Earnings Call: Q1 2019

May 8, 2019

Ladies and gentlemen, welcome to the Solarayas Quarterly Report Q1 twenty nineteen. For the first part of this call, all participants will be in a listen only mode And afterwards, there will be a question and answer session. Today, I'm pleased to present CEO, Jens Andersson. Please begin your meeting. 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 first quarter webcast for Solar. Together with me, have my colleague, CFO, Michael Jebisen. The agenda for today is, I would say more or less like always, a short business update from my side on our strategic focus areas, a presentation of the first Q results by Michael and finally and not least a Q and A session. If we start with the number one of our strategic focus areas that's about Strategic Supplies. We continue to pursue growth opportunities and align our approach to concept sales across all our markets. Our concepts assortment now covers multiple areas and now provides seven different concepts cross border. I will just name them Solar Plus, that's the old one. Solar Net, that's one of the the new ones. Solar Project just made recently. Solar Light, Solar Cable, Solar Heat and Solar Tools. So we have extended the the range of concepts offers quite a lot. But in order to strengthen our position in a very competitive market, we are constantly looking for ways to optimize the way we do business. Our business is, honestly speaking, based on local strength but from a global perspective and we need to turn that into our competitive advantage. To deliver on our strategy, we need to execute faster and harvest synergies across markets. So to enable execution power, we have changed our organizational structure and created a new common market and sourcing organization as of May 1 this year. The overall responsible for our new regional market and sourcing organization is SVP Group Commercial Market and Sourcing, Peter Peterson, who have more than twenty years of experience in that area. If we turn to industry, our intensified focus on industry now really pays off. We had a strong organic growth of more than 9% including MEG-forty five in this segment this in the first quarter of this year. For the rest of year 2019, we maintain a positive outlook for our industry segment partly due to reasonable market conditions, but mainly due to our own activities within sales supported by our market organization. As mentioned the last time, it is our ambition to raise the number of products cross border with minimum 200,000 technical and mechanical products in a combined partnership with a rather few selected vendors. This quarter, we managed to phase in approximately 30,000 products of these products. And that could not have been done without our dedicated people from Poland in our shared service in Wutsch in Poland and, of course, our local product management different markets. A prerequisite if you raise your category off is a very strong e commerce platform. And as we speak, we are putting more and we call it opt in, more and more industry customers into our new e commerce platform, which exactly have the right functionality to make it very easy to find the needed products. Turning to the last but not least, operational excellence. After a successful implementation of SAP EBM at our central warehouse in Helmstadt in Sweden, we originally planned to start a similar implementation of SAP EVM in Eurobo, our second central warehouse in Sweden. But due to the ongoing activities with the integration of Onningen, the HWS business we have taken over from Onningen, we have decided to postpone the implementation of a SAP EVM in Ermoh to the autumn, simply due to the integration of Onionen HWS business. To optimize the handling of small and medium sized goods and provide logistics with a very competitive advantage, we have implemented Alphastore and automated storage and material system at our central warehouse in Norway. With Outer Store, we are not only expanding our inventory capacity, but also adding less cost to the investment over time. The investment is expected to generate an annual return of minimum 20% per year. The solution includes 40 robots with access to 35,000 bins, servicing eight outbound and three inbound workstation twenty four hours a day. The new Altisource system will improve warehouse efficiency and take up less than 1,200 square meters of floor space. This gives us 2,000 square meters extra of space offering to use flexibility and to handle fluctuation in volume much more efficiently. At the moment, we're also looking into a similar solution in our Dutch organization, but we will come back to that later or next time. Finally, I will remind the audience about that solar will turn one hundred years at the 05/17/2019. And I believe, and I've also simply have shown that we are really and definitely ready for the next one hundred years as a true digital and green sourcing and surgical. Will now give the word to Michael for an update on the financial performance for first quarter twenty nineteen. Please, Mikael. If you look at Slide seven, first a bit of background information. Please notice that the Norwegian training business STI has been deconsolidated and is now disclosed as discontinuing operations. In addition, as announced in Q4, we have implemented IFRS 16 with effect from January 1, meaning that the historical figures has not been restated. If we measure the impact on EBITA level, it's insignificant, but there is a reclassification mainly between external operating costs and to depreciations. Looking at the revenue, we managed to reach almost CHF 3,000,000,000. So up from CHF 2,800,000,000.0 to almost CHF 3,000,000,000. That's equal to an organic growth of 5.8. What is more more important is that the trend shift we saw in Q4 where core gradually returned to growth again continued