Ladies and gentlemen, welcome to the Solar A/S quarterly report for the third quarter of 2019. For the first part of this, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. Today, I am pleased to present CEO, Jens Andersen, and CFO, Michael Jeppesen. Please begin.
Thank you. First of all, a very warm welcome to the gentlemen in the room, and also to those who are on the line for this third quarter webcast for Solar. Together with me, I have my colleague, Michael Jeppesen, which is our CFO. The agenda for today is as usual, I would say, a general update from my side, then Michael will present the third quarter results and also the guidance for 2019. Finally, there will be a question and answer session. In Solar, we keep focusing on energy efficient solution and product assortments to drive the green transition. More specifically, in Solar Norge, we have started up a Sun Partner Program, but now it has always developed into a Climate and Energy Partner Program with a broader assortment covering light, sun panels, and heat pumps.
In Denmark, we have established a new customer center in the heart of Copenhagen. Here we are focusing on sustainable solutions where it is possible at all. For instance, we have started to deliver our fast boxes with bike cycles, as well as using paper packaging instead of plastic materials. It's only to emphasize that everybody is talking about the green transition or sustainable electrification. In Solar, we already now see a huge market, and we see a very positive market going forward. At least our investments now really starts to pay off within the green transition. If we then turn to the next page, we have our three strategic focus areas. I will start with strategic suppliers. Without increasing the number of stock keeping units at our local central warehouses, we are constantly expanding the number of products available through our main digital platforms.
Currently, we have digitally at hand 250,000 products, and it's our ambition to expand that into 500,000 products within a year or two. If we did not create or have taken the bold position of establishing a common shared service in Lodz in Poland last year, this would never have been possible country-wise. We are very pleased to see that our decision last year really pays off now. Our overall goal is clearly to increase the share of wallet at our customers, mainly within our industry segment. Talking about industry, here we, as we have said before, are prioritizing a few selected key verticals, and we see a good trend, and we also sense that more and more customers are attracted because we have this regional approach. Within infrastructure, we have recently hired in a new and very strong VP, to cover the Scandinavian market.
He brings a strong track record from the industry and vast market and product knowledge. As you might recall, we already now have a significant infrastructure position in both Denmark and Norway, but of course, we also need to expand that into Sweden and Holland as well, mainly, as we see it. Within operational excellence, we have a lot of activities. In last weekend of September, we implement SAP EWM, or more precise, Extended Warehouse Management system at our central warehouse in Örebro in Sweden. The implementation was, again, I would say, very successful, and not a single customer claim were notified. A really big thanks to the project team as well as the Swedish organization for more than a well-done job.
With two very successful implementation at our central warehouses in Sweden, we are now ready for the next move, and that is Denmark, which we expect to implement in the first quarter of 2020. Parallel with our SAP EWM rollout, we're also in the middle of implementing AutoStore in Holland. The Dutch AutoStore solution is an extended version of what we did in Norway earlier this year, but basically bringing the same commercial business advantages as we have seen in Norway and already can see be fulfilled. In addition, we have also, on the more soft side, taken the next step at our journey to be a more centrally led organization. That is simply to stay relevant towards our customers, towards our suppliers, because the market is changing, and we have to adapt to that.
To serve our customers even better than that, we have created in third quarter what we call Solar Operations, which were the former name of Solar Supply Chain. Mainly, it consists of both material planning, the warehouses operations, but also the transport and services, which are connected to our customers. Also within what we call common market and sourcing, we have defined a global category management position that is covering 10 different product categories. Also there, it's our goal and ambition to consolidate, maintain, and develop the product categories cross-border instead of doing that country-wise. I will now give the word to Michael for an update on the financial performance for the third quarter and of course, also our guidance for 2019. Please, Michael.
Thank you. If we turn to page number five, please notice that we have deconsolidated STI also in 2018, meaning that the figures we are seeing is only the continuing business, whereas STI is reported as discontinuing operations. If we look at the revenue, it increased from DKK 2.6 billion to almost DKK 2.8 billion, equal to an organic growth above 6%. What is more important is to notice that the trend shift we saw in the core business in Q4, where we returned to growth again, continued in Q3, where we managed to deliver an organic growth of almost 7% in the core business. In particular, we are very happy to see that Sweden, who returned to organic growth in Q2, continued this trend into Q3 and is regaining its business. Looking at the next slide, that is number six. EBITDA ended at DKK 105 million versus DKK 93 million.
That's actually an increase of 13% compared to last year. Actually, you could argue that the underlying improvement is slightly stronger than what appears from the figures. We had this small acquisition in Sweden, which also in Q3 had a minor negative impact. Despite the very successful rollout of SAP EWM in Sweden, it always triggers additional costs in the period up to the implementation. Looking at the margin, we see a substantial improvement in the external operating cost, EOC, as we call them, but at a more or less similar negative impact on depreciation. This is the impact of implementing a new accounting policy regarding leasing.
