our cost structure. Michael will later give you some more detailed insights to our financial figures. Next slide please. I will now give you a short update on our strategic focus areas if we start with a very important one our strategic suppliers. During the second wave of COVID-nineteen pandemic, we have succeeded in maintaining our delivery performance. The combination of well known brands and solar concepts makes us reliable and a robust company when it comes to our service degree. We are highly committed to increase our share of concept sales across markets and we are making very good progress in this regard. At group level our current share of concept is now close to 21 and that is still the ambition to reach 30% over time, but it is an ambition. But at the moment we are on 21%. We collaborate with our suppliers on exclusive TB rights. And just as an example, during our strategic period from 2018 to 2020, we have increased our exclusivity share of revenue from our Solar Light concept from nearly nothing to now around 70%. Industry focus also one of our very important strategic focus areas. At the beginning of this year our Scandinavian industry business extended its agreement with Copenhagen Airport. The agreement is based on a TCO approach, a common understanding of process optimization, supply consolidation and of course strong logistic services. Our industry team also have strengthened our position within infrastructure a lot. And in this quarter again we saw two digit growth despite COVID-nineteen within infrastructure. On the other hand, we have also seen a declining demand from especially the OEM industry and even a harder decline on marine offshore. And it is partly due to COVID-nineteen, but of course also declining oil prices. If we then turn to our operational excellence, as I said before, we are steadily growing our concept share and we do it with our new customer experience platform or e commerce platform where we're onboarding a lot of new customers at the moment. As I said before, Hugo will give you a small update on our digital business in a few minutes. We still expect to implement SAP EVM extended warehouse management system in Sola Holland in early twenty twenty one. This will finally complete the implementation of SAP EVM through Sola or throughout Sola. And remind you that the journey started back in June 2018. Furthermore, we are right now preparing a business case on our central warehouse in Denmark. And this is of course to analyze opportunities and hopefully also further optimization of the very important Danish central warehouse. I will now give the word to Hugo. Please Hugo. Thank you, Jens. So if we turn to the next slide, I just want to give you a small example from the quarter on sustainability. We have a highly efficient and very precise supply chain in solar, which we've honed over decades. And efficiency has been achieved by driving standardization and lean processes. But as sustainability grows as a topic for our customers and for Sola, we also look at our supply chain operation with fresh eyes. We look broadly across our supply chain starting with what we deliver to our customers and working our way backwards to how we deliver, how we transport, how we package in our central warehouse, how we store, how we receive goods and how we work upstream with our suppliers to improve sustainability. For efficiency and standardization purposes, we've used air cushions to protect goods that don't fully fill up our standard boxes. But this is also excess waste that we sent to our customers, so we wanted to reduce it. And with better knowledge of what we are packing, it turns out that we can. So we've cut out more than 75% of air cushion use through better data and better training of our employees on packaging, on handling and on product fragility. And that not only reduces waste, it also reduces time both for us and for our customers as well as cost. It's just a small example of how sustainability is also better business. And we are working on taking it even further as part of our out of store implementation in The Netherlands, we are testing automated box racing which builds the box on the fly to the specific height needed, reducing cardboard and shipping volumes with further sustainability, efficiency and cost gains. Let's go to the next slide. As Jens said, we had a very solid exit from our investment in Bemobject. We bought at million and sold at DKK237 million and we're obviously thrilled with that. If you go back to what we said when we made the investments, I want to also give you a sense of what we have achieved from a digital business development perspective with BIM Object. So BIM Objects run the world's largest and fastest growing content management platform for Bing objects, which are essentially digital twins of construction materials complete with not only a three d model, but also the specifications describing the product, which is used by digital construction tools. BIM is the standard for digital construction and sharing product specs across our value chain. And we believe that any major player in the future of construction needs to understand how to add value in the context of BIM. And with BIM Object, Solar has built competencies on BIM, which we couldn't have gained on our own. So today, we support our customers and projects with a BIM mandate by sourcing or even developing BIM objects on supplied materials. Our customers and designers and even contractors can find a wide assortment of solar concept articles on the BIM Object Cloud. And we've actually developed an entirely new concept assortment solar project, which is tailored for BIM based design, estimating and sourcing. And finally, we have for some years now worked closely with our suppliers, really requiring them to supply BIM data for the products that we source from them. So with this, we feel well positioned for the growing