into Q1 reaching an organic growth of 5.7 In particular, we are happy that Norway and Netherlands continue to improve the growth rate. Looking at Slide number eight, we ended with an EBITDA of CHF 80,000,000 versus CHF 69 last year. Despite some challenges with increasing freight costs, which diluted the margin and a less favorable mix in terms of customers and products, we actually managed to strengthen the margin from 2.4 to 2.7%. If you look at the figure, you can see that there is an increase of 1.5% from the EOC and depreciation diluted with 0.9%. As I mentioned before, the implementation of IFRS 16 means a reclassification. And this has an impact of approximately 1% on EOC positive and similar negative on depreciations. Looking at Slide nine, we see the earnings per company. And we are happy to see that all units except from the Swedish has improved compared to last year. Sweden remains on the same level as what we saw in H2. Despite this, we managed to improve the earnings from DKK 69,000,000 to 80,000,000 or if we look at core from CHF 74,000,000 to CHF 81,000,000. Also in related, we saw progress. We ended with minus 1,000,000 versus minus 5,000,000 last year. So with the exception of Sweden, we now have improvements in all companies. Looking at Page 10, cash flow. We see the traditional pattern with a negative cash flow in Q1 from operating activities. I'll comment on that in a minute. Looking at investing activities, we are at million, mainly with investments of our EVM, that's our SAP warehouse management system, but also our CHP system. And then, of course, we have spent some money on out of store, as Jens was mentioning before. Financial activities are up CHF260 million. You should notice here that there's been a reclassification of short term debt into financing activities. And that's the reason. We did pay out DKK102 million in dividend during this period. But if we take a closer look at the operating activities, and that's the right side of the slide, we can see that as usual there's quite some non cash items in the P and L. Inventory is slightly up, but this is more compensated by the suppliers. And then we see receivables up with CHF279 million. This is the normal seasonality. Bear in mind that the starting point here is the January 1 where we always have all time low. If you compare with last year, we see a stronger increase. But you should notice that last year, Easter actually started in March, meaning the sale was lower. So if we adjust for this and the stronger growth, this is the level you should expect. So there's nothing in it except the normal seasonality and the impact from the growth. Looking at the net working capital, as a consequence, as what I was mentioning before, and I'm now on Page 11, we can see that it's up from 10.3 to 11.8% measured at the end of the quarter. This is driven by the increase we have seen in accounts receivable mainly. Looking at our gearing, which is the figure on the right side, you can see it increases and so does the interest bearing debt. What you should be aware of here is that given the implementation of IFRS 16, we have now CHF $278,000,000 more interest bearing debt. That's the capitalized value of the future payments. EBITDA has also increased with CHF 28,000,000 as a consequence of this. But we calculate the gearing based on the last four quarters. This means that if you look at the P and L, we have only now seen onefour of the impact, whereas at the balance sheet being a snapshot, we see the full impact. If we adjust for this, the gearing would be and use you can say the old method and adjusted EBITDA for the impact of IFRS 16 gearing would be 1.9. So we are within our own guidelines. Looking at page number 12, we can confirm our market outlook for this year. We don't really see any major changes to the market compared to what we disclosed in our Q4 figures. We still expect overall the market both within installation and industry to continue to grow. Turning to our expectations for 2019, Page 13, we confirm our expectation of an EBITDA of CHF365 million being CHF370 million in core and minus CHF5 million in related. If we look at the revenue, it was slightly above expectations or it was above expectations. So we have changed our guidance on revenue from approximately CHF 10,700,000,000.0 in core to now above CHF 10,700,000,000.0, whereas the expectations for related remained unchanged $650,000,000. Thank you, Michael. Now it's time for Q and A. So please, if there are any questions. Alexander Boryska from Carnegie. So on Industry, when you exited Q4, you said that Industry was generally below expectations on the performance. And now you have a very strong performance on Q1 this year. Should that be seen more as in line with your expectations? Is it above expectations? Or how should we look at it? It's a little bit above our expectation. I think in the fourth quarter, we were a little bit what you say, there were a lot of opportunities, but now we see them definitely be booked in our accounts. So I think it's more or less that we knew that something were tracking in the right direction, but now we can see it. So it's more or less a postponement from force into first. So I think and I hope that what we are doing now also will be tracking in the right way in the quarters to come, but you never know. But at least we saw a very strong and solid growth in the first quarter on our industry segment, which is very positive because it's one of our focus areas. And if we look at industry on a country by country basis, are there any countries where you're where you're underperforming or where you see opportunities to do better? I would say that definitely, Norway is is doing very well Denmark is doing pretty well. Holland also doing very well. Sweden is still a little bit below our expectations. But bear in mind