If we look at the gross margin, we see it being diluted compared to last year, mainly due to a less favorable customer product mix in the growth areas in the Netherlands, which actually on group basis had a negative impact of 0.4%. Despite this, we actually managed to compensate this by being more efficient, so staff had a positive impact on the margin of 0.4%. In total, we managed to increase from 3.7% to 3.8%, or if we look at core, we see a similar from 4.1% to 4.2%, absorbing the additional costs in Sweden. Turning to the next slide. If we look at the earnings per company, we see a good development in Norway and the Netherlands. Sweden, way below last year, and that was also as expected. Compared to Q2, we actually see an improvement in the Swedish earning.
They are gradually picking up, and they are following the plans, the get well plan that we have developed. In Core, we managed to improve the EBITDA from DKK 99 million to DKK 111 million, whereas Related ended unchanged at a minus of DKK 6, which were very disappointing. We saw in MAG a disappointing development where we had negative growth in the last half of the quarter mainly. As a consequence, we had initiated several restructuring activities, which has had a cost of DKK 2 million in this quarter but will deliver full year savings of DKK 7 million going forward. Turning to the next slide, looking at year to date. Earnings in Core business is up with 10%, despite Sweden being below last year, or in terms of DKK, from DKK 235 million to DKK 258 million. Also Related, we've seen improvements, not to the extent we actually did expect.
Looking at the cash flow at page number nine. Operating activities generated DKK 144 million, which I'll comment on shortly. If you look at investing activities, they are up from DKK 30 million-DKK 40 million. The main part of the TPE investments are related to our investments in AutoStore in the Netherlands, and the IT investment is mainly our [CHP platform] and, but of course also to a small extent, our Extended Warehouse Management system. Financial activities, minus DKK 88 million. Bear in mind that there's been a reclassification of short-term debt if you compare with last year, and there's also an impact of implementing the new accounting standards on the leasing. If you look at the right side of the slide, we see the cash flow from operating activities. Non-cash items is DKK 140 million. There's, of course, a huge impact from the impairment of BIM.
Looking at the net working capital elements, that's inventory, receivables, and liabilities, we see a minor increase in inventory. Normal seasonality would actually mean a higher increase in inventory. We are still in the process of normalizing the inventory in Sweden. Bear in mind that when we acquired the Onninen activities , we basically acquired quite a lot of inventory. Receivables remain flat. Also small increase in liabilities. Turning to the next page, you can see that net working capital remained flat compared to Q2. Bear in mind that we still have the full balance sheet impact from the acquisition in Sweden. We still only have a part of the P&L effect. In terms of percentages, has an effect of approximately 0 point. Looking at NIBD, it came down from 2.6 to 2.2, driven by cash flow, also the pick-up in earnings.
All other things equal, we expect the yin to continue to reduce in the coming quarters. Guidance, page number 11. We reconfirm our outlook for 2019 in the different markets, we reconfirm our EBITDA of DKK 265. We increase our expectations in core with DKK 10 million, given the good track record year to date, and we reduce the related similar with minus DKK 10, so the net impact is zero. Looking at revenue, we changed our guidance from at least DKK 11.6 billion to approximately DKK 11.75 billion. Bear in mind, we have a negative impact on FX, which gave us quite some headwind.
Yes. Okay. Thank you, Michael. Now it's time for Q&A. I don't know, let's start with the gentleman in the room, and then later take the ones who are on the line, please, if there's any questions.
Yes, Alexander N. Maximilian from Carnegie. If you just start out with MAG45. When we sat here after Q2, you mentioned that you had gotten indications from the customers of MAG45 that the revenue that wasn't there in Q2 would sort of pick-up in Q3 and Q4. I'm just wondering what's sort of happened since then. When you talk about a strategic review, could you elaborate a bit on what you're actually reviewing?
I'll let Michael take that.
Yeah.
Please, Michael.
If you look at the revenue, it's true, and actually the trend we saw in July supported that information. There was actually a rather strong growth in July, but it came to a complete halt in August and September, where we actually did see negative growth. The information we are getting now from the main customers is that the pick-up has been postponed until next year. This is also why we had to change our expectations. If you look into the guidance now, you'll actually see that we're guiding for negative growth in Q4. Basically, we expect the trend to continue, the trend we've seen in Q3. We don't expect any pick-up in Q4 in the revenue in MAG45.