significance of BIM in the projects we supply. With that, I'll hand the word to Michael. Thank you, Hugo. Turning to Page number seven. We can say that in essence, Q3 reflects the same development as we saw in Q2, where the revenue was slightly down, but this was more than compensated by increasing gross margin in combination with lower cost, leading to an increased earning. But if you focus on the revenue, we came out with billion, down from almost EUR2.8 billion. This is equal to a negative organic growth of 4.8%. Looking at the segments in Q3, it's very much in line what we also have seen in Q2. As Jens were mentioning, there are very different developments within the segments. Industry OEM is facing headwinds, the same Marine offshore is down with 21%. But we do see growth with infrastructure and also our new top segment trade continues to deliver solid growth rates. It should be noticed that a part of the negative growth can be explained by pruning of products, which is one of the initiatives in our Project Better business. Amongst other things, we see that the sale of boilers in Netherlands, but also in Denmark where we stopped completely continues to be reduced as initially announced also and as expected. If we now turn to the next page, Page eight. With an EBITDA of €132,000,000 Q3 was the eighth consecutive quarter of year over year growth in EBITDA. The main driver is the increase in gross margin, which delivered an astonishing 1.8% increase. It should have been noticed that this was supported by one off income of approximately DKK10 million related to extraordinary price increases. This actually on group level has an impact of 0.4%. This mainly relates to our Norwegian subsidiary. If you look at the cost in absolute terms, we continue to see a drop similar to what we saw in Q2. There's a drop of €13,000,000 of which there's a positive contribution of FX of 7,000,000 and general cost saving of 11,000,000 partly countered by additional costs for the SAP EVM rollout of €5,000,000 But if we look at what type of cost is it that we see this reduction, it is amongst others, it's travel costs, it's entertainment costs and it's also costs on running cars, showing that we are becoming a more and more digital company. Looking at the next page, Page nine, the year to date performance. Well, in total, we spent €21,000,000 on SAP ABM, 8,000,000 on restructuring and out of store. This is partly offset by the €8,000,000 we got in other income. So in essence, core business compared to last year have delivered €73,000,000 increased earnings or EUR 63,000,000 if we adjust for the one off due to price increases and related has increased with EUR 13,000,000. So in total, we managed to increase the earning with EUR 65,000,000 from EUR $245,000,000 to EUR $310,000,000 or astonishing 27%. Looking at the next page, cash flow. We see a positive impact from operating activities of EUR 142,000,000, which I'll comment on shortly, investing activities of EUR8 million, financial investments of EUR116 million, which mainly relates to repayment of short term debt with EUR138 million, repayment of long term debt, installment of lease liability, but also a reclassification of from non current interest bearing debt of EUR 43,000,000 related to holiday allowance. But if we take a closer look at the operating activities, we are particularly happy to see that the improvement we have realized in Q1 and Q2 regarding inventory continue. We did see despite we're entering the high season a small positive impact from inventory and this is done without jeopardizing our strong logistical performance as mentioned by Hugo previously. The main single contributor is receivable, which is down with CHF 29,000,000. It should be noticed that September, of course, also were impacted by negative organic growth. We do not this is important for us see any delayed payments from customers. So our debtors remain strong and healthy. Liabilities was slightly negative with EUR 48,000,000, of which, of course, the reclassification is a part of it. Looking at the financial support we have received in deferred payments of VAT and tax, this now total EUR 73,000,000. At the end of Q2, it was EUR 60,000,000. Of these EUR 73,000,000, approximately 50% will be repaid here during Q4 and the remaining 50% will be paid during early twenty twenty one. Turning to the next page, looking at net working capital, we see a continuous improvement compared to Q3 twenty nineteen, going from 12.6% down to 11.9%. This, of course, has a positive impact on the gearing, where we see a combination of increased earnings and reduced net working capital, bringing the gearing down to 1.2. So within a year, we have reduced the gearing with more than one times EBITDA. It should be noticed that a part of this is due to the support packages, which will be reversed. And there's still a small impact from which is more technical due to the way IFRS 16 was implemented, but still it's strong performance. Turning to the next page. We revised our guidance the October 21, increasing the earning from DKK400 million to DKK435 million. And this the main driver here is increased gross margin, increased efficiency in combination with cost containment. And as stated by Jens also, our guidance here on core is in line with our initial expectations to the strategy period, which come to an end here by the end of twenty twenty. So we will deliver the 4% we announced when we started this strategy period. That was the last comment from me. Thank you. Yes. Now it's time for questions and answers. And hopefully, there will be some on the phone. So please? So thank Our first question comes from the line of Michael Peterson from SVB. Please go ahead. The line is open. Hi, thanks for taking my question. The first question is relating to the revenue generated through the Bimobject collaboration. You talked about like the impact going forward from the