Earnings Call: Q1 2020

May 6, 2020

Ladies and gentlemen, welcome to the Solar Q1 twenty twenty Conference. Today, I am pleased to present CEO, Jens Anderson and CFO, Michael Jepersen. Speakers, please begin. Thank you. A very welcome to this first quarter webcast for Solar. Together with me, I have my two colleagues, that is CEO, Hugo Dorf and CFO, Michael Eberson, and of course, with good social distance to each other. The agenda for today is, I would say, more or less like normal, but I will give you a general business update. Then later, Hugo will take over and give you a digital business update. And finally, Michael will present our first Q results and our outlook for 2020 before we go to the Q and A session. Sola is today fundamentally a digital company. And combined with our strong and agile supply chain services, we can support our customers 20, three sixty five days. And that is in a very efficient but also very safe way under the recent circumstances. Later, Hugo will give you some very interesting insights and facts about solar's digital position as we speak. Financially, our total business achieved the best first Q result in a decade and all entities delivered on or above our own estimates, despite the business challenges followed by COVID-nineteen, but also considerable cost for a very successful SAP EVM rollout in Denmark, partly also Norway and of course also cost for Out of Store in Holland. I will now give you a short insight in our strategic focus areas. If we start with strategic suppliers, our combination of dual product assortments on fast runners covering both A brands and Solar Concepts allow us to compensate for potential shortage of certain products caused by the COVID-nineteen crisis. But up to now, I can only say our service degree to customers are stable and secure in all markets. Overall, all segments and markets are showing steady growth on our concepts and thereby support our long term margin improvement goals on group level similar to what we saw in 4Q twenty nineteen. Turning to industry focus. Just recently, Solar entered a strategic partnership agreement with GlobalConnect. And GlobalConnect is a leading Northern Europe data center and fiber infrastructure provider. The partnership involves a total supply chain solution, which means that we, Solar, will take over all local stocks from GlobalConnect and serve them directly from our central warehouses with extended use of our digital solutions. The partnership will potentially cover a number of geographic markets and the first deliveries are already carried out in Norway. So our strong Scandinavian position within the infrastructure business continues to strengthen, which is very positive. On the other hand, we have to say that declining oil prices is not good for our Marine and Offshore business. So far, we haven't seen a lot of problems yet, but of course that will come in the autumn, no doubt about that. Turning to operational excellence. Our cross border organizational setup has proved itself during these challenging times, enabling us to deliver, united execution power and adapt to the new normal caused by COVID-nineteen. With now three successful SAP EVM implementation, the next planned implementation in line is Solana Norway and we still aim for implementation before the summer holidays. However, timing will depend on possible travel restrictions due to COVID-nineteen and we need our project team to be on-site to secure a smooth and safe implementation. Last but not least is our out of store solution in Sola Holland. It's now fully operational. We pick and pack daily up to 9,000 product lines per day. And that is in a green context as the power consumption is reduced to one third compared to the past. But green solutions is also a huge sales opportunity and has been there for sometimes, especially within light, ventilation, heat pumps and PV solutions. Our expectations to the growing market for EV chargers are huge, but also our latest solution with PV cells on the rooftop on vents have a strong potential. Here we are combining Greek behavior with flexible and productive access to electrical power for the craftsmen and that is why we in solar call that better business. I will now give the word to Hugo, who will give you some interesting insights in our digital business. Please, Hugo? Thank you, Jens. Yes, as Jens said, we are fundamentally a digital company. Yes, we supply physical products, but we do this as a highly digitalized business. From almost 60% of orders being placed through our mobile app by installers in the field or through a deep integration with their digital business solutions. Those orders are picked by our increasingly automated warehouse systems and digitally scheduled with our transport partners. And from our broad range of e learning services, building customer competence to our technical support staff interacting with customers remotely through video or connecting digitally with their installations to troubleshoot or just help them find the best solution. The products we supply are also increasingly digital themselves and connected through IoT, which further supports digitalization. So we are a digital business. We have invested in digital solutions since the late 1980s and our digital business results are clear today. Leading our industry on digital business development means we don't have our management focus and our cash tied up in a large retail footprint. But it also means that Sola prospers with the increasing digitalization of our industry. And digitalization is accelerating, especially now during the COVID crisis and demands for social distancing. More than 90% of