When we talk to the customers, it appears that they have quite a strong pipeline coming in, but we've still decided to initiate some right sizing of the company to a newer reality. As we speak, that is ongoing. Not only the right sizing, we're also looking at what we can do to drive more revenue and better margin. Strategic revenue in our terms means that all options are basically open. We are doing an in-depth analysis of the company, of the market, and of course, we need to assess what to do going forward.
When we made our strategy in the beginning of 2018, we wrote that if three years were gone and it was not EBITDA positive, we would make a strategic review. That's what we are doing, because we have been owner of MAG45 for now three years. That's what we are doing. No decisions yet, of course, we need to make a deep dive to see what is the right solution for Solar and MAG45 going forward.
All right. Just to make sure I understand, you haven't lost any customers in MAG45, so it's more of a postponement of revenue?
We haven't lost any customers. Actually, we continue to regain customers and actually also new sites. It's not that we have lost customers. Definitely not.
All right. If we move towards your core business, which is performing very well. If you look at Denmark, the organic growth you're seeing there, is that mainly driven by the installation or the industry business?
In third quarter, it was both, I would say. Installation is still tracking pretty well, but we would anticipate that the growth going forward will be a little bit more modest, but the market is still okay. The project market will be lower going forward, especially in the big cities like Copenhagen and Aarhus and Aalborg, et cetera. We see a huge market for climate and energy, which talking about that, now we really see that it's not only talk anymore, it's really orders which are coming. Charging stations, heat pumps, light LED. A lot of orders is now coming out of this mega trend. That's great.
Okay. When you say that you expect activity in the installation business to be down in the second half relative to the first half.
Is that still up year-on-year?
It's still up.
It's still up.
Around 4%, yeah.
Okay. We shouldn't necessarily expect negative organic growth in installations-
No.
In 2024.
It's a modest growth also in 2020. It's still a growth scenario.
In 2020 as well?
Yeah. That's what we see right now. Yeah.
If we look at Norway, you improved profitability quite a bit.
Yeah
in the quarter. What was the underlying reasons for that? Is that the AutoStore implementation or the contract wins?
I think it's a combination of several things. If you look at the growth in Norway, it is in a lot of segments, actually. We can see particularly marine offshore is growing again. We took a huge downturn in marine offshore that has seemed to rebound rather strong in this quarter. Basically, almost all segments in Norway are growing at the moment. It's a more balanced growth, you can say, compared to what you are seeing in the Netherlands.
Talking about AutoStore, of course, that's a part of it, but I think the commercial side of AutoStore is that we expanded the number of products, and there we see a lot of growth coming from the expansion. The share of wallet per customer is increasing. I think AutoStore is, of course, a matter of productivity. I think the positive part is also that we have expanded our assortment a lot, which now pays off.
Just to pivot a bit to Onninen. When we sat here after Q2, you were quite pleased with what you'd seen so far. I was just wondering if you'd get an update on whether there's, with a bit more time in the books, if you've learned anything new.
Well, basically, you can say the integration went very well. Now it's a bit like trying to separate the hot and cold water after you mixed it. We're still pleased with the way things are going. As expected, and this is also what we've seen, the entire revenue did not transfer. That wasn't to be expected either. You always lose some revenue. We still see that there are quite some opportunities, not only within the heating and plumbing part, but also within the retail segment that we got. Although it seems to be a slightly different creature compared to what the Swedish organization normally are working with. It's a separate unit. It has to be like that. I think it's still a bit honeymoon in it, I think, but you still need to work with some of the things in order to get the profitability.
We are still very happy with it, definitely.
All right. I can definitely do a few more questions, but maybe open up the floor for anyone listening in.
Okay. Ladies and gentlemen, if you haven't already and you wish to ask a question, just press 0 and then 1 on your phone keypad now and press 0 and then 2 if you want to cancel. We go first to the line of Simon Block at Nordea. Please go ahead. Your line is now open.
Thank you. A question on Sweden from my side. The division obviously performed better here in Q3. In the report you mentioned that you have implemented some further initiatives here in Q3 to improve earnings going forward. Could you elaborate a bit on what these initiatives are? Thank you.
The sound here is a bit unclear. If I understand your question right, because it was a bit on and off. You're asking to the initiatives. I missed whether was it in MAG45.
It was in Sweden.
It was in Sweden.
What is happening in Sweden is we did this plan, the integration plan, and of course a major part was done in Q2. There are things that will happen in Q3, Q4, and also I think the last two or three branches, they'll be closed down in Q1 next year. Where it simply takes some time to make the full transition. It's that type of initiatives that we are looking into. Also because we knew that it's very difficult to assess how much of the revenue can you actually retain. By law, all staff transfers, and then you need to adjust to the revenue you see. That adjustment was executed here late Q3 in order, we can call it a right sizing. That is what we are referring to. We still carry too many costs related to this.