that the industry in Sweden is very it's a very low number. It's mainly an installation we are doing in Sweden. So we hope that there is a lot of opportunities in Sweden going forward, but we are coming from a very low level on industry in Sweden. But all the three other markets are doing pretty well or very well. Yeah. Okay. And talking about Sweden, so obviously, there's been some issues last year with with the organizational structure, and and you reverted it. And it seems as though you've you've stemmed the bleeding in terms of of of, you know, stabilizing the top line. But but can you give us some coloring on what sort of needs to happen for Sweden to revert back to previous performance? Is it simply a question of of time or are there any specific milestones you sort of need to surpass? Honestly speaking, we are doing a lot in Sweden. The Danish CFO, just entered into to to the Swedish market, as an interim CFO, and he will, together with the management team up there, doing a lot. We have made a get well plan, which we are following quite intensively. But you're right. The top line is back. The margin is too low, and we still need some efficiency gains up there, mainly due to a lot of, as you know, restructuring last year. And that means that our goals for Sweden is were higher, and they delivered not as expected. Still, I think we are doing what is needed in Sweden. And hopefully, we'll soon see Sweden back to a better performance than we have seen in the first quarter. The Swedish market as such seems still to be growing. We've not seen any setback in the market. Compared to last year, I would say that we had some countries which were not performing as expected. Now we, I would say, are doing better except from Sweden. So that's the positive part of of the history. Yeah. Okay. And if we look at MAC 45, generally, pretty solid improvement in from also a a pretty bad comparison, I guess, in in q one eighteen. But But so for the year, you're guiding for a loss of $5,000,000 How should we look at that in terms of growth? Because you said you're a little bit below expectations on the top line in this quarter, but for the full year, keep your expectations. But with the strong growth you're seeing in the remaining three quarters, if your expectations are correct, how should we view that in terms of profitability? Is there a chance that they will breakeven this year or I would say definitely there's a chance, but we still remain a little bit humble and say that we go for the minus 5% until we have seen a more solid and more I would say a more they should track every month even better. But they have some good months. The margin is definitely going in the right direction. Yes, you might say that the top line is a little bit weaker than before, but we also, in all fairness, have to remember the reference point, which were pretty high last year. So all in all, they are tracking as expected. And of course, we hope that they will deliver as expected. And if you grow faster in the remaining three quarters, would that put more pressure on your margins in Mike 45, or should it be more operating leverage to actually be a positive on on margin? How is sort of the relationship between that? All other things equal, it should be able to strengthen the earning. And they have a very strong focus in Mac on strengthening the earning, not only on the new revenue but also on the existing customers. I think in all fairness, they've actually done a good job. But as you mentioned, the reference point in particular in Q1 were not particularly impressive. That's a fair statement. But we think they're doing a good job on it, and they are on the right track. Okay. Then just one more for me, I guess, before I give it on. You talked about the AutoStore solution you're rolling out now. And you said that you would consider doing it in The Netherlands. So in The Netherlands, you have two warehouses, if I'm not Would such a solution potentially enable you to close one of them? I would say that's not in our plans, but we will definitely make the out of store solution in Alkmaar, which is our headquarter in Holland. And then we will see what that gives us of opportunities. But right now, we are talking about extending ALKMA with Altostor and then the Actually, one more question for me, if that's okay. So concept sales, I know it's a part of reaching your 2020 targets. Can we get a brief update on the progress in terms of the different markets? I cannot give you some exact numbers. I can only say that it's moving in the right direction in more or less all markets, even in Denmark where we have by far the highest percentage of concepts. Even there, we see a good progress. So all in all, we are very satisfied with the concepts sales and the way we are tracking. But as I also mentioned, we are now changing the organization. So there will be only one group HVP for all countries. So we go from branches to regions now to markets and not countries. And that's what we did the May 1. And of course, we will look into the next phase that is to consolidate our purchase cross border even more than we have done in the past. Thank you very much. Thank you, Alexander. Okay. Thank you. Ladies and gentlemen, if you do have a question for the speakers, Our first question comes from Hans Grosven from Nordea. Please go ahead. Your line is open. Good morning. Two questions. Looking at the margin or the earnings development in Sweden, Jens, you talked a little bit about that you assume an improving profitability for the remainder of the year. What is the sort of without giving a specific country guidance, how much improvement are you expecting for the full year for Sweden? And then to Michael on Slide eight, there was a lot of noise in the call. But was I right to understand that the EOC and the depreciation changes actually