our deliveries already support this with contactless ordering and overnight or courier one hour delivery. We can also see that the crisis is driving a further change in buying behavior towards digital. A fresh study by Molyo, a construction company based in Denmark among four fifty companies points to digital tools for coordination, communication and ordering as crucial for business continuity during corona. It's not a big surprise. There are three specific findings in the study, which I want to highlight. First of all, a clear majority of the companies state that they'll continue to use these tools after the crisis because it's not only safer, it also improves efficiency, productivity and collaboration both internally and externally. Secondly, the biggest increase among companies was actually with contractors and subcontractors and those are Solars customers. And then thirdly, in terms of digital tools, the biggest increase we found was within construction technology, so Contech solutions that are specific solutions built for our industry. So it wasn't about video conferencing or Excel as you might expect. This is great for solar. Those customers will seek partners who can support and even challenge their digital efficiency, which is what we do. So digital transformation is accelerating in our industry. And you may ask what it takes to thrive. There are really four capabilities that need to be in place and I'm happy to say that Solar has successfully implemented each of these. First of all, a robust digital operations platform providing transparency, control and transactional data across the business. Secondly, a flexible customer platform supporting a personalized experience and behavioral data across all customer touch points thirdly, a strong data integration, data analytics and data science expertise and tool set and finally access to top skills and technologies within the key new digital application areas of our customers' business. This means we are uniquely positioned to benefit from digitalization. Going to the next page. Digital is better business. It's not only fast and efficient, but it's also an opportunity for us to provide a better and more personalized customer experience. Our web shop and our app is able to use data to tailor the assortment and the services to specific needs, whether you're an electrical installer doing daily service from your van or you're a procurement specialist of a food and beverage company or you're a large utility or infrastructure company using our webshop to schedule third party logistics services from solar on materials that you procure yourself. Data also guides our sales reps on where to focus and provides our marketing department with precise metrics on our campaign effects and allows them to target with extreme precision. All this helps us serve our customers better, being more relevant and to better understand, anticipate or even predict their needs. The higher our digital order share, the more data we accumulate and the better our service becomes. This drives more customers to our digital channel, creating almost a virtuous circle. We also know from our data analysis that digital customers have a higher value for solar, not only because they are often very happy to serve themselves, but because they are also more successful and they are more focused on productivity, which again plays to solar's strengths. We have proven the benefits of our new customer platform and adoption is accelerating in all markets. And the platform will be shouldering the majority of our almost €1,000,000,000 of annual digital business by this summer. Our near term focus will now be on leveraging data, leveraging our strengths digitally, especially around logistics services and leverage the high degree of digital orders to increase automation of our operations for efficiency, quality and even better and more tailored customer experience. Many see digital transformation as a threat. We see it as a clear opportunity, not only because we believe we master what it takes to compete, but because we have a clear vision of the value we can bring in a more digitalized industry. We will see new strong players enter our markets, but one should not underestimate the value of combining one hundred years of domain expertise with digital business acumen developed over more than three decades of digital investments. So Michael, over to you. Thank you, Ugo. Looking at the next slide. With an organic growth slightly above 1%, we delivered well above DKK 3,000,000,000 in revenue in Q1, which is in line with our expectations. We did not encounter any impact from COVID-nineteen until the March. The impact was limited to only some of our markets. Looking at the next slide, EBITA was up from CHF 80,000,000 to 97,000,000 on a group basis. As Jens were mentioning earlier, it's particularly notable that we managed to increase the gross margin with 0.4% despite the continuation of sale of low margin products in NL, which had a diluting effect on the gross margin. So basically, the trend that we saw in Q4 continues into Q1 And we have a very strong focus on increasing our profitability through our Project Better business, but also our other strategic initiatives, which are continuing to deliver improvement. There was a positive impact of CHF 7,000,000 regarding the settlement of a litigation. Staff cost diluted, however, the margin slightly with 0.3%. It should be noticed that we did initiate restructurings in both Mac and Solar Netherlands. We implemented Autostor in Netherlands and we had a SAP rollout in Denmark. In total, we spent CHF 17,000,000 on what you can define as one off