For instance, we have rented additional warehouses, one in Halmstad where we have a central warehouse and one in Örebro. Small central warehouses close to the real central warehouse, but it drives costs. This is also what we were referring to, that we've still not normalized the inventory. We have too much on the shelf, so we need to get that done, and that is what we're working on.
Okay. Thank you. Also one question on Netherlands and Norway. You mentioned that the gross margin was a bit hit from lower margin customers and products in these regions. Is this something we should expect going forward? Is it more of a temporary nature?
I think it's a more temporary thing. We took some direct orders with a very low margin. Of course, if you look at a nominator and denominator discussion, that will dilute our ambition for reaching out for the 4% on EBITDA. I think it was a few one-off very big orders, but a few one-offs. It's definitely not something we will do in our core business for more than a few selected orders. I hope that answers your question.
It does. Thank you. That was all for me.
Okay. We now open the line of Yihui Zhao at SEB. Please go ahead. Your line is now open
Hi. Thank you for taking my questions. I have two. Firstly, looking to the other business, could you elaborate a bit on the development in the quarter? I can see the revenue in the top line, you had DKK 150. Compared to Q3 last year, it was DKK 235. On the gross margin, I think improved a lot. Could you add a little bit of color here? The second question is on the gross margin development. There has been sort of a downward trend for the last three quarters. What will be the initiatives to improve it, or do you expect it would continue at the same level or decline, further decline in the coming quarters? I'll keep two questions for now.
The other continues amongst a lot of different things. It continues DIY deliveries and also the retail segment in other DIY. It's mainly in the Netherlands where we have seen quite a drop in the revenue to this segment. To a small extent, also Norway has seen a setback in that segment. It's a bit of a mix of a lot of things. It's not our main concern. Our main focus is the industry. It's a bit more opportunistic, I would say, in general. Your question on the gross margin is, if you look at this quarter, we're still fighting with freight costs being too high. They actually have a negative impact on, I think, 0.1% in this quarter. We have this mix shift. Apparently, we're very good at growing within low margin businesses.
As Jens was stating before, that we've maybe been a bit too aggressive this quarter in order to reach these high growth rates. This is not a general trend, I would say.
I need to comment that the Netherlands alone declined our margin 0.4% this quarter, which is, of course, not acceptable. I hope that we have answered that pretty clearly that we should take orders, but at least there has to be a limit how low we can go. In Holland, they have definitely went too low. That's for sure.
You don't need to grow at all costs, basically.
The margin will be hopefully more balanced in the coming quarter.
A more balanced customer product mix.
Exactly
than what we see in this quarter.
Okay. Thank you. Just want to clarify, the 0.1% margin impact was on a group level or was on a divisional level?
That was only done by Holland on its own.
Yeah, the DKK 0.1, as I remember, freight cost was, that's also on group level, the negative impact, freight cost.
Okay, thanks.
Okay. If anyone on the phones has any questions, again, please press zero and then one, and there will be a brief pause. As there are currently no questions on the phones, can I pass back to any questions in the room?
Yeah, I can go for a couple more. You say that in the Netherlands, they went too low on margins in order to win orders. Does that mean we should expect growth in the Netherlands to slow down going forward?
That could be a conclusion. Rather have a low growth and which is profitable than have a high growth that is not profitable. Of course, that could be a conclusion. That being said, the Dutch market is still very good and it's strong.
All right. Just a final question on your warehouse management system that you implement in Sweden and you're going to implement in Denmark next. Could you just give a bit of coloring on sort of the business rationale behind it? Is that also the SKUs?
It's mainly a risk assessment because we have an in-house developed system which we need to phase out, a very old system. It's more a risk thing than it's AutoStore. That's about productivity. It's a business case. I think I will leave the wording to Michael because he is heavily involved in this.
Heavily involved in that. The old system is actually the old legacy system, which is based on COBOL. It's a mainframe system. It has turned out that it's become, we simply are not driving efficiency here because it's too difficult to make any changes in the system. Short term, we don't expect any benefits from the ACP rollout. We absolutely convinced going forward that it's going to give us some opportunities where we can make some processes more efficient. We simply have to, and it holds the opportunity to do that. We took a decision when we did this rollout that we would keep it as close to standard as possible and make as few changes as possible. We've done quite some ERP rollouts. We took some hard learnings there.
One of the takeaways that we have at least is that people can only absorb a certain amount of changes, and we'd rather get it done and over and then start to improve with the release one, two, and three. That's the overall thinking. Short term, you shouldn't expect any improvements, but I think long term, we will drive improvements out of it, yes.
Thank you. That's very clear. That's all for me.
Thank you. Any more questions? No? We will say have a nice day, and thank you for listening in. Let's talk next quarter again, hopefully. Bye-bye.