Earnings Call: Q3 2019

Oct 31, 2019

Ladies and gentlemen, welcome to the Solar AS Quarterly Report for the Third Quarter of twenty nineteen. Today, I am pleased to present CEO, Jens Anderson and CFO, Michael Yefsson. 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 Jefferson, 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 three or the third quarter results and also the guidance for 2019. And finally, there will be a question and answer session. In solar, we keep focusing on energy efficient solution and product assortments to drive the the green transition. More specifically, in Solana Norway, 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 back cycles as well as using paper packaging instead of plastic materials. It's only to emphasize that everybody is talking about the green transition In solar, we already now see a huge market and we see a very positive margin going forward. So 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 center warehouses, we are constantly expanding the number of products available through our main digital platforms. Currently, 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 decision of establishing a common shared service in Poland last year, this would never have been possible, country wise. So 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 tied 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 the September, we implement SAP eVM or more precise extended warehouse management system at our central warehouse in 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 implementations 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 twenty twenty. Parallel with our SAP EVM rollout, we're also in the middle of implementing AlphaStore in in Holland. The dart the Dutch AlphaStore 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 in Norway and already can can 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. And that is simply to stay relevant towards our customers, towards our suppliers because the the market is changing and we have to adapt to that. So to serve our customers even better than that, we have created in 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 warehouse operations, but also the transport and services, which are connected to 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 And 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 SGI also in 2018, meaning that the figures we are seeing is only the continuing business, whereas SGI is reported as discontinuing operations. If we look at the revenue, it increased from $2,600,000,000 to almost $2,800,000,000 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, 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 $105,000,000 versus $93,000,000 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 and despite the very successful rollout of SAP EVM in Sweden, it always triggers additional cost 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 less favorable cost and the 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. So 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 costs additional costs in Sweden. Turning to the next slide. If we look at the earnings per company, we see good development in Norway and Holland. Sweden were below last year and that was also as expected. But 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 99,000,000 to $111,000,000 whereas related ended unchanged at a minus of minus 6,000,000 which were very disappointing. We saw in MAC a disappointing development where we had negative growth in the last half of the quarter mainly. And as a consequence, we had initiated several restructuring activities, which has had a cost of $2,000,000 in this quarter, but will deliver full year savings of $7,000,000 going forward. Turning to the next slide looking at year to date. Earnings in core business is up 10% despite Sweden being below last year or in terms of Danish kroner from DKK $235,000,000 to DKK $258,000,000. Also related, we've seen improvements, but not to the extent we actually did expect. Looking at the cash flow at Page nine, operating activities generated $144,000,000 which I'll comment on shortly. If you look at investing activities, they are up from 30,000,000 to $40,000,000 The main part of the PPE investments are related to our investments in Altostor in The Netherlands and the IT investments is mainly our CHP platform and but of course also to a small extent our extended warehouse management system. Financial activities minus 88,000,000 bear in mind that there's been a reclassification of short term debt if you compare with last year and this is also and there's also an impact of implementing the new accounting standards on releasing. If you look at the right side of the slide, we see the cash flow from operating activities. Non cash items is $140,000,000 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, you see a minor increase in inventory. Normal seasonality would actually mean a higher increase in inventory, but we are still in the process of normalizing the inventory in Sweden. Bear in mind that when we acquired the unending activities, we basically acquired quite a lot of inventory. Receivables, remained flat and 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, but we still, only have a part of the P and L effect. So in terms of percentages, this has an effect of approximately zero point Looking again, it came down from 2.6% to 2.2% driven by cash flow, but also the take off in earnings. All other things equally expect the NIM to continue to reduce in the coming quarters. Guidance, Page number 11. We reconfirm our outlook for 2019 in the different markets and we reconfirm our EBITDA However, we increased our expectations in core with $10,000,000 giving the track the good track record year to date and we reduced the related similar with minus 10,000,000 so the net impact is zero. Looking at revenue, we changed our guidance from at least $11,600,000,000 to approximately $11,750,000,000 Bear in mind, we had a negative impact on FX, which gave us quite some headwind. Yes. Okay. Thank you, Michael. Now it's time for Q and A. I don't know. Let's start with the gentlemen in the room and then we'll take the ones who are on the line, if there's any questions. Yes. Alexander Boryska from Carnegie. If you just start out with MAC 45. So when we sat here after Q2, you mentioned that you had gotten indications from the customers of MAC 45 that the revenue that wasn't there in Q2 would sort of pick up in Q3 and Q4. I was wondering what sort of happened since then? And when you talk about a strategic review, could you elaborate a bit on both what you're actually reviewing? Mike, you that? Thanks, Michael. If you look at the revenue, it's true. And actually, the trend we saw in July supported that information. There was actually rather strong growth in July, but it came to a complete halt in August and September where we actually did see negative growth. And what we the information we are getting now from the main customers is that the pickup 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 payoff in Q4 in the revenue in Mac. However, when we talk to the customers, it appears that they have quite a strong pipeline coming in, but we still decided to initiate some rightsizing of the company to a newer reality. So as we speak, that is ongoing. Not only the rightsizing, 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 twenty eighteen, we wrote that if three years were done and it was not EBITDA positive, we would make a strategic review and that's what we're doing because we have been owner of MEG-forty five for now three years. So that's what we're doing. So no decisions yet, but of course, we need to make a deep dive to see what is the right solution for solar and MEG-forty five going forward. All right. And just to make sure I understand, you haven't lost any customers in MEG-forty five, 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. So it's not that we have lost customers, definitely not. All right. And 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. But 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 Auckland, etcetera. But then we see a huge market for for