costs. Of this, approximately 80% relates to staff costs, which more or less balancing out the dilution we saw from staff cost. If we calculate the net impact from the one off income and the one off cost, this has a this is equal to approximately a loss of 10,000,000. So not only did we manage to compensate for this net loss of DKK10 million, but we also managed to increase the profitability on top of this with DKK17 million. So it's only fair to say that the underlying business performed very well during Q1. Looking at the cash flow at next slide, as expected in Q1, we saw a negative impact from operating activities, albeit at a slightly lower level than last year. I'll comment on this shortly. Investing activities were slightly down from CHF 31,000,000 last year to CHF 25,000,000 this year. The main part of the PPE investment is related to our auto store investment in The Netherlands. IT investments is mainly our CXP platform, that's a customer journey experience and also to and to a lesser extent our warehouse management system. If we take a closer look at the operating activities, we're particularly happy to see that inventory was reduced with CHF 85,000,000. This is partly due to that Sweden is now more or less normalized after the acquisition of activities we did in Q2, but also due to a focused effort. As mentioned in previous quarters, this has been one of our focus areas and we've succeeded. We've done this in a structured way without jeopardizing our ability to serve our customers. The normal seasonality had a slightly stronger effect on receivable compared to last year. We saw an increase of DKK $3.00 3,000,000 versus DKK $279,000,000, mainly because there was one additional working day in March. So it's very it's imperative to emphasize that we are not seeing any payments being delayed from debtors. We had a minor increase in liability compared to last quarter, but it should be seen with in connection with the fact that we at the same time are reducing the inventory. So looking at the next page, regardless of the initiative, net working capital remained at the same level more or less as last quarter when calculated as an average over the last four quarters. Looking at net working capital at the end of the quarter, we do see a minor reduction compared to both Q2 and Q3 and we were on par with Q1. So in all, we are very comfortable with the development we have seen this quarter. Gearing ended at DKK1.9 billion, which is a slightly increase from the DKK1.7 billion we saw at the year end. Again, this is due to the seasonality, but also to the fact that we have paid out million in dividend in Q1. So we are therefore well within our range within our target for Gearing, which is between 1.5 to three times. Turning to the next slide. The March 27, we withdraw our guidance for 2020. Looking at April, we ended up with a negative growth of just 1.6%. We're particularly happy to see that our best performing entities in terms of earnings, that's being the Danish and the Norwegian entities, are keeping up the performance in April. It should be said that in general, we've seen a slightly more volatile sales pattern compared to what we normally see, but we do not see any deterioration during the months as such. And we can see in Netherlands now that the sale of low margin product is starting to slow down as announced previously. In general, construction does not seem to be impacted so severely by the lockdown as we initially expected in March. Within installation, the overall trend seems to be that service sale is declining slightly, whereas the project sales remain stable. Within the industry, there seems to be a slowdown among OEM customers, whereas infrastructure as a total continued to grow. Despite the development in April, we have already taken several initiatives to protect our earning and cash generation. And as stated before, we are fundamentally a digital company with a very agile business model. This has also been confirmed by the analysis we have done in order to prepare ourselves for several different scenarios. So this in combination with the strong balance sheet we have as a starting point, we are comfortable that this will enable us to continue to develop our business also during 2020. Thank you, Michael. So now it's time for questions and hopefully also good answers. So please, if there's someone on the line who wants to raise a question. Thank Our first question comes from the line of Michael Peterson of SEB. Please go ahead. Your line is open. Hi, thank you for taking my questions and also congratulations on a relatively strong Q1. First question is regarding the staff cost. It's up around almost 6%, but the amount of full time employees is up around only around 2.3%. What is driving this? Is this higher salaries? Or have you reduced your workforce and hence some cost relating to that? That will be the first question. It's driven by the restructuring that we have initiated in Denmark sorry, in The Netherlands and in Mac, which, of course, carried some cost with us. Plus, as a consequence of the SAP implementation, quite some money was spent on overtime in Denmark, but there's also the movement the installation of Outro Store in The Netherlands is a fairly complex operation where we, as a part of the installation are moving articles from Daiwa to our central warehouse in Alkma. This has also triggered a substantial more spend of staff cost. So it's not that we see salary inflation going through the roof, definitely not. Okay. So maybe if you can maybe put a figure on how much of the structuring relating to Netherlands and MAG 45? Is it like a couple of millions? Or is it very limited? 