SOLAR product concept. Maybe can you try to quantify that how large that is or it could be? So we don't disclose that at this point. Okay. Then maybe to another question then. In Industry, you talk about the infrastructure performing well. You mentioned double digit growth. What should we expect going forward? Is this some kind of like new markets that you guys are tapping into? And what is driving this? The market is definitely growing. We see five gs also coming now. The expectation is that we will still see two digit growth at least for a period. But then of course the reference point is also getting higher and higher, but the market is growing all in all. It's the market is owned by a few players. So it's also our ability to win those players. And we have good cooperation with Phoebe in Denmark and with Telenor in Norway and also now GlobalConnect in whole Scandinavia. So I think we are tracking well, and we believe that the market will still be pretty solid in the coming years. But of course, one day it comes to an end, the structure will definitely, maybe in 2024 be ended in Denmark. But then we see other markets where we can support our customers. So it's a very exciting journey we are on. Okay. And then maybe to my second question. See that Sweden is down quite a lot in Q3. Can you maybe try to describe why that is? Is it driven by onion? Or what is the main reason for the last decline? Yes. And you mean revenue wise? Yes, revenue. Okay. Yes, because if I'm not mistaken, earning is up. But there was, of course, an impact from the Oninen acquisition. We did some heavy pruning after we took over Oninen. Simply had to close down some segment that were not profitable for us. So I would say a part of the negative growth that you see is simply due to the initiatives that were launched in Q3 and Q4 last year. And now you have a fairly high reference point, which will balance out here during next year. So it's a very good explanation. Okay. Thank you very much. Our next question comes from the line of Simon Block from Nordea. First of all, a question regarding the guidance. I was just wondering how much the lower revenue expectation is due to lower overall activity and how much is a consequence of the better business activities? Yes. It's a good question. But of course, the COVID-nineteen is still hitting us, mainly on the industry part. But of course also the installers who are visiting industry customers. I would say maybe one third is pruning roughly speaking and then two third is coming from the COVID-nineteen situation. That is very roughly estimated. Okay. Thank you. Perfect. And then I also have a question regarding the sales BIP object. I was just wondering what your thoughts are about how the proceeds should be used? Because it looks like your gearing is low and most of the warehousing business has been completed by now. So I was just thinking, yes, what your thoughts are, if it would make sense to pay it out to shareholders or if you have anything else you're looking into. First of all, we are not done with renovating the warehouses. We are currently looking at the central warehouse in wine, which both needs to be expanded, but also to be optimized. And of course, when we have something more firm here, we will of course disclose it. So I'd say that we are not done on that journey. But it's regarding the proceeds, it is still too early to say. And of course, we are considering various ways. And I think it's fair to say, you look at our track record, the Board of Directors has always been very firm on exercising the gearing, meaning in periods where we have been below, we have always sent the money back to the shareholders. There's no intention of trying to run a bank. So I would expect that things to come fairly soon. But I think as we also have said, we can in one single quarter or two be below the gain before we actually react. But the gain guidance stands that Board has always been very firm on that. Okay, perfect. Thank you. We have a follow-up question from Michael Peterson from SVB. Please go ahead. Your line is open. Thank you for taking my follow-up question. This is relating to the Solara concept. You mentioned that the target is 30% over time. Have you made any initiatives in order to reach this? Or how do you expect to get there from the 21% to 30%? Yes. It's a long journey. I said it was an ambition. It's not a clear target. It's more an ambition. And we have one country already delivered on that. That's sort of Denmark. And the learnings from Denmark is, of course, cascaded to the other markets and headed up by the same director as well. So the learnings from Denmark will be cascaded to the other markets. And of course, when we make exclusivity as we have done on solar light, then you have a clear answer because then we are selling the same products across border. So but the 30% is an ambition. Maybe, Hugo, you can support this. Yes. No, madam. This is also this is daily business for us. This is daily there are daily activities in all markets on optimizing this. So for sure, there is a lot of very concrete steps underneath that overall objective. Okay. And then maybe a follow-up in relation to the gearing. The financial target of the 1,500,000,000.0 is it likely to be the same going forward? Or is it subject to change? Well, I mean, it's been like that for quite a while. So I would be very surprised if any changes came up on that. It doesn't really make any sense as we see it at least to change it. I assume you are here looking at to revise it in downwards direction. There's absolutely, as far as we know, no plans on doing that. It has been like this for years. All right. Thanks very much. Thank you. We have no more questions from the line. I will hand it back to our speaker. Please go ahead. Thank you. Thank you for the questions and hopefully also good answers. And have a very nice day here in Copenhagen. Bye bye.