climate and energy, talking about that, now we really see that it's not it's not only talk anymore. It's it's really orders, which are common, charging stations, heat pumps, light LED. So a lot of orders is now coming out of this megatrend. So that's great. Okay. So 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%, yes. Okay. So we shouldn't necessarily negative organic growth in the inflation. No, no, no. It's a modest growth also in 2020, but it's still a growth scenario. In 2020 as well? Yes. That's what we see right now. Yes. And if we look at Norway, you improved profitability quite a bit in What the was the underlying reasons for that? Is that the auto store implementation and the 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. And we can see particularly Marine offshore is growing again, which will be huge downturn in Marine offshore and that has seemed to rebound rather strong in this quarter. But basically almost all segments in Norway are growing at the moment. So it's a it's a more balanced growth you can say compared to what you are seeing in in The Netherlands. And and talking about out of store, of course, that's a part of it. But I think, the commercial side of out of store is that we expanded the number of products and there we see a lot of growth coming from the expansion. So the share of wallet per customers is increasing. So I think AltoStories, 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. And just to pivot a bit to Oninen, when we started Rakuten II, you were quite pleased with what you've seen so far. I was just wondering if you could get an update on whether this with a bit more time in the books if you've learned anything new? Well, basically, you can say the integration went very well. So now it's a bit like trying to separate the hot and cold water after you mixed it. But 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. So 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. And so I think I think it's I think it's like a it's still a bit honeymoon in it, think, but it's still I need to work with some of the things in order to get the profitability. But 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. So, ladies and gentlemen, if you haven't already and you wish to ask a question, just press 0 and then one on your phone keypad now. So we go first to the line of Simon Block at Nordea. Please go ahead. Your line is now open. Thank you. So a question on Sweden from my side. So the division obviously performed better here in Q3. And 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 it was in Mac, like it was in Sweden. Okay. It was in Sweden. What is happening in Sweden is we did this plan, the integration plan and of course the major part was done in Q2. But there are things that will happen in Q3, Q4 and also I think the last two or three branches that will be closed down Q1 next year, where it takes it simply takes some time to make the full transition. And it's not in this 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. And by law, all staff transfers and then you need to adjust to the revenue you see and that adjustment were executed here late Q3 in order to make use of a kind of a rightsizing. So that is what we are referring to. There's still we still can't too many costs related to this. For instance, we have rented additional warehouses, one in Hunstadt where we have a central house and one in small central warehouses close to the real central house, but it drives costs. And this is also what we were referring to that we've still not normalized the inventory. So 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. And then 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 our nominator and denominator discussion, that will dilute our ambition for reaching out for the 4% on EBITDA. So I think it was a few one off, a very big orders, but a few one offs. So it's definitely not something we will do our core business for more than a few selected orders. So I hope that answers your question. It does. Thank you. That was all for me. Okay. So we're now over to the line of Yifui Zhou 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? And I can see the revenue in the top line, you had 150,000,000 but compared to Q3 last year, it was $235,000,000 And then on the gross margin, think, improved a lot. Yes, could you add a little bit color here? And then second question is on the gross margin development. And so there has been sort of downward trend for the last three quarters. And what will be the initiatives to improve? Do you expect it would be continue at the same level or decline have further decline in the coming quarters? Yes. And I'll keep two questions for now. The other continues amongst a lot of different things. It continues DIY delivers and also retail segment in as a DIY. It's mainly in The Netherlands where we have seen quite a drop in the revenue to this segment. And to a smaller extent, also Norway has seen a setback in that segment. But yes, it's a bit of a mix of a lot of things. So it's not our main concern. The main focus is the industry. It's a bit more opportunistic, 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 of, I think, point one in this quarter. And then we had this mix shift. Apparently, we're very good at growing within low margin businesses. As Jens were stating before that we may be a bit too aggressive this quarter in order to reach these high growth rates. So it's not that we expect this is not a general trend, I would And I need to comment that The Netherlands alone declined our margin 0.4% in this quarter, which is of course not acceptable. 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. And in Holland, they had definitely went too low. That's for sure. You don't need to grow at all costs basically. I mean So the margin will be hopefully more balanced in Yes, the coming the more balanced cost in the product than what we see in this quarter. Thank you. And just want to clarify, The 0.1% margin impact was on a group level or was on a divisional level? The impact from Netherlands Yes. And the one point, the 0.1, as I remember, freight cost was that's also on Google and had a negative impact. Okay. Thanks. Okay. If anyone on the phones has any questions, again, please press 0 and then 1, and there'll be a brief pause. As there are currently no questions on the phones, can I pass back to any questions in the room? Yes, I can go for a couple more. So 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 where it's not profitable. So of course, that could be a conclusion. But that being said, the Dutch market is still very good and it's strong. All right. And just a final question on your warehouse management system that you're implementing 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? Maybe a risk assessment because we have an in house developed system which we need to phase out a very old system. So it's more a risk thing than it's out of store. That's about productivity. It's a business case. But I think I believe the the wording to Michael because he's involved in The people involved in us yeah. The the old system is the, is actually the old legacy system, which is based on corporal as a mainframe system. And it has turned out that it's become I mean, 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 SAP rollout. We actually will be 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 also opportunities to do that. But we took a decision when we did this rollout that we would keep it as close to stand up as possible and make as few changes as possible. We've done quite some ERP rollouts. We took some hard learnings there. And one of the takeaways that we have at least is that people can only absorb certain amount of changes and we rather get it done and over and then start to improve with the Reach one, two and three. So that's the overall thinking. Short term, you shouldn't expect any improvements. But think long term, will drive improvements out of it, yes. Thank you. That's very clear. That's all for me. Thank you. Any more questions? No? Then we will say have a nice day and thank you for listening in and let's talk next quarter again, hopefully. Bye bye.