4,000,000. Approximately 4,000,000 has been spent. Then to my second question. You reported your figure for April, which shows on group level a decline of 1.6%. You say that Denmark and Norway are kind of flat and the other ones are down. Since Denmark and Oasis are quite profitable, would this cause a higher margin as those regions are stable and the other ones are declining? I mean all other things equal, you're right. Okay. And then maybe if you can elaborate a little bit on what's driving these respective geographies like what markets like in Denmark and Norway. I assume that construction seems to be pretty well going on here in Denmark. But what is driving the flat development in April in Norway? In Norway, we did actually see a slight surprisingly development. The April was a bit weak and then we regained momentum at the April. And one of the surprising things was that offshore started very weak and then it gained actually some momentum towards April. We're still concerned about the development long term on offshore, as mentioned by Jens, whereas in Denmark, it's more spread to various segments. But one of the segments who are performing well, as we also stated, is infrastructure. Okay. And then maybe last question, if I may. You talk about service sales being down. Is that like caused by like a periodic hesitance and something that you expect to pick up later? Or is it a general slowdown? I think the reason why the service sales are down to our installation companies is simply because they do not have access to the industry companies they are used to work for due to COVID-nineteen. So when everything will be opened again, we are pretty sure that we will see also that, that will increase again. But at the moment, it seems not possible to get access to all industry buildings for our insulation customers. That's the reason, Michael. Okay. Good. That was nice picture. Thank you much for the answers. Thank you. Our next question comes from the line of Simon Luch of Nordea. Please go ahead. Your line is open. Yes, hi. Just one question for me. I was thinking maybe you could elaborate a bit on the cost saving initiatives that you have implemented. I mean, what exactly are you doing and how much are you expecting to be able to save? We haven't set out any official target on what we expect to say. But it's more to give it clear to make it absolutely clear that we will take the initiatives needed in order to protect the earnings. What we've done so far is we've used follow-up in several countries in order to adjust to development. We've seen them. We've tightened cost control. We've tightened credit management. But we will I mean, it all depends on how the development goes in terms of activities and that is very uncertain. So I can unfortunately not give you clear answers. But it's a lot of initiatives that have been launched. But at least we prepared ourselves for a worse situation than we have seen so far. So we have been at least able to remember that a great part of our cost is ready to staff, we have used the three part possibilities in Denmark. We have made some permission or permutation, its name, in Norway and partly also Sweden. So we have done a lot of government or use the government possibilities so far when it's possible. But as also stated by Michael, April went pretty okay. And therefore, we also need to have the warm hands we need to serve our customers in the daily work. So it's a balancing act, I would say. And we have a follow-up from Michael Peterson of Please go ahead. Your line is open. We have a follow-up from Michael Peterson of SEB. Please go ahead. Hi, thanks for taking my follow-up question. It's relating to the government spending that it's looking to maybe increase maybe in the second half of this year and next year. How much of this do you expect to hit your markets? I would say like infrastructure is one of the areas being mentioned and then also renovating of the business or the building mass in general. Of course, we are sure that some projects will be postponed. On the other hand, we also think that the government will open for other opportunities. The sector, I don't know the English word for that, but Landsbugafonten that is one of the things at least in Denmark, which will be put into the market. It's a NOK30 billion investment over the next five years and of course we'll benefit from that. On the other hand, I think as also Hugo stated, there's a lot of opportunities within e commerce, within data. And of course, we hope that Climate and Energy will be subsidized in some way or the other and thereby also that we will gain our part from that. So it's there's not a precise measurement on that, but I think there's both pros and cons going forward. Okay. Thank you. We have seen some green refurbishment projects being moved forward, and we've been lucky to land win a couple of those. So I think we're well positioned for that part as well. All right. Thank you. And then maybe if you see maybe a little bit of a slowdown, have you seen any actions from your competitors in terms of pricing or similar? Or do you see the competition as unchanged during the COVID-nineteen period? I'd say in our business, there's always price competition. So nothing new there. So it's sometimes crazy, but it's still crazy. It has not accelerated at least. So that's an honest answer on that. All right. Thank you very much. Thank you. Seems to be no further questions coming through. So I'll hand back to our speakers for the closing comments. Okay. Thank you to all who are listening in. Have a great day. And hopefully, we will all be safe out there. Take care and bye bye.