relates to the implementation of the combined impact of IFRS 16? And if that's the case, am I then right to assume that underlying for that change there's been an eroding margin in the first quarter? Thank you. I will take question number one. Yes, the top line is back as expected. Now we need to work on the margin. I cannot give you any exact numbers. But I will say that we definitely need to work on the margins in Sweden. And that is, I would say, as normal. Look into each customer, look at the gross discount per customer, increase the number of concepts, doing internal trading as also a part of our future way of collaborate between countries. So hence, I cannot give you some exact numbers, but I'm pretty sure that we will see Sweden over time be in a better shape than we have seen the last three or four quarters. Our or the Danish CFO is an interim CFO in Sweden for at least the next six months, a very experienced guy who will at least make a deep dive into the possibilities, which still are in Sweden. So I hope that is a sufficient answer so far. If we then turn back to Slide eight, Page eight. You can actually see it, Hans, if you look into the report at Page 23, we've actually disclosed the impact. And what basically happened is that we take CHF 29,000,000 out of the external operating cost, that's the leasing part, And we reclassified it like so CHF 28,000,000 is moved to depreciation and CHF 1,000,000 is moved to financial expenses. And if you adjust the figure for that, you'll see that it has an impact of approximately one. So if we were following the past practice, the improvement in the margin of 1.5% would be 1% and we will not have sorry, would be 0.5% and not 1.5%. And the depreciation would not dilute the margin with 0.9%. It would be positive with 0.1. So all in all, the margin would remain the same. So it doesn't really change if you measure on EBITDA, which is what we do. So you can say that graph in relative is slightly misrepresenting as the net change is pretty much zero. Answer? The answer is that if you look at the 27 the 2.7%, they are unchanged. There's no impact on that one, which is important. There's a reallocation between depreciation and external operating costs. So the development in external operating costs is less favorable compared to what is being showed here, compared to what it would have been if we have kept the old practice. Practice. So it's just moving around between the lines, but it's all above EBITDA. But Michael, referring to the table on Page one, you can see on EBITDA, there is a change of 1,000,000, which is pretty much close to zero. In here, you show that there is a margin delta of plus 0.6%. Yes. Well, that's hence, this is from compared with last year. Your reference point was last year where we had a margin of 2.4%. And that figure is unchanged. I mean, due to we haven't implemented IFRS in the historical figures. It wouldn't have changed anything either. So we are increasing the margin from 2.4% to 2.7%. Yes. The EBITDA margin is up with 0.3% if you neutralize for the different things within IFRS 16. So it is an improvement of 0.3%. Yes. But my question is, if you had implemented IFSR 16 in Q1 twenty eighteen, would there then still have been a margin expansion over the year over year? Yes. We've been exactly the same. Exactly the same. No difference. No difference. Okay. Then going back to Sweden, last year, you had a profit, EBITDA of $52,000,000 and $1,784,000,000 Am I right to understand that what you're basically implicitly are guarding is something above 52 but below 84. That's right. Okay. Thank you. Okay. Thank The next question comes from Louis Xu from SEB. Please go ahead. Your line is open. Thank you for taking my question. Actually, most of them have been covered. But still two questions from my side. Firstly, is it possible for you to give guidance on the savings from your cost containment initiatives for this year? And secondly, I just want to follow-up on the Sweden. You mentioned performance on margin in the region was under expectation. And could you is it possible for you to give us the timeline? When would you see improvement or at least recover from last year? If it doesn't materialize, then is it the risk to your guidance for this year? I'll start with two. Think as we also announced last year, the main part of the cost initiatives were executed there, which is in line with what we originally said when we launched the strategy. We continue to have a focus on it, absolutely. And if you look at this quarter and you adjust for FX and you take MAG out of the equation, because they are still growing and they have some growth cost, we actually more or less run flat in terms of the costs. So compared to last year, so despite we have a growth of 4%, We have salary inflation. We more or less managed to balance it out. I can say to add to what Michael is saying, as we also said last year, the strategy were like the phasing of the strategy was cost first, industry second and concept last. And I think in all fairness, it's also how it looks at the moment. So that was just a small comments to Michael's comments around savings. Regarding Sweden, I cannot give you at the moment any clear and fact based figures on Sweden. As I mentioned twice, the Danish CFO started that working in Sweden from the May 1. Together with the management team up there, he will at least come back with some findings, and then we could be more clear, hopefully, in the next quarter. So I hope it's what I can give you at the moment. Okay. Thanks. Thank you. Thank you. There appear to be no further questions. I'll return the conference back to you speakers. Okay. Thank you. Thank you for listening in. Thank you for the gentlemen in the room. And have a very nice day here in Copenhagen and the rest of Europe and Denmark. Thank you for today.